Aerospace manufacturers are being asked by their airline customers to offer more comprehensive and cost-effective support in today's tough financial climate. How are they reacting to the challenge?
Aerospace manufacturers have spent much of the past decade focused on how they can raise their game in the aftermarket, offering ever deeper life-time support deals to their customers. Over the past 12 months, a cash-strapped airline industry has been demanding even more, and there is good reason why the original equipment manufacturers have been keen to oblige.
While airlines have been eager to reduce their investment in new engineering capabilities and cut their variable costs, so the manufacturers have been equally keen to capture their share of a growing and potentially lucrative services sector. Such trends were there well before the events of 11 September, but they appear to have been accelerated by the crisis.
While some carriers are clearly not yet ready to quit maintenance entirely and others continue to build up centres of service excellence, all are reviewing how they operate their support businesses and seeking help from the manufacturers on how they can do it cheaper.
Honeywell notes the same trend in the post-Gulf War period in the early 1990s, with airlines asking for new support services in their efforts to cut costs. "This time we are much better positioned," explains Adrian Paull, vice-president for customer services at the company's Aerospace Electronics Systems division. "We have got a number of additional services in our portfolio, such as a healthy position in pre-owned equipment, while on the leasing side, we can put programmes together with financial partners to provide initial spares provisioning as part of a power-by-the-hour agreement."
Engine aftermarket
However, discussions have gone beyond short-term measures to cut costs, towards talk of forging much deeper and longer-lasting relationships between manufacturer and airline. "We are listening to our customers and developing products around what they want," says Daniel Heintzelman, president of GE Engine Services. "We have to be right there with them and do things we've never done before."
Since the last downturn, GE has led the field in building up a massive aftermarket business with revenues now coming in somewhere around $5.5 billion including a mix of civil, military and spares. It has since been followed by Pratt & Whitney (P&W) and Rolls-Royce.
According to specialist consultancy Aero-Strategy, the underlying engine repair and overhaul market should be worth around $10.3 billion this year, representing 30% of all civil maintenance work, which it pegs at $34 billion. The consultancy estimates that manufacturers, led by GE, now have a 46% share of engine overhaul, with another 14% served by independents such as MTU. Another 10% is carried out by airlines for third-party customers and the remaining 30% is captive.
For GE, standing by its customers has meant a rapid expansion of its "At the Customer/For the Customer" (AC/FC) programme, developed to help airlines reduce their costs. Over the past year, GE realised that although it had made a significant expansion in its services footprint across the globe, there were airlines with their own maintenance shops with which it had little activity.
"It goes way beyond selling a product," says Heintzelman. "We are taking our important Six Sigma resources and putting them out there in the customer shop." Six Sigma is a process improvement tool and methodology used by many corporations to improve business efficiency. Trained GE managers - known as "black belts" - are sent out to work with the airline's maintenance operation. According to GE chairman Jeffrey Immelt, the programme has already saved airlines $400 million at their maintenance sites. It does not necessarily commit airlines to increasing their business with GE, but nevertheless brings the customer closer.
"As the manufacturer, the key to our role is being able to develop the technology and solutions to allow industry to continue to drive productivity year after year," says Heintzelman. "Some airlines are thinking more broadly around the cost of operations, which has given us the opportunity to think about solutions to introduce change on a planned rather than reactionary basis." This has resulted in a strategy to produce packages for its existing engines that incorporate "today's technologies to enhance the residual value of the upgraded engines and the aircraft they power". An example of this is a $300 million deal with Southwest Airlines for upgrade kits on older CFM56 engines.
Partnership building
The record of the engine makers in building formal relationships with carriers over the past decade has been impressive. And airlines have been becoming more receptive to possible tie-ups over the past year, according to John Thackrah, vice-president for aftermarket services at P&W. "Airlines are looking at all possibilities within their organisations to focus on their core competencies and shed MRO. Some are looking at joint ventures or assistance with selling a product, or with selling a product line," he says.
KLM's Maintenance & Engineering division is one of those in search of partnerships, although P&W's own efforts to form a comprehensive "nose-to-tail" operation with the Dutch airline faltered last year. The carrier has since turned to GE to create a - for now - less ambitious relationship.
The "customised service agreement" between the two is also an example of the flexibility both companies are willing to show to get a deal done. It will see GE helping KLM streamline its overhaul processes, increase efficiency and reduce inventory levels, with the focus on GE's CF6 engine, which power the carrier's Boeing 747s and 767s and its newly ordered Airbus 330s. The resulting release of capital will be reinvested by KLM in its new c75 million ($73 million) engine overhaul centre.
The partnership approach is one that Boeing is also now adopting in the aftermarket field after realising it was not best suited to offer a complete MRO service. Boeing was discouraged by the low profit margins posted by airline maintenance shops, as well as the unease the venture was causing among aircraft customers.
Boeing's readjusted philosophy sees it "looking for opportunities to partner with airlines and to put together a better value solution as a result", says Michael Bair, executive vice-president at Commercial Airplane Services. "It's a focus change. Our focus in the aftermarket business is making other businesses successful. If that happens, then we'll get something too." Boeing believes that it "brings the intellectual capital of the aircraft" to the services equation, and wants to leverage that knowledge in its dealings with airlines.
