CAROLE SHIFRIN WASHINGTON
Ambitious players are jockeying, either on their own or through joint ventures or alliances, to expand their presence in the fiercely contested, but potentially lucrative, business of providing aviation support services
Static is not a word that can be used to describe what is going on today in the maintenance, repair and overhaul (MRO) industry. It is exceedingly dynamic with myriad players - old and new - seeking to establish their place in the highly competitive, potentially lucrative business of taking care of the long-term maintenance and repair needs of airlines.
US players include: key original equipment manufacturers (OEMs), whose participation is growing; the traditional, largely independent MRO companies; some major airlines and now, increasingly, combinations and joint ventures between them. And many are on the prowl to acquire other companies to broaden their capabilities.
The stakes are huge, as the business of providing aviation support services is expected to yield substantially more revenue and potentially greater profits over the life of the aircraft, engines and other components than the initial sales themselves. The most recent market outlook from Boeing Commercial Airplanes estimates sales of new aircraft will total about $1.7 trillion over the next 20 years, while revenues from commercial aviation support services over the same period will come to $3.1 trillion.
In its breakdown of those services, Boeing estimates that almost half the $3.1 trillion will be in aircraft MRO activities, including airframe heavy maintenance, engine repair and overhaul, and non-engine component overhaul and repair. Annual sales of MRO services, which totalled $44.6 billion last year, are expected to grow to $110 billion by 2020. This does not include aircraft servicing, such as line maintenance, or major aircraft modifications, such as interior and avionics upgrades and conversion of passenger aircraft to freighters.
The money to be made in this segment was obvious early to General Electric Aircraft Engines. It is unquestionably the largest OEM participant in what has become known as the "aftermarket services" business of selling downstream maintenance services. Overall revenues for GE Engine Services - the unit tasked with marketing those services - amounted to $6.5 billion in 2000, accounting for 60% of the total revenues of GE Aircraft Engines. Revenues from services for commercial engines were $5.1 billion. Early into the game, the reach of GE Engine Services is vast, with more than 40 facilities in every corner of the world, and more to come.
Aggressive growth can have a downside though. Although GE has created a global infrastructure and enviable customer base, George Oliver, president of the services unit, says the company found it had some performance shortfalls and was not as responsive to customers as it needed to be. As a result, he says, the company has over the last 12-18 months sought to focus on the customer, particularly on product delivery, turnaround times, the provision of accurate invoices and fast issue resolution. "We survey our customers weekly, and there has been a huge improvement in customer satisfaction scores."
Oliver adds that GE continues to expand its product offerings, such as in the areas of maintenance reporting, remote diagnostics and inspection technology, and to add value to customer relationships through initiatives such as digitalisation, use of the internet and component repair collaboration.
Engine competitor Pratt & Whitney came into the aftermarket business much later than GE, but has been aggressively expanding its level of participation. Despite failed talks with KLM to produce a "nose-to-tail" joint venture, P&W's expansion into the business has been impressive.
The company's delayed entry was the result of a long-standing commitment to stay out of the aftermarket sector and not compete with customers of its engines, according to Dan Webb, senior vice-president for large commercial engines and aftermarket sales. But as time went on, its market share was eroding, its competitors got into aftermarket services and the "business model" changed, as competition to get engines on the wing intensified.
Aftermarket allure
Webb explains that it was inevitable P&W would join the others in aftermarket services. "The market does not support the real cost of developing, producing and supporting the engine," he says, leaving the aftermarket the only place that such costs can be recouped.
Through intense marketing of aftermarket services, expanding its physical facility capacity and forming joint ventures, P&W has quadrupled its backlog in the last two years. The business - about $1 billion a year today - is forecast to increase to $4 billion by 2005.
P&W's goal is to grow organically - using existing capacity more efficiently - and through joint ventures or merger and acquisition activity, Webb says. In the last 18 months, P&W set up joint ventures with Air New Zealand, Tubes Processing, Japan Airlines International Aerospace, and with Singapore Technologies Aerospace and SIA Engin-eering. It also acquired the Braathens engine maintenance centre in Norway, specialising in CFM56-3 and -7 engines. "If you're in the overhaul business, you have to do CFMs," he says. "There are 10,000 CFM engines out there."
The company has also signed large, multi-year, engine services contracts with Japan Air System, United and Northwest Airlines. "The fleet management agreements are relatively new to Pratt," Webb says, "certainly their magnitude and our aggressiveness in pursuing them."
Webb says his position - responsible for both new engine and aftermarket sales - is representative of how P&W is approaching the business. "The OEM has a unique role to play in the aftermarket," he says. "In sales meetings, we not only talk about how an engine performs but also what we will do over the whole life of that engine."
Spurred on by a desire to reduce its reliance on the sale of commercial aircraft, Boeing also has joined the MRO fray. "It is relatively new that we decided there is a market here that we have a capability to participate in and can add value," vice-president and general manager of customer support Brad Cvetovich says, adding that it is a logical extension of Boeing's knowledge of the aircraft it designs and builds.
Cvetovich says Boeing does not intend to be a full-service provider participating in every segment of the business on its own. "We're looking to partner with other MRO providers, particularly subsidiaries of airlines. Where we think we would excel is in areas providing total integration solutions." This stems from Boeing's experience in systems integration of aircraft and missiles and its engineering resources, he says.
