Engine maintenance providers are taking different approaches to tackling overcapacity. Some are eager to jump on the acquisition trail, while others plan to give takeovers a wide berth
The question of overcapacity and the need for further consolidation in the engine maintenance, repair and overhaul sector draws mixed responses depending on who you ask. Some engine maintenance specialists are aggressively seeking out and taking advantage of potential acquisition and joint venture opportunities, while others plan to steer clear of mergers and takeovers to focus on developing their core capabilities and building alliances with various parties.
A strong proponent of future consolidation among engine maintenance providers is Jim Keenan, senior vice-president and general manager at Pratt & Whitney Global Service Partners. He believes there is "very significant" overcapacity in the marketplace, and is keen to take advantage of it to grow P&W's business. "Consolidation in the MRO industry is required as much as in airlines themselves," says Keenan, although he adds that all of P&W's facilities are full "because we focus on winning business before building facilities".
P&W is concentrating on increasing its presence in China and Turkey, and is on the lookout for additional joint venture opportunities in these two countries. The company will later this year break ground on a new CFM International CFM56 overhaul shop in Shanghai, which it is opening through a joint venture with China Eastern Airlines. "We've been in the CFM56 business for many years but we're now expanding it dramatically as we complete our joint venture with China Eastern, the largest CFM56 operator in the Asia Pacific region," says Keenan.
P&W also plans to open a maintenance facility for the CFM56 and the International Aero Engines V2500 in Istanbul next year, as part of its agreement with Turkish Airlines Technic. "Our business model is based heavily on joint ventures, and half of our 26 facilities are joint ventures," says Keenan.
In addition to its joint venture strategy, P&W is also taking an opportunistic approach to potential acquisitions: "We continually look for good opportunities to grow our business, and we have the resources to engage in mergers and acquisitions where we see opportunities," says Keenan.
Another company poised to take advantage of potential acquisition opportunities is Germany's MTU Aero Engines, which is keen to expand its presence in Brazil, India, Russia and the Middle East.
"It's fair to say we are a financially strong company and we're in a position to make acquisitions if the right opportunity comes around," says MTU's chief executive of commercial maintenance, Bernd Kessler. He adds that the company is on the lookout for both original equipment manufacturer and maintenance acquisitions.
"We will not make an acquisition just for the sake of it - it would have to be a strategic fit with our core engine business," says Kessler. "We're looking for opportunities in the field of technology - acquisitions around repair technologies and potential acquisitions in new markets and regions. We're looking for opportunities to spread our wings in the Middle East and India."
In addition, MTU is considering partnerships with airframe maintenance providers. "MTU will never get into the airframe business but we are looking for ways to co-operate with airframe MRO providers," says Kessler. "We're not looking for joint ventures, it would be more marketing and service partnerships." He adds that this is something that could happen "relatively soon", depending on available business opportunities.
MTU is also looking to spread its wings in terms of the types of engines it has the capability to maintain. "We are looking at expanding into new engine programmes on the MRO side," says Kessler. "We already do all the high growth engines, but we're in the process of moving into new engine programmes. This is a central point in our overall strategy."
This approach is also being taken by P&W, which aims to "dramatically increase" its share of the CFM56 and V2500 servicing market. "If we include the V2500 as an engine manufactured by others, our percentage of the total overhaul market for competitor products is 25-30%," says Keenan, adding that he expects this figure to grow to 40% over the next five years.
Another company to keep an eye on is Dubai Aerospace Enterprise (DAE). It acquired Standard Aero and Landmark Aviation at the beginning of August and plans to quickly expand their portfolio of engine overhaul services. DAE Engineering chief executive Robert Mionis says organic growth for the newly combined companies is planned as well as additional acquisitions.
But he adds that DAE will not rush into acquiring more engine maintenance providers. "We will be very choosy," says Mionis. "We will only go for acquisitions that have value of enterprise and differentiation. We don't want to compete on labour. We want to compete on turn-times and technical competence."
Dubai expansion
DAE eventually wants to establish a maintenance facility in Dubai, leveraging the capabilities it acquires overseas. Standard Aero is the world's largest independent maintenance provider for regional jet and turboprop propulsion systems but all its shops are in North America and only 25% of its business is generated overseas. While international expansion is possible, Standard Aero's most likely first step under DAE will be to expand its portfolio to include larger engines. It currently only handles engines powering aircraft with 50 seats and fewer.
Mionis says collaboration with SR Technics, in which DAE acquired a 30% stake last year, will also be pursued. He points out that the engine capability of SR Technics is focused on larger engines, primarily the CFM56 and PW4000, so there is no overlap with Standard Aero and plenty of synergies.
SR Technics is part of DAE's strategy to become a major global maintenance provider, but Mionis says it will continue to operate independently. Standard Aero and SR Technics are both top 30 commercial aviation maintenance providers and combined they have an annual revenue stream of about $1.5 billion. This figure will grow as DAE continues to hit the acquisition trail but Mionis says he is not interested in buying airframe service providers because of overcapacity in this sector: "The most attractive piece to us is engines. It has a lot of value added and a lot of technology differentiation."
