Paul Lewis/WASHINGTON DC
The aero engine service business has undergone a fundamental overhaul since 1995, when manufacturers began to recognise the untapped potential of the aftersales market to boost revenue. Airlines, struggling to cut costs, have been moving meanwhile to spin off their engineering divisions or to exit the industry altogether.
By designing and producing ever more reliable and competitive powerplants, engine manufacturers have fallen victim to their own success. Companies have traditionally relied as a rule of thumb on earning three times as much from spares over an engine's lifetime than from its original sale price. This is no longer the case, with engines staying on wing for extended periods and shop visits becoming more infrequent.
Ian Lloyd, Rolls-Royce aero repair and overhaul managing director, says: "The economics of the big twin have changed all that. That ratio is now probably one to one, as original equipment vendor sales have been squeezed and engine reliability has improved exponentially. The RB211-535 rewrote the book on that."
Diminishing returns on sales have forced manufacturers to seek more lucrative income streams to help offset the increasingly large amounts of money needed to pursue new developments. One area that General Electric, Pratt & Whitney and R-R have collectively neglected over the years has been the repair and overhaul of their own product lines.
The traditional view had been that, "-if you have a Chevrolet, you don't take it back to Detroit to fix it", but this is rapidly changing as manufacturers start to recognise life-cyclerevenue opportunities.
Estimates of the the market size vary, but with airlines spending on average $1 million or more per engine overhaul, and an installed base of some 34,000 commercial powerplants, the potential for growth is clear.
For GE, this has translated into a thriving four-year-old Engine Services business that has more than doubled its sales since 1996. Service and parts sales topped $5 billion by the end of last year and accounted for 53% of the Cincinatti manufacturer's total aero engine revenue. According to GE Engine Service president Bill Vareschi , "-this reflects high digit growth rates."
P&W and R-R have enjoyed smaller sales - of about $1 billion and $1.5 billion, respectively - but are projecting bold growth for the next five years. P&W aims to double its sales during this period, while R-R is targeting a 50% share of an estimated $9 billion support market for its commercial engines by 2002, excluding its Allison product line.
A good proportion of this new business is coming from airlines that are either divesting themselves of maintenance, repair and overhaul activities altogether, or, in the case of a few majors, are throwing in their lot with one of the three main manufacturers. P&W president Karl Krapek observes: "Most airlines want to get out of this business long term. They want to become much more virtual."
The economic rationale behind every carrier operating its own overhaul shop is fast disappearing as four-engined Boeing 747 Classics are phased out and the more dependable Boeing 777 and Airbus A330 twins find wider acceptance as fleet workhorses. The bottom line benefits for operators contracting out are not simply confined to structural streamlining, contend manufacturers.
NEW PROCEDURES
GE's Vareschi explains: "We're bringing airlines new procedures and processes that optimise workscope, lower the cost of operations and reduce the time taken for engine repair and overhauls, to the point that delivers the maximum value to customers in terms of on-wing time-we view this as a real 'win-win' situation." He claims cost saving of up to 15% and a corresponding increase in on-wing time of as much as 30-40%.
British Airways was the first major airline to exit the business, tying the disposal of its Cardiff engine overhaul plant to a launch order for new GE90-powered 777s. The South Wales, UK, facility is now GE's principal workshop worldwide for the support of its new large engine. When the UK flag carrier switched to the R-R Trent 800 engine for its 777 purchase last year, the deal included a "total care package" at R-R's recently expanded Derby service facility.
Other major international operators have taken the opposite approach and, rather than treat engine overhaul as a loss-making liability, they view it as a money-making opportunity. Carriers such as American Airlines and Singapore Airlines (SIA) have used their buying leverage to attract fresh injections of venture capital and work from manufacturers.
"A lot of our principal customers have roots in this business, and we've found it appropriate to recognise that fact when establishing new facilities and to build on what they've got. It means you end up working very closely with your key customers and avoid setting up in hostile competition, which, sooner or later, they are going to remind you of," says Lloyd.
Cathay Pacific Airways' parent company Swire Pacific, along with R-R, was among the first to form such a joint venture in late 1995. Hong Kong Aero Engine Services (HAESL) has since provided the model for other airline-industry partnerships. R-R, in return for a $120 million investment, has a 50% stake in a geographically strategic centre from which to support its fast-growing Asia-Pacific customer base.