Boeing expects consolidation to play a part in the MRO industry and to be a participant, he says. "We're always looking at acquisitions to grow our business. But they would have to be in line with our core competence." Among those areas, Cvetovich lists information management, logistics, systems integration and engineering services. To date, most of Boeing's acquisitions in this area have been in information services. Its purchases include flight information services provider Jeppesen Sandersen and maintenance information services providers Continental Graphics and AeroInfo Systems.
Boeing ambition
Joe Gullion, who served as president of Boeing Airplane Services for three years before joining AAR this year, has no doubt that Boeing will find "the right model" and be successful in the services arena. But, based on his role in helping launch its aftermarket products and services offerings, he says it is not that easy.
Although Boeing has the advantage of holding all the data on its aircraft, it does not have a broad range of maintenance capabilities. In order to create the kind of 757 freighter conversion and total fleet management programme it did for DHL Worldwide Express, for instance, Boeing had to contract out work on a number of pieces, including airframe modifications, engines, landing gear and components. These elements, plus Boeing's overheads and profits, can increase the costs of a programme, perhaps to a non-competitive level.
A major MRO provider needs the ability to control all the elements of the work, according to Gullion, now AAR's executive vice-president and chief operating officer. He says the firm has facilities in-house to perform work on narrow-body airframes, landing gear, engine components, composites, cargo systems and the like without outsourcing.
"The service provider with breadth can offer a fairly comprehensive package to the operator," he says. "The challenge for us is to take that breadth of capability in the narrowbody market to operators who outsource their maintenance." AAR's strategy is to expand its customer base in its areas of expertise, such as landing gears, and then expand AAR work for those customers into its other capabilities. "We can do work across the table and be a one-stop shop," he adds. "That's what our strategy is."
Gullion thinks that capability is especially attractive to both the established airlines that contract out most of their maintenance - such as Southwest, FedEx Express and UPS - and the newer airlines - such as AirTran and JetBlue - that do not want to establish a maintenance infrastructure.
Independent opportunity
"I think there's a world of opportunity for the independent that can manage its cost structure and provide value-added work," he says. He also thinks the regional jet sector will be the most explosive MRO market over the next five years. AAR recently signed an agreement with Embraer to be an authorised repair station for aircraft component maintenance and repair, and is working to extend that relationship. "We're talking with all of the manufacturers," he says.
A company with close to $1 billion in annual revenues, AAR's growth strategy includes further acquisitions of small businesses that would add value and extend its breadth. "You're either the consolidator or the conso-lidatee," Gullion says.
Although no US airline has the extensive third-party maintenance operations of their European counterparts, at least two major US carriers with substantial in-house maintenance programmes are seeking to increase their third-party work.
Delta Air Lines' technical operations division is moving aggressively to grow what it calls its "insourcing" business. Basil Papayoti, director of technical sales and marketing, says Delta is on track to meet its 2001 goal of $70 million in insourcing revenue, up from last year's record $50 million in sales. The carrier's goal is $400 million in third-party revenue by 2004.
Delta's plan is a change in strategy from the past, when it sought third-party work only to fill in troughs of its workload. With the retirement of older three-engine aircraft providing excess capacity, a competitive cost structure and wide-ranging capability, Delta decided to use what it had to generate revenue. "Now we're growing the business," Papayoti says. "We want to be a force in the industry."
In the last six months, Delta signed deals to provide maintenance services for fractional ownership group NetJets' Boeing Business Jets, for World Airways' MD-11s and the US Government's Boeing 737NGs. It also signed letters of intent with three smaller airlines.
The strategy was created independently of its budding relationship with Air France Industries, the maintenance arm of its SkyTeam alliance partner, but it helps Delta become more global, Papayoti says. "We are leveraging the know-how of Air France, learning from them and utilising their reach in Africa, Europe and the Middle East," he says. "And they're leveraging our knowledge of North and South America to give them access to those markets."
The two do joint marketing, offering a range of different aircraft and engine services. Air France principally operates Airbus aircraft, while Delta flies mostly Boeing and McDonnell Douglas types. Delta favours Pratt & Whitney engines, Air France opts generally for GE engines. "When you look at the combination of assets and capabilities, we have the ultimate one-stop shop," Papayoti says.
Also largely self-sufficient in maintenance, United Airlines too is marketing its MRO capabilities, especially in areas in which it has built and wants to continue to expand technical excellence. One such area is work on PW2000, PW4000 and CFM56-3 engines, which United uses on nearly 400 aircraft. "We like to bring in additional business where we have areas of excellence and can maintain core competence," says Louis Mancini, United's vice-president for engineering and technical support.
Engine maintenance has become a primary marketing focus for United's airline support division - United Services - and it has been successful in bringing in about 60 third-party engines each year for overhaul. Paul Upp, director of maintenance services for United Services, says customers include numerous airlines plus sizeable US Government contracts. This includes engine work on US Air Force C17s, in a team with P&W, and on US Executive Branch C32s (Boeing 757s), in a team with Boeing. "My modus operandi is to team with someone with a proven track record," Upp says.
777 partnership
Last year, United and Lufthansa Technik extended their existing MRO partnership to offer technical and maintenance support for the Boeing 777 market worldwide. "The 777 is a perfect vehicle for this," Upp says. United was a launch customer, currently operates 53 of the aircraft and has extensive inhouse engineering and technical capability for the aircraft and the engine.
The carrier brings operational experience to the joint venture while its German partner, which does not operate 777s, brings experience managing customer programs, