GRAHAM WARWICK / WASHINGTON
The events of 11 September have not only affected airlines and manufacturers. Services and spares providers are also having to adapt to survive
Since 11 September, attention has focused on the plight of the airlines as they struggle to stem their losses and the manufacturers as they race to cut their production rates to match the rapidly reducing demand for new aircraft.
This month, as companies release their fourth-quarter and full-year results, the impact of the US airline industry melt-down on the aftermarket is becoming evident. Manufacturer after manufacturer is reporting a dramatic decline in spares sales and a reversal of fortunes for their once-growing services businesses.
Industry leaders believe the months since 11 September may have seen a step change for the aftermarket, with the wholesale grounding of older, higher- maintenance aircraft. What remains in service is a smaller fleet of newer, lower maintenance types with inherently more reliable and longer-lived components.
After previous recessions, most of the grounded aircraft have been returned to service, often with start-up airlines and, after conversion to freighters, with cargo carriers. This time around, many in the industry believe the oldest types - Boeing 727s, early 737s and 747s and McDonnell Douglas DC-9s - will never fly again.
"The classic aircraft are melting away leaving the new generation aircraft, which are so much more reliable," says Bernd Kessler, Honeywell Aerospace vice-president and general manager aviation aftermarket services. This has huge implications for that substantial sector of the US maintenance, repair and overhaul industry that revolves around supporting and modifying these older airframes and their engines, avionics, systems and components.
Many of aircraft that may never fly again are powered by Pratt & Whitney's JT8D and JT9D turbofans, mainstays for many of the engine shops in North and South America. Parent company United Technologies has acknowledged the impact, revealing that spares sales at P&W were down 40% in the last quarter of 2001, largely because of the widespread grounding of JT8D-powered narrowbodies and JT9D-powered widebodies.
In addition to grounding aircraft, airlines are also flying less and taking engines and components to their full overhaul lives, says Kessler. When a component breaks or wears out, airlines are now more likely to repair it or replace it with a used part. This is impacting the spares sales of those companies with a majority of their products on new generation aircraft.
Spares slump
GE Aircraft Engines says spares sales have been down 15-20% since 11 September. Revenues at maintenance arm GE Engine Services were flat in 2001, propped up by sales of engine upgrade kits, but are expected to be down 15% this year. The company is cushioned somewhat by the fact that only around 30% of the parked aircraft are GE-powered, but as Engine Services also overhauls P&W as well as Rolls-Royce engines, there is some impact from the grounding. On the positive side, GE expects its services business to bottom out this year, while the drop in new engine deliveries is expected to continue through 2003 and into 2004.
Avionics and systems suppliers are also being affected. Service and support revenues at avionics manufacturer Rockwell Collins were down 25% in the fourth quarter, in line with the reductions in US passenger traffic. While the firm saw some improvement in service sales in December, "retrofit sales are seeing significant deferrals", says chief executive Clay Jones.
There are grounds for optimism, however. "We are seeing airlines coming in to reopen discussions on a few retrofit items. Where they have aircraft going through C and D checks they see the advantage of doing certain upgrades during the down period," Jones says. "If they have got to do something over the long term, it makes sense to do it when the aircraft is down for major modification."
The story is similar at Honeywell, where the product range spans avionics, electronic and mechanical systems, auxiliary power units (APUs) and engines. At Honeywell Engine Systems & Services, where services and spares account for around half the business unit's $5 billion in sales, aftermarket revenues have declined by up to 18%, Kessler says.
"Spares sales are 25-30% down across the industry, and the airlines are not buying new parts any more," says Kessler. He believes there has been a fundamental change in the aftermarket, with the airlines' new-found willingness to use repaired and refurbished parts opening up opportunities for new services. Honeywell has to move away from its focus on products, including spares, towards services, he says. "We are 20% services and 80% products today. We have to transform to 60% services, 40% products. It is the only way to survive and achieve decent growth."
Honeywell's approach is to drive down its overhaul cycle times to become more competitive, to develop advanced repair technologies, and to offer end-to-end logistics management services. Kessler says turnaround times at the company's overhaul facilities have been reduced from 70 days to the "mid-20s" for engines, from 55-60 days to below 20 for APUs, and from 30-35 days to between seven and nine for mechanical system components.
Repair technology
With airlines looking for ways to keep components in service, original equipment manufacturers (OEMs) such as Honeywell and GE are investing heavily in repair technology. "The scrap rate in this industry is still huge," says Kessler. "But the time when the OEMs could crank out new parts and sell them at huge mark-ups is over. The airlines expect low-cost, high-quality repairs." He says Honeywell has established a sales force to work with airlines and identify repairs for high scrap-rate parts.
Diagnostic and inspection systems and services are another potential "bubble business" in the aftermarket. Later this quarter, Honeywell will roll out a wiring integrity monitoring system, both as a product and a service, that promises to reduce inspection costs dramatically. GE Engine Services, meanwhile, has formed a unit that provides inspection services, including remote diagnostics.
In the aftermarket, the aftermath of 11 September looks set to separate those players who perform only maintenance, repair and overhaul from those who have the capability to come up with solutions to problems which may only now be presenting themselves to the airlines.
Source: Flight International