In turn, its Swire partner, Hong Kong Aircraft Engineering, secured the capital it needed to move its engine business from the now closed Kai Tak Airport into new and expanded facilities. The 20-month-old Tseung Kwan O plant includes a 130,000lb (580kN)-thrust test cell, a 4,000m2 (43,000ft2) engine-build area and other workshops to support its new Trent 700/800, International Aero Engines V2500 overhaul and -524G/HT modification capabilities.
HAESL has since been joined by a recently opened second 50:50 joint venture, Texas Aero Engine Services (TAESL), between R-R and American Airlines. The new company's 42,750m2 plant, built on American's site at Alliance Airport, Fort Worth, Texas, is initially supporting the airline's -535 and Tay 650 engines. A Trent 800 capability, TAESL'S principal raison d'être, will be added this year with the delivery of American's first 777-200.
New R-R initiatives in the pipeline include a second Asian partnership with SIA, to start in 2002, and possibly a tripartite European venture with Swissair and Lufthansa to support Trent 500-powered Airbus A340-500/600s. In the meantime, R-R's Spanish affiliate, ITP, has established a foothold in Latin America with the purchase of a controlling stake in Mexico's Turborreactores. "The overhaul market as we defined it is hell of a lot bigger now then when we established HAESL," reflects Lloyd.
GENERAL ELECTRIC MOVES
GE has also been busying itself establishing a worldwide engine service network to complement its main facilities in Wales, and California and Kansas in the USA, through a succession of take-overs and joint ventures. In 1997, GE acquired Greenwich Air Services, which in turn had swallowed up UNC and the engine service businesses of Aviall and Chromalloy during the previous year.
The company has been equally aggressive outside North America, paying $50 million in 1997 for a 70% interest in Malaysia Airlines' Aircraft Engine Repair and Overhaul (AERO) and another $20 million for a 20% stake in EVA Airways' Evergreen Aviation Technologies. AERO will act as GE's regional centre for CFM International CFM56-3 and PW4000 overhaul work, while Taiwan will be the main base of operations for CF6-50/80 work.
A memorandum to take a 40% share in Philippine Airlines' maintenance division appears to have fallen victim to that carrier's recent wider problems. In the meantime, GE, though its subsidiary GE-Celma, has bought 95% of Varig of Brazil's engine services and signed a memorandum with the local Xiamen authorities in China, initially to establish an on-wing support facility with the eventual aim of developing a comprehensive overhaul shop.
"We've got to get into China," states Vareschi. "Our vision would be to establish a CFM International overhaul shop in Xiamen with equity participation from several airlines-Our role there is to broker a deal. GE doesn't have to be the majority partner."
China has proved to be a fickle environment for new joint ventures, many of which fail to get off the paper - including an earlier planned GE Engine Service partnership with China Southern Airlines. The Guangzhou-based carrier has since signed a new memorandum with MTU to study the establishment of a V2500 facility, while Snecma has reached tentative agreement with China Southwest Airlines to develop another CFM56 shop in Chengdu.
ASIAN FOCUS
P&W claims also to be talking to "-at least three airlines in China to see how best to put their shops together", but much of its attention has been focused until now on South-East Asia. Its cornerstone is the newly established Eagle Services Asia, in which P&W holds a 51% stake and SIA the remainder. The airline has transferred its PW4000, JT9D and CFM56-5 work to the new partnership and this will be expanded in the future, including possibly a V2500 support capability.
"This is just the start," says Krapek, with other joint ventures planned for Asia. He adds: "We will announce within a year a similar joint venture in Europe with a major carrier. You will see a lot of activity in the USA and we'll do something in Africa and South America- These countries will form the global network."
Manufacturers are not looking simply to develop and extend their geographical coverage, but also the commercial scope of their aftersales activity. On-wing support is already a reality for many carriers, as are hospital shops, total care packages and maintenance by the hour agreements. The next step is to harness information technology to predict engine health and optimum maintenance schedules.
R-R has already signed a memorandum with Science Applications International to form just such a joint venture. "Data management is a key development that needs to be fed into the whole support chain in order to understand better what is happening to an engine and plan what needs to be done.This provides opportunities for several new services that we can offer," says Lloyd.
With aerospace manufacturers working ever more closely with airframe leasing companies, the day may not be too far away when airlines will be able to rent thrust from an engine company. "That's where I see things going," says Krapek. "No one has yet sold true thrust management, but some day it will come- probably in South America first, and maybe Asia.
Source: Flight International
