Engine and avionics manufacturers have targeted low-cost carriers for aftermarket support. Now major airlines are in their sights
With the trend to outsource maintenance continuing to accelerate, and 4-5% annual growth forecast for the component maintenance market over the next five years, engine and avionics original equipment manufacturers (OEM) are aggressively developing new aftermarket support packages to capture more of the lucrative repair business.
Customers looking to reduce their costs are turning increasingly to the OEMs, not just for maintenance packages, but for complete logistics support programmes, that can be paid for by the flight hour. "Since 9/11, the airlines have become more co-dependent on OEMs for engineering and logistics support," says Carl Brown, Honeywell Commercial Electronics Systems' vice-president, global customer service sales. "This is particularly true of low-cost carriers, which mostly look to the OEMs and third-party maintenance sources, and has led to a trend away from spares ownership."
Until 18 months ago, Brown says, almost no carrier leased line-replaceable units, or major systems or components. "Now, they are asking for five- to 10-year contracts that include spare parts and logistics support at a cost per flight hour." This trend has boosted Honeywell's Integrated Support Solution (ISS) spares programme, under which the OEM retains ownership of the parts. By agreement with each airline customer, the critical spares needed to assure an aircraft's dispatch are defined and placed at predetermined locations. As the inventory is drawn down, it is immediately replenished.
When ISS was introduced in 2002, it was targeted at low-cost carriers and regional airlines, but is now expanding to the major airlines, says Brown, especially Boeing 777 operators. That is partly the result of upgrades to the twinjet's Honeywell-built AIMS integrated modular avionics system to an enhanced version, AIMS 2. "We have seen ISS grow exponentially over the past 18 months to 15 contracts, and today we are averaging two to three proposals a week," says Brown. The typical ISS contract runs for 10 years and covers avionics and auxiliary power units (APU).
While low-cost carriers and regional airlines are a growing market for maintenance-related support contracts, Honeywell is also pursuing the major airlines. One way is through its Store Front concept, established in 2002 for APUs, but subsequently expanded to include avionics.
Stocking spares
Under Store Front, a predetermined spare parts inventory is held and managed by Honeywell, but positioned at or near the airline's maintenance base. As the airline draws from the inventory, it is billed for the part plus a transaction fee, which also applies to rotable exchanges. "The airline saves on inventory costs, while enjoying quick access to the equipment," says Brown. Honeywell now has 14 Store Front arrangements worldwide, mostly with major airlines, and that number is expected to increase in 2005.
The OEM has also targeted the business aviation sector with its Honeywell Avionics Protection Plan (HAPP), started four years ago as an avionics management programme for post-warranty aircraft. Under HAPP, Honeywell owns the inventory, while the aircraft owner pays an annual subscription fee for an unlimited number of parts exchanges. Last year Honeywell announced HAPP+, which is structured in the same manner, but for a higher subscription fee the OEM will stock the spares in the aircraft owner's hangar.
Rockwell Collins has also been taking a proactive approach to airline and corporate aircraft aftermarket support. The company's two major support service products, Dispatch 100 and Rotable Total Service Solution (RTSS), are seeing rapid growth, says Scott Gunnufson, vice-president business operations for Collins Aviation Services.
Dispatch 100 is an asset management plan under which the inventory, including all Collins-built avionics and in-flight entertainment system components, are owned by the OEM, but made available to the user. Launched in 1998, the programme covers logistics and repairs, with availability guaranteed. Offered at a fixed cost per flight hour, Dispatch 100 contracts now cover "thousands of aircraft", mostly in corporate and regional airline service, Gunnufson says.
RTSS, launched in 2003, is also priced per flight hour, with the inventory owned, managed and guaranteed by the OEM, and includes avionics and in-flight entertainment components not built by Collins. Nearly all customers to date have been corporate operators, but in June last year Phoenix-based Mesa Air Group became the first carrier to participate in the programme, applying it to its 54 Bombardier CRJ200 regional jets.
For Mesa, Collins is providing repair-chain management services for rotable components - built by the OEM and other suppliers - under a 10-year arrangement originally established with LogisTechs, which provided spare parts ownership and management. LogisTechs was last year acquired by GE Capital Aviation Services, which has continued the partnering agreement with Collins. "Dispatch 100 and RTSS are the two fastest-growing aftermarket programmes at Rockwell Collins," says Gunnufson, and opportunities are also emerging with the military, which is just starting to embrace the concept of full inventory asset management.
