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Friday, December 1, 2006

MRO Europe: Spotlighting an Industry in Transition

By David Jensen

The year 2006 has been, in many ways, pivotal for the air transport maintenance, repair and overhaul (MRO) market. Recent events have given a strong indication of what path the industry will follow. That fact was emphasized during the 2006 MRO Europe Conference and Exhibition held in October in Amsterdam. The event provided an appropriate year-end perspective of the industry and tendered two industry forecasts, presented by Marty Graham, manager-consulting services for BACK Aviation Solutions in New Haven, Conn., and David Stewart, principal, AeroStrategy Ltd. in Amersham, UK.

PMA Parts and Consolidation

Stewart cited several critical events in 2006. These include Pratt & Whitney’s decision in February to produce parts manufacturer approval (PMA) parts for CFM56-3 engines, made by CFM International, a joint venture between Snecma and GE. Pratt’s announcement “could reshape the MRO market landscape and OEM [original equipment manufacturer] economics,” he said.

Peter Huijbers, director, key account lessors and banks, Lufthansa Technik, is in agreement. “We think PMA parts are a good idea,” he said at the conference, adding that a 30 percent reduction in cost can be achieved with PMA parts.
Stewart predicted the total PMA parts consumption over the next five years will more than double its current two to three percent. That means, according to AeroStrategies projections, sales totals for PMA parts will jump from the $330 million in 2005 to $800 million to $1 billion by 2010 “Because of [Pratt’s decision], some barriers for PMA will go down and acceptance will go up,” he explained.

“I think the biggest news here is the lack of news coming from GE,” Stewart added. “They’ve said very little; we’re still waiting for GE’s reaction to Pratt’s decision.”

Stewart also labeled as a pivotal event the decision in September by a United Arab Emirates consortium to acquire SR Technics. It is one more step by European MROs to restructure in order to gain a more global scope. The consortium’s intent with SR Technics, the former maintenance arm of defunct Swissair, is to have the company gain market share in Asia and other markets.

Other evidence of consolidation and partnerships among European companies was evident at MRO Europe. For example, KLM Engineering & Maintenance and Air France Industries said their partnership would take a further step by establishing a joint, global marketing and sales network. Meanwhile, Lufthansa Technik and Air France Industries announced a joint component support solution for operators worldwide of the military A400M. Details have yet to be ironed out, but the program could be comparable to the two MROs’ partnership in supporting the Airbus A380.

Coming of GoldCare

Stewart also cited OEM encroachment into the MRO marketplace as a trend made evident from recent events. Primary evidence resides in Boeing’s decision in May to acquire the largest independent aviation parts and services company, Aviall, and introduce its comprehensive GoldCare maintenance package to accompany the new B787. Perhaps it was appropriate, then, that Boeing preceded MRO Europe with a press conference that provided a GoldCare update.

Boeing officials admit GoldCare was announced prematurely, due to a press leak. The OEM would have preferred announcing the program along with an initial GoldCare customer. It didn’t name a first customer at MRO Europe; however, Dan da Silva, vice present, sales and marketing for Boeing Commercial Aviation Services, conceded that some of the airlines taking initial deliveries of the B787 “may not be the ideal customers for GoldCare full maintenance.”

(Japan’s All Nippon Airways is the first customer to receive B787s, starting in early 2008. Boeing has some 30 787 customers who have ordered about 500 airplanes.)

“You have to understand that GoldCare is a brand new concept…based on a brand new platform,” da Silva said. “It’s more than a maintenance offering by Boeing; it’s a new business model…”

B787 operators don’t have to fully adopt GoldCare. Da Silva suggests that carriers with established large maintenance infrastructures may want to sign onto, say, only the program’s materials management part. Boeing offers two levels of GoldCare service, a lifecycle management solution that provides maintenance management and parts support, and a materials management solution that provides a supply chain and logistical service for spare parts.

