Germany needs to lower its costs and relax its employment rules if it is to sustain its position in the worldwide maintenance repair and overhaul market
Its reputation for engineering quality and attention to detail goes almost hand-in-hand with its image as a country that has high employment costs and rigid working laws. So it is partly thanks to the former, and in spite of the latter, that Germany is a world player in the aerospace maintenance, repair and overhaul (MRO) business.
Hamburg-based Lufthansa Technik (LHT) is the world's largest MRO provider, while Munich-based engine manufacturer MTU claims to be the world's largest independent provider of aeroengine MRO. Germany is also home to Airbus's centre of excellence for after-market cargo conversions, with the EADS Elbe Flugzeugwerke (EFW) plant in Dresden having been installing freight doors on A300s and A310s since 1996.
LHT's growth has historically been linked to its airline parent company, Lufthansa, which after the Second World War chose to establish its heavy maintenance facility in Hamburg, rather than at its corporate headquarters at Frankfurt Main airport. In Germany, the LHT Group also includes Condor Cargo Technik, which specialises in overhauling Boeing 757s, 767s and MD-11s, and Lufthansa AERO, focusing on Pratt & Whitney turboprop engines and now the General Electric CF34 regional jet engine.
Although its line maintenance activities employ over 3,000 people in Frankfurt and a further 1,000 around Germany, the detached nature of LHT's Hamburg facility led to a less-insular outlook than other flag carrier maintenance shops. LHT was the first to look to bring in outside work with third-party contracts in the 1980s.
According to LHT chairman August Wilhelm Henningsen, as the third-party orderbook has grown (LHT services 370 airlines and private aircraft operators worldwide), its prices have had to remain competitive. "The driving factor in any MRO deal is still cost and so contract prices have become global along with the market," he says.
Since airlines can fly their aircraft to where the price is best, one of the core steps to control costs taken by LHT is to relocate labour-intensive activities to territories with lower labour costs.
Irish labour
This strategy was identified in 1989 and the first step was to establish narrowbody heavy maintenance shop Shannon Aerospace as a joint venture with SR Technics. As well as Shannon Aerospace, now wholly owned, the company established Lufthansa Airmotive Ireland in Dublin, specialising in CFM International and Pratt & Whitney engines in 1997.
Irish labour, however, is no longer cheap, and LHT has extended its search for more inexpensive workers. Lufthansa Technik Philippines in Manila was set up in 1999 as a joint venture with MacroAsia and initially had one line reserved for Philippine Airlines, with a second for third-party Airbus A330/A340 overhauls. LHT facilities in Luqa, Malta perform C checks for Airbus A320s and Boeing 737s, while LHT Budapest handles heavy 737 D checks. There is also an LHT short-haul aircraft centre in Brussels and component repair centres in Ireland, Malaysia and most significantly in Shenzen, China. LHT and Rolls-Royce are also searching for a location for the N3 facility for Trent engines, which is likely to be somewhere in the new EU member states with good connections to Frankfurt.
The strategy is not to abandon Germany, however, but rather to expand overseas along with the market. LHT's main facility, at Hamburg's airport, employs 6,100 people, a figure largely unchanged over the past decade and representing two-thirds of the group's total in Germany.
Aside from the folly associated with abandoning significant investments in Hamburg, Henningsen admits relocation of work can be politically sensitive. This is particularly true now, as German unemployment is running at around 4.7 million, or 11% of the workforce. But Henningsen says the unions understand the need to supply customers with a high-value product that also needs to be competitive against the world market price. Union representatives sit on LHT's supervisory board, and any decision to move work is approved by them on the workers' behalf.
Henningsen points out that most new projects start as joint ventures, and as such generate more work. An example is an agreement reached last year with Austrian Airlines. Under the c65 million ($77 million) five-year deal, LHT will overhaul Austrian's A320s, A330s and A340s in Budapest and Manila and complete engine overhaul in Hamburg; in return, Austrian's engineers will take over the C checks of Lufthansa's A340 fleet in Vienna.
But with heavy maintenance increasingly farmed out to cheaper outstations, the concentration at Hamburg has been on the higher-value end of the MRO chain. LHT Hamburg focuses on component repair, engine overhaul and parts development. It also specialises in in-flight entertainment and VIP completions, which are less price-sensitive and require greater skills, says Henningsen. The company also invests heavily in component test benches to reduce time spent by engineers. "But this investment pays off because we are known as a reliable supplier," says Henningsen.
It has also increased productivity, which compensates for part of the higher per-employee cost. Lufthansa Technik insists that one of its selling points is quality and says the nature of German people contributes towards this. Henningsen says: "Of course Germany is not cheap but it does have advantages; we have a very highly educated, very technically minded people who value precision."
Price pressure
This approach will be needed, however, as the MRO market is contracting-in overhaul time as aircraft components become more reliable. This means there is less work to spread around, which could lead to an even greater downward pressure on prices, he says. Ironically, much of the increased reliability has come from MRO providers feeding back data on corrosion points and failures to original equipment manufacturers. Henningsen is sanguine about this, saying that although there is little obvious reward in feeding such information back, the end result is good for the aircraft industry as it results in cheaper aircraft, which means more overall aircraft requiring servicing.
The MRO sector is bloated, however, with almost every flag carrier in Europe retaining its own maintenance departments - and in the case of Sabena and Swissair, the maintenance department has survived the airline. Henningsen says: "There are lots of players and no one disappears. The industry needs consolidation."
LHT's past success enables it to invest in new equipment to service new aircraft types, which Henningsen believes to be crucial. Witness LHT's decision to invest in Embraer regional jet component repair, which led to the LOT Polish Airlines deal, he says. Those who cannot service new types will eventually die, he adds.