Aftermarket care
Engine vendors are also rolling out extensive aftermarket support plans. General Electric Aircraft Engines' Maintenance Cost Per Hour (MCPH) programme, under which the customer owns the assets, but the OEM manages inspections and maintenance, has been running since 1996. While the programme has been popular, some airlines have asked GE to offer the plan using a cafeteria approach, rather than as a complete package, says Bill Fitzgerald, vice-president and general manager global operations for GE Engine Services.
"The airline might decide it would be more economical to maintain certain engine components, while outsourcing the rest to the OEM," says Fitzgerald. "The choice would depend on a number of variables, including engine type; whether it is leased or owned; the airline's knowledge of the engine model's configuration; along with the engine's maintenance history and cost. With older engines, the airline will be in a pretty good position to know this, but for newer engines, they may ormay not. That's why some customers may want to assume some maintenance responsibilities and others may want the OEM to do everything."
For the past three years, GE has been establishing partnering arrangements with those airlines that perform their own maintenance. "The terms of the arrangements are unique to each airline, based on its needs. No one maintenance solution fits all," says Fitzgerald. At the moment, GE is involved in three partnering arrangements. The first, which began in 2002, is with KLM for the GE CF6-80E that will powers the airline's Airbus A330s, the first of which is yet to be delivered.
Subsequently, GE partnered Air France on the GE90-115B powering the carrier's 777-300ERs, and the airline has a second agreement covering the General Electric/Pratt & Whitney Engine Alliance GP7000, which will power its Airbus A380s. Japan Airlines has an agreement for the GE90-115Bs it uses on its 777-300ERs. More partnering agreements are expected in 2005.
Network growth
Strong interest in more comprehensive repair and overhaul outsourcing prompted GE to introduce the Engine Exchange programme in the fourth quarter of 2004 for the CFM56-3C-1, the powerplant produced by its CFM International joint venture with Snecma for the Boeing 737-300/400/500. As an engine is pulled off the aircraft and sent to GE for repair and overhaul, the OEM exchanges it for another that is service ready. Fitzgerald says a decision will be made in 2005 about bringing another engine type into the programme. Also under consideration for Engine Exchange is the inclusion of available upgrade kits, although no decision has been made.
Rival engine manufacturer Pratt & Whitney expects customer support to be its major revenue growth area over the next decade, especially as legacy airlines confront low-cost carrier competition. According to Jim Keenan, senior vice-president and general manager - aftermarket, P&W's primary services focus is on the newer-generation engines that were developed and first delivered in the early 1980s. This includes the PW2000 and PW4000, the International Aero Engines V2500, and the CFM56.
While a repair and overhaul market continues for the older generation P&W JT8D and JT9D engines, it is expected to shrink drastically over the next five to 10 years. One exception is the JT8D-200. "Since the Boeing MD-80 is the major application of that engine, we expect it to remain in service for at least the next 15 years, and in substantial quantities," Keenan says.
P&W also believes most of the growth in engine aftermarket support will be in single-aisle aircraft, of at least 100 seats. "We see this as our primary target market for the next 20-25 years, and it is presenting us with opportunities to open additional facilities to meet that demand," says Keenan. "We are in discussions with potential partners to establish more facilities especially for this market." In December, under a joint venture with Air New Zealand, P&W opened a V2500 service facility in Christchurch, New Zealand. That expanded the capacity to repair this popular engine, which is also maintained at a P&W-owned facility in Columbus, Georgia.
Of P&W's global network of 24 support facilities, half are company owned and the remainder operated under joint ventures. The network will be expanded further in 2005, also through a combination of OEM-owned and joint-venture enterprises, Keenan says. The network supports the company's Fleet Management Programme (FMP), an asset management scheme. "As more airlines outsource maintenance, Pratt & Whitney, through FMP, will offer a total asset management suite, or custom tailored plans that use portions of the total package," says Keenan.
With the A380 racking up orders, P&W is aggressively promoting FMP to the buyers of GP7000-powered versions of the ultra-large airliner. "We think that with the A380 we will see a greater demand for comprehensive aftermarket support programmes, because, on a per-customer basis, we are not talking about large fleets," says Keenan. "With small fleets of a particular aircraft type, airlines find it more challenging to create and maintain the repair capacity needed for a relatively low volume of engines."
