Maintenance special: Value proposition

Engine manufacturers are enjoying a boom in their after-market business as low-cost players and a growing number of legacy carriers are outsourcing their powerplant servicing to the original manufacturers

Most CFM International CFM56s and International Aero Engine (IAE) V2500s now enter the market under a power-by-the-hour programme that see them returned to a manufacturer for servicing. Both engines have chalked up record orders in recent years, driven by rapid growth in the low-cost carrier sector. Several of the manufacturers in the CFM and IAE consortia are expanding their maintenance capacity in anticipation of a boom in shop visits when all the new engines reach their first overhaul intervals.

CFM joint-venture partner Snecma expects CFM56 annual shop visits to roughly double by 2010 from 2,000 to 4,000. IAE expects annual shop visits for the V2500 to increase from 700 to 1,000 within the next five years. The V2500 is not as prevalent as the CFM56 because while both are sold on the Airbus A320, the CFM56 exclusively powers Boeing 737s and some A340 variants.

Airlines still have the choice of hiring third-party maintenance companies, some of which also offer power-by-the-hour packages, to overhaul their engines. But an overwhelming majority of narrowbody operators now opt for package or power-by-the-hour solutions at the point of sale from original equipment manufacturers (OEMs). Low-cost carriers and start-ups have traditionally opted for such packages, originally launched in the early 1990s, rather than invest in building up their own engine maintenance infrastructure. More recently, several legacy ­carriers have sold off their engine maintenance infrastructure and also begun outsourcing this type of work.

"We see a confluence of events in the airline industry that is causing a permanent change in the industry," says P&W senior vice-president and general manager James Keenan. "Legacy carriers in particular are unable to avoid a restructuring of their cost base."

"We have several legacy carriers within our after-market style of agreements," says IAE vice-president of business development Peter Turner. "Cost control and cost consciousness are important as legacy carriers battle with new-generation low-cost carriers."

Power-by-the-hour

CFM56 operators seeking to buy a maintenance package at the point of sale can choose between power-by-the-hour offerings from the two manufacturers that make up the consortium - General Electric (GE) and Snecma. Two members of the rival IAE consortium, MTU Aero Engines and P&W, as well as several non-OEMs, offer CFM56 services as early as the point of sale.

V2500 operators can only sign up for maintenance at the point of sale from IAE itself or a non-OEM. IAE, unlike CFM, has decided the consortium company should be the vehicle for selling packaged after-market services. The maintenance is then distributed at a ratio set by the joint-venture agreement across the four partners - MTU, P&W, Rolls-Royce and Japanese Aero Engines (JAEC). MTU is currently the largest provider with about a 50% share of the V2500 overhaul market. Rolls-Royce and P&W each have about 20% shares, while JAEC member Ishikawajima-Harima Heavy Industries has only 2.5%.

If an airline does not buy an after-market package from IAE, it can approach the four member companies as well as third-party companies. But that doesn't happen much anymore. The majority of new V2500 customers opt for fleet hour agreements including Select, a new product IAE introduced last year which combines the after-market service it has been offering since the early 1990s with engine upgrades.

Turner says since Select was launched, it has enjoyed over 80% take-up. Select covers all scheduled and unscheduled maintenance work at a fixed cost, as well as technology insertions after they become available in 2008, a product only an OEM can offer. "We can underride the risk because we're the OEM," says Turner.

Overall only 30% of the total V2500 fleet is currently participating in IAE after-market programmes. But given the recent take-up rates - of the 600 V2500s sold last year, 562 were sold with Select or other after-market products - this figure will clearly grow. "We see that increasing to 50% by the end of this decade," says Turner.

"The number of engines under IAE Select is growing," says Rolls-Royce managing director of aero repair and overhaul John Paterson. "But a lot haven't had shop visits yet."

Although their after-market sales organisations have little to sell these days when it comes to the V2500, the IAE joint-venture partners do not mind IAE taking the lead. "We're happy with the approach. At the end of the day we want to bring value to the customer," says Keenan.

"We believe the OEM is the appropriate level," agrees Rolls-Royce director of services Miles Cowdry. Adds Turner: "It's always been IAE's philosophy that IAE is the route to the market. It was quickly recognised the airline customer base wanted an integrated service offering from the OEM."

IAE claims its after-market products are so successful it helps persuade new A320 operators to select the V2500 over the CFM56. "It's a very strong sales message IAE brings," says Turner.

CFM cannot match this offering unless it undergoes a drastic restructuring and expands into the after-market sales business. That is not about to happen, according to its members. "It will be extremely difficult for CFM to get into the maintenance business because of anti-trust laws," says Snecma Services vice-president of customer operations Pierre-Emmanuel Gires.

That means GE and Snecma will continue to aggressively compete for CFM56 after-market business from the point of sale. In response to increasing demand for packaged after-market services, GE last year launched its customer-tailored OnPoint solution with Malaysian low-cost carrier and CFM56 operator AirAsia as the first customer. Snecma introduced a new CFM56 power-by-the-hour offering in 2003 with Russian carrier Aeroflot as launch customer.

Several third-party companies are also aggressively pursuing CFM56 business, including Lufthansa Technik, MTU, P&W, SR Technics and Timco Aviation Services. "The OEM doesn't always win," says Cathay Pacific Airways engineering director Derek Cridland, who selected SR Technics over GE and Snecma to service his CFM56 fleet. "There are lots of others."