The decision to set up a cargo conversion business in the former East German city of Dresden was based on capacity rather than cost, says EADS-EFW vice-president sales and marketing Juergen Habermann: "We had to leave Hamburg Finkenwerder as more capacity was needed for Airbus final assembly. We found the plant in Dresden had the facilities and the workforce."
Habermann says that there was no government-funded financial incentive behind the move to the east, and it was purely down to finding a plant that had the capacity and workforce to carry out the conversion work as the business geared up for the major cargo boom in the late 1990s. "When we started the conversion line we employed 200 people. We now have 800, plus 50 apprentices," says Habermann. "We had to train all the people and the government provided some financial support for that."
Conversion work began at the plant in 1996, and it has now completed 50 cargo conversions of the A300 and A310, and EADS has delivered a total 103 conversions across all its plants (Bremen Lemwerder, Hamburg Finkenwerder, Dresden and EADS Sogerma in Bordeaux). It is also the centre for the A310 multirole tanker transport (MRTT) conversion programme for the German air force.
Soviet era
Before reunification, the plant was called VEB Flugzeugwerft and had been responsible for overhauling Soviet era civil and military aircraft and helicopters. "It carried out heavy maintenance on Tupolev Tu-154s and MiG-19/21 fighters," says Habermann.
After the wall came down, EADS's predecessor Daimler-Benz acquired the Dresden plant and had to find a use for it. It initially produced major components for the Fokker 70/100 airliner - work that again had been transferred from Hamburg.
EFW can also offer full maintenance and overhaul during modification. The plant is responsible for manufacturing the composite floor panels and other furnishing components for the entire Airbus family, and has been contracted to develop and manufacture the lower deck cargo lining for the A380 passenger and freighter aircraft. It has also delivered over 3,000 reinforced Airbus cockpit doors for retrofit/installation.
After reaching a peak conversion rate of 11 conversions at Dresden in 1999, levels have dropped. The company has a backlog of 14 conversions - four A300s, seven A310s and three A310 MRTTs.
The plant found a strong supply of good local labour as it expanded in the late 1990s, and has an apprentice school at the plant that employs around 50 trainees on three-year courses. "We get a good selection of candidates each year, as we require around 12-20 new apprentices and receive over 400 applications," says Habermann.
When the conversion business moved east, there was no real cost advantage, but Habermann says that has changed as it now benefits from the lower cost structure that still exists in the old communist-run region as it strives to compete with west Germany for work. "The wages in East Germany were very low, and although they are increasing, they're still lower than in the west," he says. "There are also longer weekly working hours - 45h against 38h in the west."
Germany's rigid employment laws have hindered EFW's flexibility to adjust to peaks and troughs of the cargo market. "Since we built to our peak capacity we have not dismissed anyone. During the downturn we've put people out to other Airbus facilities because we can't easily hire and fire." Habermann says the workforce at the last peak was around 900 people, 100 of whom were contractors. These contracts have since ended, but future growth will be handled by contractors again rather than expanding the employed workforce.
Habermann says there have been inevitable cost increases amid efforts to bring the working standards of two countries together as one. But he does not believe this will necessarily see east German cost levels rise to meet those in the west, as there are signs that west German industry has realised that something may have to be done to ensure it is more competitive in the world market.
Germany's switch to the euro has made "no difference" says Habermann, and he believes that any pain suffered recently due to the weak dollar would have occurred if the deutschmark was still in use. However, the majority of revenue is in dollars and costs in euros, so "we are trying to go to around a third of sales in euros, but it is difficult", he says.
The Dresden plant is responsible for the programme management of Airbus cargo conversions, and has built its skill in the installation of cargo doors, including pre-assembly work. The doors themselves are produced by Spanish partner EADS Casa, having previously been built by EADS at Nordenham, northern Germany. EFW produces the floor panels. Habermann sees no reason to move work to lower-cost countries, as start-up training and infrastructure costs would negate any price advantage.
EFW has long been aiming to expand its conversion business to include the narrowbody Airbus models, but knows it must bide its time until the residual values of secondhand aircraft fall low enough to make conversions viable. "We think the market will could begin to appear from 2008, but Airbus does not see it until 2010-12," says Habermann. He will need to convince Airbus if he wishes to meet his earlier prediction, as EFW requires the manufacturer to provide the conversion design.
Door installation
When Airbus goes ahead with a cargo door for the A320 family, EFW could find itself in competition with other manufacturer-approved converters: "Airbus could decide to work with another supplier outside Europe," says Habermann.
MTU launched its first dedicated repair shop only 20 years ago, and has grown its MRO network to include stations in Hanover and Berlin-Brandenburg in Germany, Vancouver in Canada, Zhuhai in China, Kuala Lumpur in Malaysia and São Paulo, Brazil. MTU chief executive Dr Klaus Steffens says the globalisation of MTU's MRO business is driven by the need to gain access to overseas markets rather than pure cost saving. "I would say 90% of our decisions are strategic decisions to have access to certain markets. We did not go to China initially because wage rates are low, but to have access to the marketplace."
Steffens says the case for outsourcing engine MRO labour is weaker than that for airframe MRO providers because is it is not as labour-intensive, with most of the "value adding" in an engine overhaul accounted for by the supply of replacement parts and repair of individual parts, rather than tear-down and reassembly.
The final evolution of Germany's full integration looks set to have major implications for the MRO business if the issues of rigid employment laws and high costs are not tackled as hoped.
ANDREW DOYLE / MUNICH, MAX KINGSLEY-JONES / LONDON & JUSTIN WASTNAGE / HAMBURG
Source: Flight International