Manufacturers of smaller aircraft engines are also promoting their own aftermarket service programmes. This year Honeywell will invest around $10 million in the development of advanced repair methods, including coatings and welding technology, for its engines and APUs, says Tim Mahoney, vice-president and general manager, aviation aftermarket services. That is double the amount budgeted in 2004. The new repair technologies would be made available to Honeywell-owned facilities, and independent service centres that repair the company's products.
Among the beneficiaries of Honeywell's increased investment in new repair technologies will be its ISS programme, which will be expanded in 2005. "We are continuing to look at more aircraft types and more parts and components - in addition to APUs and propulsion systems - to which ISS plans can be applied," Mahoney says. "For example, we are adding wheels, brakes, and air cycle systems this year." ISS is being expanded, he says, because more customers want more comprehensive plans. "This is particularly true of the low-cost carriers that don't want to set up facilities and special procurement organisations to acquire and manage components," he says.
In 2005, Honeywell will make two additional enhancements to aftermarket support. The first involves increased collaboration among the three aftermarket businesses within Honeywell Aerospace: the Avionics group; Aviation Aftermarket Services, which deals with mechanical components; and Aircraft Landing Systems. This will give customers a single point of contact from any of the three aftermarket organisations. The company will also become more involved in partnering arrangements with other entities, as well as establishing more prime contractor relationships with customers, and acting as subcontractor to third-party shops that support Honeywell customers.
At Pratt & Whitney Canada, new customer support plans are in development for the new PW600 family of small engines. The PW610F and PW615F, respectively, have been selected to power the new Eclipse 500 and Cessna Citation Mustang very light jets. "These engines will be used on a very low-cost product," says Benoit Brossoit, vice-president service centre. "The programme we design will have to provide the same service levels we offer for other engines, but at a fraction of the cost. To do that, we have started using simulation tools to develop repair service methods for the PW600."
Moving market
Over the past year, P&WC has embarked on a major initiative addressing the operational side. "We are re-engineering our facilities to provide quicker service and improve flexibility," Brossoit says. The OEM operates a company-owned network of 21 facilities, and works with an additional 12 independent overhaul shops. The initiatives are meant to enhance support for the new engines, as well as legacy products such as its JT15 turbofan, and PW100 and PT6 turboprop families. "The aftermarket growth opportunities, however, are with the PW300 and PW500 turbofans, along with the PW600," he says.
Under its Fleet Management Plan for airlines and Eagle Service Plan for corporate operators, both cost-per-flight-hour programmes, P&WC already services over 3,900 engines.
But the market is not standing still and recent improvements such as a maintenance cost guarantee, under which P&WC shares any costs that exceed the guarantee, usually 50:50, show that customers are continuing to put pressure on OEMs to help down their costs.
might provide full-scale services to one or more of the major US carriers - unthinkable just five years ago.
PAUL GOODWIN / NEW YORK
VEM adds vim to market
The turbulent weeks immediately after 11 September 2001 were never going to be the best time to launch a standalone maintenance, repair and overhaul (MRO) business. But Brazilian MRO provider Varig Engineering and Maintenance (VEM) - spun off from the flag carrier in October that year - is establishing a reputation for flexibility and value that is winning airline customers from as far away as Thailand.
The company, which has operations in Porto Alegre and Rio de Janeiro, is expanding its horizons, looking at opportunities in the defence, business aviation and freighter conversions sectors. Around 30% of its $160 million in annual revenues comes from non-Varig customers, and VEM is keen to increase this figure.
VEM's main strengths are Brazil's low labour rates - around $40 a manhour - and what chief executive Evandro Olivera describes as his compatriots' "knack for enormous flexibility and creative troubleshooting". He adds: "MRO centres elsewhere give little leeway for work outside rigid schedules, but we are able to handle requests on short notice."
Brazil's size makes it the hub of South America's MRO market - there are more than 400 airframe, avionics and engine MRO facilities in the country, 80% of which cater for the country's huge general aviation community. Other big players include engine maintenance houses GE Celma and Rolls-Royce Brasil, which attract a large number of their customers from neighbouring countries.
