The huge global maintenance market is struggling to find any reasons for optimism, but is seeing the first signs of an albeit fragile recovery.
After a positive start to 2003, the war in Iraq and the SARS epidemic soon quashed the hopes of those in the maintenance world seeking an upturn in business this year. "They put a big dent in commercial aviation activities and market confidence," says Daniel Heintzelman, president of General Electric Engine Services, by far the industry's largest aftermarket supplier, as shown in this year's ranking of civil maintenance operations.
The hope is that 2004 will prove to be the year in which a sustained recovery really takes hold. "At Pratt & Whitney, we expect growth in 2004, but it will be another tough year, with the steepness of the upslope difficult to predict," says Jim Keenan, senior vice-president, P&W Commercial Engines and Aftermarket Services.
The big three engine manufacturers - GE, P&W and Rolls-Royce - have solid strategies in place to capture more business as demand recovers. They also stand ready to work with airlines on whatever form of maintenance arrangement they what to create. Alongside the engine giants, a handful of airline affiliated service operations represent the largest and most aggressive players in the third-party maintenance market.
The scale of the market available to these third-party contenders is not simply a function of the level of flying by the world fleet. It also rests on how much appetite there is among carriers to keep maintenance work in-house with their own engineering departments.
As demonstrated by the survey of maintenance spending by mainline airline groups, the picture in 2002 was varied. Some have clearly brought work back in-house as they cut capacity and made room at their service bases, while others continued a drift to outsourcing. The outsource trend should receive a boost from the growing band of low-cost carriers and start-ups, for which engineering is decidedly non-core.
Expenditure
The survey, which this year shows true maintenance expenditure for the first time by including the costs of labour as well as materials, also shows two clear categories of outsourcing carrier.
There are those, such as Air France, Cathay Pacific, Lufthansa, Singapore Airlines and Varig, that predominantly use their service subsidiaries. Then there are others, such as America West, All Nippon, British Airways and Southwest Airlines that, although they retain a portion of in-house activity, have outsourced to a large extent.
In engine services, there has been a fast increase in power-by-the-hour deals, which are an effective way for carriers to outsource. R-R for instance has 60% of the Trents it has sold on its TotalCare hourly power packages, and booked another $3 billion worth of these deals last year, says Ian Lloyd, director services. "TotalCare locks in a substantial aftermarket for us," he adds.
GE increased its backlog of long-term engine support deals by $4 billion to $30 billion in 2002, says Heintzelman. P&W was slower off the mark with its Fleet Management Programs. It had just 1% of its engines on these deals in 1999, but has reached 15%, and the number is growing quickly, says Keenan.
It is to the US majors that many look for a profound change in the outsource picture for airframe maintenance. Traditionally, American, Delta, Northwest, United and US Airways have performed this work themselves, particularly on their Boeing and McDonnell Douglas fleets. Between them, these carriers spent over $8 billion on maintenance last year, and none outsourced more than a quarter or so.
This is a number sure to rise at United. In May, it closed its Indianapolis and Oakland heavy maintenance bases as part of employee concession deals it is obtaining in its bankruptcy process. These were large service organisations. Indianapolis, for example, employed over 2,000 people, specialised in Boeing 737, 757 and 767s and later Airbus A320 family aircraft.
Some of the work these bases performed has been transferred to United's service headquarters and sole remaining 16-bay heavy facility in San Francisco. But most has been outsourced, with United estimated now to be farming out 80% of its heavy maintenance, compared with just 20% previously. US Airways is also exploring a large expansion in outsourcing, with heavy work on the A320 fleets at the top of the list.
Such radical moves, especially taking into account the strength of feeling against outsourcing on the part of airline mechanics, is almost impossible to contemplate for a carrier outside the bankruptcy process. But today's harsh climate means the unthinkable is now on the agenda, and players that could handle the transfer of one or more heavy overhaul lines are confident that a serious volume of work will be outsourced by some US majors over the next year.
Over the past few years, there has been considerable debate over the role Airbus and Boeing, as well as the engine makers, have sought to play in the aftermarket. Mainline carriers with their strong service affiliates have been particularly suspicious. Lloyd of R-R recognises the concern of some over the "power of the OEMs [original equipment manufacturers]", but says the overhaul ventures it has created are "healthy and very practical, working to some common goals".
Boeing rethink
Partly influenced by airline confusion over its intentions, Boeing has ditched its strategy to expand significantly in the aftermarket by entering the heavy maintenance field, with its equally heavy demands for hands-on labour. "Airframe maintenance is very competitive today and we've recognised the fact that on the touch labour part Boeing will not be competitive enough to succeed," says Marty Bentrott, vice-president services, sales & marketing, for Boeing Commercial Airplanes.