One of the efforts is to "try and get more airlines to adopt the Boeing Maintenance Program (BMP)", the manufacturer's standard guide for how to service and maintain its aircraft, explains Bair. "A lot of airlines don't use it; it makes things incredibly inefficient."
As a result, aircraft are not maintained in the same way or serviced at the same recommended intervals, making it more difficult to transfer them to other airline fleets. Following the BMP will avoid a lot of servicing duplication, and "could help to drive 25-30% of non-labour maintenance costs out", says Bair.
Two years ago, when Boeing first approached carriers to offer its services in the area, few were listening. "Now we are starting to see airlines come to us and ask us to help them implement the maintenance programme that came with the aircraft," he says. Boeing can offer a package that includes running the BMP, reliability analysis, providing all spare parts and even performing the aircraft modifications that an airline cannot do.
Its most comprehensive servicing contract to date, and one that has only been running for 10 months, is with Spanish carrier Aerolineas de Baleares, says Bair. Boeing essentially manages the entire maintenance programme for the airline's fleet of six leased 717-200s.
Service packages
Honeywell saw the demand for more creative service packages starting in early 2001, when the cost crunch for carriers really began, says Bernd Kessler, vice-president for aviation aftermarket services at the company. After 11 September, the calls to outsource various aspects of maintenance came thick and fast. "Airlines were saying: take items like APUs (auxiliary power units) and components off my balance sheet," he says. "Customers are expecting tailored solutions and we have to have the flexibility to meet those expectations."
Honeywell already had in place its Integrated Services Solution to address this requirement, and its first nose-to-tail system and component support package has been in place with French charter airline Euralair for its Boeing 737NG fleet for several months. This deal includes Honeywell components and those of other manufacturers. It has seen the company build up a "digitised supply chain" that guarantees the just-in-time delivery of spare parts, and Honeywell effectively "manages the repair business in the background," says Kessler.
"We are in the process of transitioning our aftermarket business from wrench-turning to a real services organisation," he adds. This includes providing engineering support to carriers and MRO groups, like Switzerland's SR Technics.
Power-by-the-hour contracts - in which airlines pay a fixed rate per flight hour for the maintenance of systems and components - were already popular and have become more so. A growing population of new generation engines are on such deals, whether from manufacturers or third party operations, and a rising number of other major components are joining the list.
Continental Airlines, for instance, has signed a large deal with Honeywell that sees all that manufacturer's systems and components, across the carrier's entire fleet, coming under one umbrella power-by-the-hour contract. Honeywell is also promoting the notion of providing system upgrades through the deal, says Adrian Paull. "There is very little appetite for new kit today, but we can provide upgrades by the hour for a defined period." For example, the hourly rate paid could be increased for a couple of years and Honeywell will install upgraded avionics technology.
For the airline, such deals bring predictable part servicing costs during the lifetime of the contract. According to International Aero Engines (IAE) president Stephen Heath, from the manufacturer's point of view it assists in the sale of new engines, and the total value of a power-by-the-hour deal often exceeds the value of the original engine purchase price. "Today, 90% of our proposals have a fleet-hour agreement as part of them," he says, with 20-25% of IAE's V2500 engines covered by such deals today.
When IAE was formed in 1983 by P&W, Rolls-Royce, MTU and Japan Aero Engines, it was never envisaged that it would engage in the aftermarket, explains Heath. "What has evolved is a recognition by customers and manufacturers that aftermarket support is an important part of an manufacturer's portfolio," he says, with by-the-hour contracts forming just one element of IAE's commitment to provide an appropriate level of support in recent years.
Total care
IAE consortium partner Rolls-Royce believes its power-by-the-hour programmes, which it calls Total Care Packages, are a "strategic differentiator" for the manufacturer, says Mike Terrett, president of civil aerospace at Rolls-Royce. "We have got 45% of current production engines on some form of Total Care or fleet hour programme with 52 airlines," he says. Around 40% of Trents in the large widebody jet market and 83% of AE3007s in the regional jet sector are covered by such programmes.
"Total Care is all about the engine staying on wing. It aligns our interest with those of the customer. What's good for them is good for us," says Terrett. "It fits with our ethos of not competing with our customers but co-operating with them."
P&W and GE have similar ambitions. "Fleet management programmes are our future," says P&W's Thackrah. Today around 40% of its engines are covered by power-by-the-hour packages.
GE's Heintzelman estimates that the manufacturer has a backlog of $26 billion worth of contracts to support the existing and still-to-be-delivered engines of its customers. It struck its first full-service deal in the early 1990s. Such deals give the manufacturer the chance to improve the engines to reduce their future maintenance costs - which is in their interest, as the contracts generally last five or 10 years. "We know we have to deliver value over a long period of time, and we will provide the technology to achieve that," says Heintzelman.
The message from the manufacturers is that their customers are seeking more help and that they really are listening to their pleas. "We have been on a two-year journey to ask what can we really do as the manufacturer to reduce the cost of ownership to customers," says Honeywell's Kessler. Manufacturers know only too well that healthy airlines are essential to their own success, and that they must play their part in helping customers back to their feet.
Source: Airline Business