Elsewhere in South America, Chile's Enaer is building its third-party civil business with some success, while Argentina's main MRO companies, Aerol¡neas Argentinas and Lockheed Martin Aircraft Argentina (LMAASA) are battling to win new customers as the country recovers from its economic collapse of two years ago.
VEM is the heavyweight in the Latin American MRO market. The company performs heavy maintenance up to D checks, primarily on Boeing and McDonnell Douglas aircraft, but has added the Airbus A320 to its roster. VEM also carries out avionics, interior and airframe modifications, and has an agreement with Israel Aircraft Industries (IAI) to perform freighter conversions on Boeing 767-200s. VEM's Porto Alegre centre is converting the fourth and final airframe for Colombian cargo airline Tampa, launch customer for the 767 freighter. IAI forecasts nearly 1,500 freighter conversion jobs over the next 15 years, of which 300- 400 will be Boeing 767s. The Brazilian-Israeli partnership believes it can capture a large portion of that market.
Another priority is setting up a dedicated corporate aviation MRO centre at VEM's Congonhas airport facilities in S‹o Paulo. The company is confident of winning a significant slice of the market in Brazil and the rest of South America. The site has become an authorised Gulfstream warranty centre - the only one south of the USA. Similar agreements have been concluded with other airframe manufacturers, including Brazil's Embraer for its Legacy business jet.
A second target market is one with which VEM has had a long but irregular association. The company has traditionally secured defence work almost by default, as was the case with the Brazil's presidential Boeing 707 and the overhaul of 10 ex-Rio Sul Embraer EMB-145s for the air force. But now VEM is actively seeking wider participation in the market. Recent examples are its involvement in the EADS Casa C-295 and Lockheed Martin P-3BR programmes, where VEM will have a role in supporting both aircraft.
Chile's Enaer, meanwhile, has traditionally serviced the country's air force, but has recently moved into the civil field, carrying out airframe and avionics overhauls for local carriers, such as LAN and Sky Airlines and focusing on Boeing 737 Classics. It recently gained customers from Argentina and Colombia, with Uruguay's Pluna the latest addition.
Defence remains Santiago-based Enaer's core market. It carries out overhaul and upgrade work - in association with IAI - on Chile's fleet of Northrop F-5Es and Dassault Mirage 50s. The company also hopes to play an important role in upgrading the ex-Netherlands Lockheed Martin F-16A/Bs that were offered to Chile in late 2004, if the deal comes to fruition.
In contrast, the Argentinian MRO sector has had to contend with the difficulties that have dogged the country's economy. High hopes were pinned on Cordoba-based LMAASA. Aside from its plans to produce the upgraded AT-63 Pampa trainer for the Argentinian air force, the company was expected to provide maintenance and overhaul services for airlines, including flag carrier Aerol¡neas Argentinas. But the airline's poor financial performance led to far less overhaul business than originally envisaged. This was further aggravated by delayed payments on contracts for the Argentinian air force.
"The last two years were very difficult for us to survive," says Alberto Buthet, LMAASA president. "We saw a growing commitment by Lockheed Martin [in 2004], and I think we are going to have a good year." The company has completed the modernisation and overhaul of 12 Bolivian air force Beech T-34s, and signed an agreement with the Argentinian air force to upgrade its varied fleet of 30 transport aircraft over the next few years to meet the latest civil airspace standards.
After gradually losing much of its MRO capability during the 1990s, Aerol¡neas Argentinas is making a concerted effort to regain ground. After reopening its Ezeiza-based maintenance centre in early 2003, the airline is making significant investments in recovering its airframe MRO self-sufficiency. Aerolineas has already converted one of its 737-200s to a corporate jet in partnership with US firm CompletionAir. However, its emphasis is on regaining the capability to perform scheduled airframe maintenance up to D checks to stem the drain on its finances from sending aircraft to neighbouring countries or the USA.
The Latin American MRO market is recovering from both the aftermath of 11 September and the crippling economic problems of countries Argentina. For major player VEM there remains one final objective - to secure more customers beyond the continent. Chief executive Olivera is convinced that, eventually, the company might provide full-scale services to one or more of the major US carriers – unthinkable just five years ago.
JACKSON FLORES / RIO DE JANEIRO
Source: Flight International
