Overall, the maintenance market, although still tough, is becoming significantly more active, with the first signs emerging that capacity for certain products and access to the best suppliers is getting tighter
With traffic back to the pre-2001 peak and flying hours climbing sharply surely the good times are back for the maintenance industry? Certainly business activity is strong but many questions remain. There is overcapacity in certain regions and product lines, supplier pricing power continues to be weak and there is unceasing pressure from customers for greater productivity and efficiency.
“I would definitely say that the market is recovering,” says Philippe Erni, executive vice-president sales and marketing at SR Technics, which now has maintenance operations in the UK and Ireland as well as Switzerland, having integrated FLS Aerospace last year. “We are seeing a rise in demand, but on the other hand it is still on short notice. Unfortunately, while demand has recovered, prices have not.”
GE too sees the market picking up and sees a similar picture on rates. “On the aftermarket in general there is overcapacity on some platforms,” says Jacques Chausse, general manager engine services marketing at GE. “This overcapacity creates a huge supply and demand imbalance resulting in price erosion.”
However, the capacity story is highly variable, with the greatest oversupply in airframe overhauls. “The heavy airframe market is peculiar at the moment,” comments David Stewart of maintenance consultancy Aerostrategy. “Most places are busy, but the market is still cut throat.” And few are buying widebody airliner servicing for the long term. “People are buying for the next season because they can get cheaper rates, it is very low margin business.” Some of the exceptions are Cargolux and Virgin Atlantic in their recent multi-year deals with KLM Engineering & Maintenance for Boeing 747-400s and United Airlines with China’s Ameco for 777 checks.
The ability of suppliers to offer slots for heavy widebody maintenance in high-cost regions like Europe will often depend on whether they can wrench their cost base downwards. Otherwise this labour intensive work will naturally gravitate to lower cost regions like the Asia-Pacific. It is already doing so. “If you ask some of the big players in Europe to genuinely say whether they want more heavy maintenance work the answer would be no,” says Stewart. “They want to service the customers they have and focus on other areas for growth,” he says.
KLM has been through this very debate. “Everybody wanted to go east because of low labour rates,” says Peter Somers, executive vice-president of KLM Engineering & Maintenance. “We were struggling with the justification of whether, given the availability of cheap labour in eastern Europe and especially rising competition in China, KLM would be doing the wrong thing by doing [airframe] maintenance in Amsterdam.” A project that has reduced turnaround times by a third on its 747 heavy maintenance lines convinced the company it can remain competitive in this arena.
Capacity question
For some the past few years have been a question of survival and keeping their workers busy at whatever price. Little airframe capacity has actually left the market even with the supplier consolidation that has occurred. It is easier and cheaper to mothball a hangar than actually demolish it. But the first signs are emerging that the worst, as far as suppliers are concerned, is over. For carriers the good times on prices will continue, but capacity at the best suppliers cannot be guaranteed.
All agree that there will be more outsourcing opportunities, both from traditional carriers putting out work from their own shops and from low-cost players that do not want to enter the servicing world in the first place. Boeing says this strong trend, especially for engines and components, will see outsourcing as a whole rise from 50% of all maintenance to 65% within the next several years. This is keenly contested business because it is generally on longer-term contracts. “Our focus is we want to get a limited number of customers willing to stay for longer-terms,” says KLM’s Somers. “It helps with yield management as you have lower overheads working with a few customers than lots of different ones.”
In the components field there is also the possibility of long-term deals, especially if several components are packaged in a single contract. “People like to talk to you seriously if you are prepared to do a deal for five to 10 years,” says Jean-Claude Schmitz, senior vice-president maintenance and engineering at Cargolux. “I certainly see growth in component management contracts for any carrier new in the game,” comments Stewart of Aerostrategy. Carriers find a deal attractive that puts a group of components on a flying hour rate basis with guaranteed availability of parts, he says.
As carriers begin to strike deals lasting years rather than months, the short-term nature of the market is changing. “There are some airlines looking well ahead,” says Erni. “For example, one large European flag carrier is already starting to talk about reserving slots in 2007-8. They are fully aware that slots will be rare in that period. From 2007 we will not have enough capacity to accommodate all the heavy maintenance work we have in Europe unless we build up significant new capacity.”