The stiff competition for CFM56 services is good for airlines but also has resulted in overcapacity, at least ­according to some maintenance providers. "We see overcapacity," says GE Engine Services chief executive Bradley ­Mottier. "We don't want to add shops. We're focused on value."

Mottier estimates maintenance capacity covering all GE engines is currently outstripping demand by 40% and says this gap will not narrow even as the number of engines in the market soars. He explains newer engines require less maintenance and can stay on wing 4-15% longer than legacy engines. Plus new efficiencies at maintenance shops are allowing firms to overhaul more engines using the same space.

Lufthansa Technik chairman August Henningsen also predicts a possible overcapacity situation driven by efficiency improvements and says providers must be careful about expanding. "There is sufficient capacity in the market," he says.

In response to the overcapacity, GE has already closed two shops in the USA and one shop in China. GE warns the situation could worsen because some flag carriers still insist on opening new shops to overhaul their own and third-party engines. For example, Mexicana has committed to opening a CFM56 shop with Snecma and China Eastern has committed to opening one with P&W. Aeroflot is also negotiating opening a CFM56 shop with Snecma and both Snecma and P&W are seeking to open a CFM56 operation in India.

Third-party work

"A lot of customers want to create their own facilities and they think there is a market for third-party work." Mottier says. "We think the overcapacity will increase. We're not planning to add shop capacity now or remove it," he says. "If we add shops it will take away business from some of our customers who have shops." He acknowledges other CFM56 maintenance providers plan to dramatically increase capacity. This will clearly result in a decrease in market share for GE, which seems prepared to accept this. "We typically don't talk about market share," Mottier says.

Snecma will happily talk about CFM56 maintenance market share and how it aims to close the gap with market leader GE. Giles estimates GE is capturing 30-40% of the CFM56 maintenance market while Snecma has a 15-20% share. "We have some ambition to grow," says Giles.

Snecma's new shops in Mexico and potentially India and Russia will expand a shop network which now includes overhaul facilities in Belgium, China, France and Morocco. The Mexican shop is designed to eat into GE's dominant position in the US market. "We need a solution for the US and that would be Mexico," says Giles.

P&W's Keenan also does not agree with GE's views on overcapacity and says all P&W shops are currently full. P&W plans to at least double its maintenance capacity over the next several years but Keenan says this will be achieved more by improving efficiencies at existing shops rather than opening new ones. "I'd like to double the business in the footprint we have today," Keenan says. "Capacity growth will be much smaller than volume growth."

He says demand for more services in emerging markets will be addressed by repositioning some capacity. He claims the Chinese market can use the extra capacity that will be generated by P&W opening a CFM56 shop with China Eastern, although MTU and Snecma already operate CFM56 shops with China Southern and Air China, respectively, and overcapacity forced GE to close its CFM56 shop, owned partly by China Eastern and Hainan Airlines, in 2003.

"Three shops in one country is a lot," says GE Services general manager of marketing Jacques Chausse. "You don't necessarily need a shop in every country," adds Paterson of Rolls-Royce.

Kennan of P&W makes a different point: "Many joint ventures are attempted and abandoned. That's not our model. We've learned over the years how to make the model work. The mistake often made is people move too quickly in joint ventures without ensuring you have the right partnership energy."

Compared with the CFM56, the competition is not as intense on the V2500. Lufthansa Technik and Taiwan's Evergreen Aviation Technologies are the only non-OEMs which overhaul V2500s and capture roughly 10% of the market. In comparison, several non-OEMs capture about half of the CFM56 market.

The recent success of IAE's Select product also means only 20% of the market is now up for gabs. The lack of competition could be seen as bad for airlines but IAE insists this is not the case. "Our solution is as cost competitive as it can get," says Turner.

"The IAE sales pitch on Select is very impressive," says Kingfisher Airlines executive vice-president Hitesh Patel. "If I'm a new carrier without much experience I'd definitely go with IAE."

Kingfisher now uses Lufthansa Technik to service V2500s but is considering switching to IAE to service the V2500s powering a new batch of 30 A320s. "Lufthansa can't offer me Select 1 [technology insertions]. Only an OEM can offer me Select 1. That is an issue," Patel says. He adds the purchase of Select by Indian rivals Air Deccan and IndiGo could give them a cost advantage because their V2500s will burn less fuel.

The success of the CFM56 and V2500 has helped boost maintenance revenues at all the companies participating in the two joint ventures (see table, p53). After- market services now account for almost half of MTU's engine business and over half of sales at P&W and Rolls-Royce.

The UK-based manufacturer says over 80% of all its engines are currently serviced at Rolls-Royce shops or under its TotalCare packaged after-market services programme. About 45% of the Rolls-Royce fleet of 11,500 engines, excluding the V2500, now participate in TotalCare. It expects this figure to increase by 2010 to 50% of the entire fleet, or 7,500 of the anticipated 15,000 engines. Of the 18,000 GE engines in service, 30% are now under long-term service programmes and GE expects this figure to grow as the fleet expands over the next 10 years to 32,000 engines.

P&W is focusing so much on maintenance these days it calls itself an "OEMRO". "I would characterise us as a unique entity, not only an OEM but a unique MRO provider for not only our engines but others," says P&W president Steve Finger. According to Keenan: "Being an OEMRO speaks to the equal weight of the two businesses while years ago people thought of Pratt as an OEM with an after-market business. We no longer view the after-market business as only about spare parts."

"The old business model was the engine that breaks the most is the most profitable," says Cowdry of Rolls-Royce. "That irritates the customer. The new business model is the engine which fails the least is the most profitable and pleases the customer." ■

Source: Airline Business