Essentially, GoldCare is a per-flight-hour maintenance program that is centrally managed in Seattle and can include the gamut: line, component and heavy maintenance. It provides e-enabled environment, or “complex IT system,” according to da Silva, that assures the flow of secure maintenance data among the concerned entities: Boeing, its suppliers, the maintenance provider and the operator. Among other advantages, this data flow gives component providers a “fleet-wide view of how a component is performing, giving them time to design fixes, if necessary, earlier than with today’s manual process,” said da Silva.

Boeing has signed on supplier partners for GoldCare, as well as its MRO partner in Europe, SR Technics. The manufacturer plans to have two additional major MRO partners, in North America and the Asia Pacific region, and “some regional sub partners in locations such as China, India and Australia, depending on need,” da Silva said. The sub partners “will have full capability and be part of the [GoldCare] network,” he added. Boeing plans to announce its North American and Asian MRO partners no later than the first quarter of 2007.

Da Silva reported that Boeing has been testing GoldCare concepts, using its executive fleet, and that it plans to conduct a pilot program with its MRO partner before the end of the year and one with its supplier partners in 2007.

The OEM also announced three new, European customers for its Web-based Maintenance Performance Toolbox. Sterling Airlines A/S in Denmark, SAS airline in Sweden and SAS Braathens in Norway bring the total number of Toolbox customers to 13. The two members of the SAS group will use Toolbox on its Next-Generation B737s, and Sterling will use the data-transfer tool on both its Classic and Next Generation B737s. A suite of five software-application modules, Toolbox provides a means of storing, searching and utilizing maintenance documentation using Boeing’s Internet portal. It provides three-dimensional graphics and allows customer airlines to modify or author manuals. Toolbox also happens to be a GoldCare component.


Other Trends

Technological advances, many of which exhibitors at MRO Europe put on display, represent another key industry trend and are critical to the efficiency airlines are demanding in their aftermarket support. Other trends mentioned at the event include the following:

• U.S. airlines are beginning to be profitable, joining the already profitable European and Asian carriers. “From an industry standpoint in 2007, we’re looking at breaking even, and in 2008, starting to see the global airline business being quite profitable,” said Graham. Caution comes mainly from the volatile price of crude oil, which, when it rises, adversely impacts the cost of jet fuel more than most other petroleum-based products. Vanja Roller, executive vice president-maintenance and engineering for Croatia Airlines, stated at MRO Europe, “Everyone in the [aviation] industry is making money but the airlines. We want it to end.”

• The worldwide fleet size is showing steady growth. BACK Solutions forecasts 4.1 percent annual growth in new aircraft deliveries over the next 10 years. That accounts for nearly 18,000 additional aircraft and a worldwide fleet of more than 26,000 airplanes. The firm predicts the fleet mix will remain relatively unchanged, although it predicts decline in the narrowbody mix, from 61 percent of the total aircraft down to 55 percent. It also claims regional jet (RJ) growth is expected to slow down, due to a lesser interest in 50-seat jets and despite an increase in larger RJ sales. AeroStrategy forecasts a comparable 4.2 percent increase in fleet size and, breaking down the market by regions, predicts the annual growth rates in India and China will reach double digits over the next decade. Seventy percent of the orders and options are destined for international airlines and low cost carriers (LCCs), BACK Solutions reported. LCCs orders represent half the B737 sales. Most new aircraft will be leased. Huijbers said 50 percent of the commercial fleet is leased and by 2020 that number will jump to 60 percent.

• New, emerging air transport markets are becoming increasingly important. While the top three regions — North America, Europe and the Asia Pacific — make up 80 percent of the world MRO market, developing markets such as in China and India will, with their rapidly expanding fleets, provide the biggest growth. China’s MRO spend, for example, is expected to increase from the current three percent of world total to six percent by 2016, according to BACK Solutions. AeroStrategy predicts a 5.1 percent annual growth rate in the Asia Pacific through 2015 and a market value exceeding $14 billion. India, which expects to see the size of its air transport fleet triple over the next 10 years, has joined with China in becoming a fast growing market. East Europe, too, represents a growth market; a five to seven percent increase in aircraft sales is projected in the region. East European carriers seek to replace its aging Russian aircraft; even accounting for the newer, western aircraft they now have, the median aircraft age is about 12 years, according to Graham. Because of these new, fast growing markets, Stewart foresees a possible shortage of pilots and mechanics.