However, not all engine overhaul providers are as keen on acquisitions, joint ventures or expanding their maintenance portfolios to include the engines of other manufacturers. For instance, Brad Mottier, president of services at GE Aviation, says that while overall capacity in the engine maintenance market can outstrip demand by two to two-and-a-half times depending on the engine type, and while "lots of shops are partially filled", GE does not plan to make any acquisitions.
"Consolidation will happen naturally because even more overcapacity is forecast. That's why we closed two shops," says Mottier. GE is not following the same joint venture strategy as P&W either, preferring instead to form alliances: "We have some joint ventures on component repairs but our approach is to form an alliance rather than a joint venture. Joint ventures are not our growth strategy our growth strategy is to have alliance partners."
Rolls-Royce, meanwhile, is not ruling out seeking acquisitions or repairing other manufacturers' engines. On the former, Miles Cowdry, president of services at Rolls-Royce, says: "We've grown not through acquisitions but through building capacity through joint ventures and wholly-owned facilities. But we need to keep an eye on [overcapacity] as various countries put in capacity. We need to take advantage of it." He adds that Rolls-Royce's position on repairing other manufacturers' engines is "never say never", but says "we are in a different place to Pratt & Whitney".
Conflicting views
The word "overcapacity" is frequently bandied about when talking about the engine overhaul market, but it is difficult to quantify the actual level of overcapacity that exists. There are differing views on the subject depending on the area of the world and the engine type under discussion.
MTU's Kessler says there is overcapacity on the CFM56, but adds that this is a large market which has yet to reach its peak: "The first big maintenance wave is yet to come, and there will be a spike in demand over the coming years which will use most of the capacity in the marketplace."
In the USA, however, engine overhaul growth is "phenomenal" and overcapacity in the market is not a problem, according to Tony Charaf, senior vice-president of the TechOps division at Delta Air Lines.
"I don't believe in the US that we have an abundance of capacity in the engine sector. We are having no problems growing our engine MRO business," says Charaf. "You could argue that there is an abundance of capacity in the world, but we don't feel that pressure here in our facility. [Engine overhaul] is the largest contributor to our revenue."
Mottier gives a less certain roundup of the overcapacity situation: "There still isn't a universal understanding of supply and demand, or the excess capacity that exists today."
David Stewart, founding principal of maintenance consultancy Aerostrategy, believes most of the consolidation that needed to happen in the engine servicing sector has already happened. "There is not a lot of consolidation left to happen," says Stewart, adding that there are "very few independent engine MRO providers left".
Garry Copeland, engineering director at British Airways, also says life will become tougher for the independent maintenance providers as barriers to entry on newer engine models increase. "I am not overly confident about the future of independent engine MRO providers," he says.
Race to expand
Medium-sized airframe maintenance providers are racing to expand globally to try and keep up with industry giants Lufthansa Technik, SR Technics and Singapore Technologies (ST Aero). The big three have chalked up impressive growth rates in recent years through a mix of acquisitions and new joint ventures. Medium-sized firms such as Sabena Technics and TAP Maintenance and Engineering are now trying to catch up by pursuing their own acquisitions. "I don't think the era of consolidation is ending," says Sabena Technics chief operating officer Pierre Reville. "There will be more."
Sabena has acquired France's TAT Group and EADS Sogerma's maintenance business, including its US facility. Reville says it is now looking to expand its network in Latin America and Asia beyond the new joint venture operation it has just established in India. "We're trying to be more global," he says.
TAP also has expanded its footprint beyond Europe for the first time by buying VEM in Brazil. VEM chief executive Filipe Morais de Almeida says the former Varig maintenance subsidiary needed to be acquired by a larger player "to improve ourselves in turnaround time and efficiency". He adds: "This [being acquired] is a natural trend in the market. Companies are following this opportunity and want to increase their business."
Air France Industries/KLM Engineering & Maintenance is also looking to acquire companies outside Europe. "For us to be in the major league of global providers," says KLM Engineering and Maintenance executive vice-president Peter Somers, "acquisitions have to be part of our strategy."
The 2004 merger of Air France and KLM created the world's second largest aircraft maintenance provider but Somers says it is still Europe-centric: "We're close to the size of the Germans but they had a head start of course in building a global network."
In Asia, ST Aero continues to expand its global footprint with the opening this year of a joint venture in Panama, and plans more acquisitions and jvs. But medium-sized Asian providers say they're happy to stick to their home markets and are busy adding capacity to keep up with soaring demand.
Hong Kong Aircraft Engineering (HAECO) chief executive Ashok Sathianathan says it is in no hurry to establish an operation outside Asia and the Middle East, where it has just opened a new joint venture facility, and is not interested in acquisitions. "Our vision is not to be the biggest but the best," he says. "We won't go into markets just to spread our wings. That's not our strategy."
Source: Airline Business