Asian hangars too are getting fuller, further out. “The situation will tighten, especially as major carriers tie up large long-term deals,” says Tay Kok Khiang, president of Singapore Technologies Aerospace (ST Aero), one of the world’s largest independent maintenance providers. “We will find that as there are more major customers who can, and are willing to make that commitment, capacity will begin drying up in the market.” He points to a 10-year contract ST Aero won last year from parcels express carrier UPS. Under the $438 million deal, ST Aero will maintain Airbus A300s, Boeing MD-11s and McDonnell Douglas DC-8 freighters at any one of its global network of repair stations.
The desire of more carriers to seek longer-term assurance for capacity availability will inevitably put pressure on the popular suppliers. “The point is that if you look around the world there are not too many high-end maintenance providers that operate on an independent basis,” says Tay. “We believe that these people, like ourselves, have limited capacity.”
Nervous times
In a market meant to be flush with capacity, these suppliers are adding more. ST Aero is even adding capacity in Singapore, a country where labour rates are closer to European rather than Chinese levels. It is planning a second narrowbody hangar and another widebody line at its Singapore operations. “We are full and have customers knocking at our door wanting us to do more. Keeping these long-term customers happy is very important to us.”
That sentiment is producing nervousness among some smaller carriers. They are concerned that the focus of the large suppliers is sharpening on carriers looking to place major chunks of work, and are worried about a scarcity of capacity in a few years. “If you look at the volume of C checks going to be generated by easyJet and Ryanair in five years it is going to be phenomenal,” says Stewart of Aerostrategy. “Where is all that work going to go? The question is the same with engines.”
In easyJet’s case it has signed a long-term deal with SR Technics for its A319 and 737 C checks and hopes to conclude a similar arrangement for the CFM56 engines that power both aircraft within the next 12 months, says the carrier’s technical director Peter Ellison. “We are looking for vendors to come forward with a more flexible and open-minded approach than what we’ve had before,” he says, with the aim of driving significant savings over the lifetime of the contract.
Pricing pressure
For carriers wanting A320/737 airframe or CFM56 engine work the good news is that there is plenty of capacity in the market. In the short term, the reliability of the CFM56-5 and -7 engines, which power the A320 and Next Generation 737 families, means that shop visits scheduled for this year are being moved into 2006, and beyond. For some carriers the fact that the engine is running so well means they can afford to wait and buy a service from the spot market later, says GE’s Chausse.
Others prefer to tie down their maintenance costs when they buy the aircraft. “There is more demand as some carriers think they can get a better deal at the point of sale,” says Chausse. For example, GE has recently signed aftermarket engine support contracts with AirAsia and China’s Shenzhen Airlines in parallel with these carriers ordering new aircraft. GE has changed its approach to engine service deals. Where it formerly offered a portfolio of support options, including dollar per flying hour deals, it now says it will be more flexible.
Its “OnPoint” approach recognises “that now everybody needs a different solution”, says Chausse. For example, GE’s contract with AirAsia deals with the basic task of engine overhaul, but adds an engine diagnostic element and GE has taken a stake in the carrier’s engine overhaul shop, he explains.
However, despite its market size, GE has had to make some tough choices around its global network. “We are subtracting capacity right now,” says Chausse, in particular in North America. Before September 2001 GE had 460,000m2 (5 million ft2) of maintenance shop floor space, today that has fallen to 280,000m2. Two plants in the USA are closing: a CF6 overhaul shop in Ontario, California, and a CFM56-3 shop in Dallas/Ft Worth. Ontario will close by July 2006, while the Dallas operation is already winding down.
Whether it is in components, engines or airframes, there is a shift from the strong buyer’s market of the past few years towards a new equilibrium, even though carriers still exert significant pricing pressure. However, for the most-capable suppliers there is some comfort. “We are getting back some of the price erosion that has happened in the past couple of years,” says KLM’s Somers. “Airlines are willing to discuss some trade-offs if you offer a guaranteed fly-off time.”
As the balance between supply and demand begins to be restored the issue of capacity will rise up the agenda. In many cases the physical capacity can be created fairly quickly, the more difficult part, comment many, will be the training of licensed engineers.
MARK PILLING LONDON
Source: Airline Business