• The supply-chain inventory holdings are shifting from the operators and becoming more supplier-owned. Evidence of this trend, according to AeroStrategy, is the fact that the supplier-owned inventory grew from 25 percent to nearly 40 percent since 1997, a 60 percent increase.

• MRO unit costs are shrinking. There has been a 15 percent reduction in MRO unit costs since 2001, according to BACK Solutions, and the decline is expected to continue. The forecast and analysis firm said the unit cost per 1,000 aircraft seat miles (ASMs) has declined from nearly $16 in 2002 to little more than $12 today. Drivers for the shrinkage include improvement in aircraft design and technology, reduction in labor costs (because many new aircraft are going to countries with lower labor rates) and “more effective operations both from the airline perspective and from the service provider and MRO perspectives,” said Graham.

• The air freighter market is providing increased modification opportunities. Freighters account for about 10 percent of the fleet with 1,788 airplanes, according to BACK Solutions. It is a relatively small market but, said Graham, “there’s a lot of transition going on in the fleet type, where you see 50 percent growth in the airplanes being flown. In addition, he predicts 65 percent of the current fleet will be retired and, more importantly when talking about conversions and modifications, 75 percent of these aircraft will be converted passenger aircraft. “It offers an interesting way for an MRO to get a lot more value out of his assets,” Graham suggested.

• Europe accounts for 30 percent, or about $11.5 billion of the MRO market. According to AeroStrategy, Europe is the largest net importer of engine overhaul and a strong net importer of airframe heavy maintenance, though not as strong as Asia, where regional supply outstrips regional demand by 20 percent. Asia has taken advantage of a large heavy maintenance demand for North American carriers.

• The engine maintenance spend is expected to be the biggest growth sector over the next 10 years. The sector represents more than 35 percent of the $39 billion MRO market, or more than $12 billion. (The support markets for the CF6-80C2 and CFM56-3 are each greater than $1 billion.) BACK Solutions predicts six percent growth in engine support, while AeroStrategy forecasts a more modest 4.2 percent. Both agree that the engine spend will outstretch the size and growth of line maintenance, representing about 22 percent of the market; component maintenance, representing about 20 percent, and airframe heavy maintenance and modification work now representing about 23 percent of the MRO market.

• Despite several reversals to the trend by, most noticeably, American Airlines and US Airways, the amount of outsourced maintenance is expected to maintain steady growth. World airlines outsource nearly 60 percent of all MRO activity today, according to BACK Solutions; that number is projected to increase to 75 percent by 2010 and to 85 percent by 2020. Croatia Airlines’ Roller believes that more and more, “everything but line maintenance will be outsourced [and] definitely engines and components.” In addition, 2006 has seen the signing of some large outsourcing contracts, for example, Air Deccan, ATA and Spirit Air with Lufthansa Technik; Gulf Air, Sky Europe and Virgin Blue with SR Technics; and Jet Blue with Air Canada.

• Because of airline demand, the focus must remain on efficiency in maintenance support. The carriers have sought efficiency by retiring older, inefficient aircraft and engines, simplifying their fleet mixes and developing a more efficient inventory strategy. Repair facilities are being pressured to minimize the out-of-service time of aircraft, components and engines, as well as to improve quality and reliability, and reduce labor costs. BACK Solutions suggests the latter savings can be achieved by making maintenance processes more efficient, reducing rework and eliminating waste, seeking service providers in regions with lower labor rates, and matching labor skills to the work requirement.

How do all these trends add up for the air transport MRO market? AeroStrategy projects 3.6 percent per annum growth in the MRO market, and predicts it will achieve annual revenues of $55 billion by 2015. More than growth, however, with industry consolidation, OEMs entering the maintenance arena and PMA parts gaining acceptance, the market has entered a dramatic period of transition.
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