Although newly appointed Bentrott concedes that Boeing is still "early on in our evolution" in terms of aftermarket solutions, there is at least now a clear goal. The previously separate sales and marketing functions of Boeing's four aftermarket business units - Technical Services and Modifications, Maintenance Services, Flight Services, and Spares - will be integrated to present one Boeing face to the customer.
In 2002 Boeing earned $4.5 billion from these units, representing 16% of its total commercial revenues, although maintenance is not broken out - thus its absence from the ranking. This year aftermarket revenues are expected to drop sharply to $3 billion and Boeing is taking a hard look at the business.
"Our challenge is to restructure the organisation and realign it as a much tighter business with the Commercial Airplane business," adds Bentrott. The philosophy has changed from being a loner to a partner. "We are continuing to work in the marketplace to partner - this could be with existing maintenance organisations and with airline customers," says Bentrott, although this shift in emphasis is in its infancy. "There has been uncertainty in the marketplace. We realise that airlines are always looking for lower-cost alternatives, and Boeing has not always been associated with low-cost. It comes down to the specific tools Boeing is going to bring to the relationship to bring costs down."
As Boeing works towards its new strategy, it is pondering what style of support it should offer for the proposed 7E7. "For the first time we are integrating our aftermarket strategy with that of the product - this is a key bullet-point in the positioning of the 7E7," says Bentrott.
Although Boeing recognises that many carriers will stay with the traditional support model, it also wants the flexibility to offer a holistic aftermarket package - it calls it Integrated Fleet Management - for the 7E7. There are a handful of carriers that have taken such tailored support from Boeing already, where a set of maintenance services and training is provided in addition to the aircraft itself.
"This is a great proving ground for future aircraft types like the 7E7," says Bentrott. The result of this could see carriers being offered a "fly-by-the-hour"- style contract from Boeing for the 7E7, enabling them to outsource virtually the entire maintenance support for the aircraft wherever it is in the world.
Infrastructure
Creating such an infrastructure may be somewhat daunting, but doing it with a new aircraft is easier than adapting existing networks. "The best opportunity is the 7E7 or a new platform where the complexities of structuring something don't exist, and something can be built from scratch," says GE's Heintzelman.
"I don't know if the world is ready for this, but if it is we think we can participate," he adds. "It is a couple of orders more complex than what we do at the engine level today, but it might meet the needs of some of the airlines out there."
This may be a much talked about concept, but it is hardly a trend just yet. Patrick Gavin, executive vice-president customer services at Airbus, has yet to be convinced it will take off. "We are in a position to do it today, but the right word for us is flexibility. We will not impose something on the market that they don't want, but perform what they do want," he says. Some will find total support attractive, but there are plenty who want a model somewhere in-between. Then there is the trend of various large carriers to reinforce their overhaul operations and develop third-party work. "They don't want turnkey operations," says Gavin.
When Boeing was making its push in the aftermarket a couple of years ago, nervous airline engineering directors were asking Airbus if it had similar intentions. "Our strategy for two to three years has been to be more involved in the maintenance market, but not to be involved as a competitor of the maintenance organisations. We are moving to a co-operative approach," says Gavin.
"Our core business is to sell aircraft and our profit is based on that," he adds, with aftermarket revenues for Airbus marginal. "As Airbus, we need to offer any service required by an airline. However, this doesn't mean we do everything internally, we recognise we are not always the best in the market."
If a carrier does ask Airbus to act as the prime integrator for a range of support services, such as upgrading an aircraft with a new cabin and systems, Airbus will undertake the design and manufacturing work, and sub-contract the installation side to a third-party, says Gavin. Such work does not automatically go to EADS Sogerma, a partner maintenance operation within the EADS network. "We obviously have a good relationship with them, but no specific competitive advantage is given to Sogerma," says Gavin.
The overall Airbus philosophy is to support its customers in their dealings with maintenance operations, and, in turn, to help these operations provide a good service. "But we are also going further - initiating the idea of co-operation agreements with a certain number of organisations as part of a specific network," adds Gavin.
"There will be an obligation on both sides to be sure the best quality of service will be given to Airbus customers," he says. "We are not giving limitations to the number of maintenance organisations [within the network], but especially at the beginning, we will concentrate on the big operations which represent 80-90% of the Airbus market."
When Airbus is acting as a prime contractor on support work for a carrier, it will buy services from the network. It has already started discussions with maintenance operations to begin signing them up to the initiative, says Gavin.
They might be at different stages of their aftermarket product evolutions, but both Airbus and Boeing are developing strategies along similar lines. Neither will limit themselves in what they will take on, but the emphasis is on providing support to carriers and maintenance groups rather than trying to compete with them.
The engine makers are different. They not only want to dominate the overhaul market for their own engines, but in the case of GE and P&W aim to capture work on those of their competitors. At least carriers of all shapes and sizes now have certainty over the role manufacturers want to play in the aftermarket. Now they just need a market upturn to see their strategies through into practice.
REPORT BY MARK PILLING IN LONDON
Source: Airline Business
