The young but booming regional jet fleet remains on course for further robust expansion, raising the issue of who will come to dominate maintenance in this growing sector?
Last year was a watershed for the regional jet aircraft industry. After years of sustained boom, aircraft orders finally went into decline and traffic dwindled. Yet there are already signs on the horizon that the regional sector is poised for another spell of bullish growth. That again raises the question of how this expanding fleet will be maintained and by whom?
In global terms, the spend on maintaining a still young regional jet fleet is relatively modest. Specialist maintenance consultancy AeroStrategy estimates that the total spend on commercial aircraft maintenance came in at just under $34 billion last year, of which some $1.5 billion, or just 4% came from regional jets.
Yet forecasters are bullish. Earlier this year, Rolls-Royce, supplier of engines for the Embraer jet family, forecast that regional traffic will average healthy 5.7% annual growth over the next 20 years as new jet routes continue to be added. That translates into some 7,900 new aircraft deliveries, of which almost half will join the growing US fleet and a quarter go to Europe.
And as the fleet trebles over the next 20 years, AeroStrategy projects that this will translate into spending of at least $4.2 billion on maintaining the regional jet fleet. However, the consultancy notes that just how lucrative this market actually proves is still uncertain, not least thanks to the prospect of increasing competition. While more flying hours provide a boost to the level of maintenance, industry deregulation has created an open market, where competitive pricing is likely to reduce the overall spend. David Stewart, founding principal of AeroStrategy, says pressure on airline costs and a focus on core business have spawned a "competitive and viable third-party market, with outsourcing across the market the key element of cost reduction".
The trend towards outsourcing has increased because maintenance, except for line maintenance, is not seen as a core function for regional airline operations. But Stewart adds that independent providers make up only a small - if increasing - part of the regional jet maintenance business, pointing to the high investment required against a relatively small revenue stream from airframe maintenance compared to that generated by larger aircraft. Airframe maintenance for all types accounts for only 20% of the business, with engines taking up twice that volume at 40%.
Third-party limits
The third-party services market available to the independents is a small element in the regional sector, says Stewart. It is still dominated by original equipment manufacturers covering airframes and high-value engine and components, as well as a few large airline maintenance shops, he adds.
In the engine overhaul sector, the manufacturers have established a strong market presence using long-term agreements. However, quality independents such as Standard Aero and BBA are beginning to enter the market. With airframe heavy maintenance, supply has been conducted mostly in-house, as large US regionals like Comair, Atlantic Southeast Airlines (ASA) and Continental Express have all set up capability. Independents have had the toughest time in the components sector, where companies such as Honeywell and Rockwell Collins have been successful selling long-term component management deals. However, fresh opportunities are likely to develop as parts come off warranty, Stewart says.
Of the 1,670 modern regional jets in service, around a 1,000 are operated by only 11 airlines, of which all but one are located in the USA and all of which are affiliated to majors. Economies of scale come into play here, and some of these airlines see the retention of this sector as cost efficient. Delta-owned ASA, for example, operates 100 Bombardier CRJs and aims to keep maintenance work in-house wherever feasible. "The decision is based on economics and the size and type of fleet we operate," says Anthony DiNota, ASA's vice-president maintenance and engineering. An in-house services operation enables ASA to respond to changes and to build a maintenance team with specialised competencies, he argues. "The CRJ is the cornerstone of our growth and market capabilities, so it is logical to increase staff, tooling and equipment to become specialised on the fleet type," he adds.
Although opinions vary on what constitutes a viable fleet size to keep maintenance activity in-house, AeroStrategy's Stewart says 30 aircraft would be a minimum for the airframe part. Only the 11 regional, mainly US, grants meet this criteria. As for turbofan engines, although a potentially more lucrative market, at least 50 aircraft (representing 100 powerplants) would be needed to justify investment in equipment and test cells.
Founding principal of BACK Aviation Solutions Steven Casley is certain outsourcing will continue to increase. He cites two major factors that have constrained it until recently. First is a lack of focus on regional aircraft by the independent servicing providers. Second is restrictive labour contracts, mainly in the USA. But he says these are being addressed. The expanding role of regional aircraft has given providers a chance to place emphasis on this burgeoning sector. Meanwhile, the huge growth of regional jet fleets over the last few years has made it difficult for manufacturers to build capacity quickly enough to maintain required levels of maintenance provision.
Labour constraints
In the USA, Casley says the determination of the labour unions to protect maintenance jobs meant airlines were limited in their outsourcing. But, he says, the most recent airline submissions to the Department of Transportation indicate that, on a direct operational cost basis, US carriers have reached the 50% mark for outsourcing, quite a turnaround from the 70:30 split in favour of in-house maintenance a decade ago.
In the smaller European fleets, European regional jets figure at fewer than 20 aircraft per carrier, with many in single figures. This suggests a predominance of outsourcing. But Troy Jonas, general manager of aircraft services at Bombardier Aerospace, puts the figure at a surprisingly modest 25%. In contrast, maintenance on the present small Asian regional jet fleet is almost 100% outsourced, he says.
Scope clauses in the USA have also limited the number of regional aircraft operated by mainline carriers, holding up regional growth. But the Chapter 11 bankruptcy protection of US Airways and United Airlines has resulted in a re-negotiation of employment contracts, eliminating many restrictive clauses. Casley says this has put pressure on other majors with regional affiliates, primarily American, Continental and Northwest Airlines, to try harder to force a restructuring of employment contracts. "This could result in a domino effect, creating a more flexible order in the market and a resurgence of aircraft purchases, which would eventually filter through to the maintenance business," he adds.
Manufacturers currently take more than half of all outsourcing work, with engine makers having a near-90% market share. Bombardier and Embraer have a global network of service centres and provide a 24-hour, year-round field service, while engine manufacturers General Electric and Rolls-Royce have the market virtually sewn up through their own and licensed facilities. The only real competition will be provided by Delta Air Lines, which intends to service the CF34 engines on CRJs operated by its regional subsidiaries Comair and ASA. Embraer's service centre at its S‹o Jos‚ dos Campos base is backed up by facilities in the USA, Europe and the Asia-Pacific region, while Canada's Bombardier uses its West Virginia Air Center for heavy maintenance for North American customers, and has licensed Adria Airways for CRJ maintenance in Europe.
Long-term plans
Jonas at Bombardier sees a need for a second maintenance centre in the western USA, and says a presence in Asia may be established via a licence agreement when there is the demand. "We lead in CRJ heavy maintenance and see it as a core business to support our position of providing lowest-cost maintenance," he says. "We have two-thirds of the market in North America, but our long-term view is to retain half."
In the short term, Jonas says the market will support only a few well-equipped companies alongside the manufacturers and airlines because today's advanced technology jets consume less than half the maintenance hours of older types. Overall, however, outsourcing will continue to account for the largest part of the maintenance business, and the major portion of that will be provided by the original airframe, engine and component manufacturers.
REPORT BY GÜNTER ENDRES IN LONDON
Source: Airline Business
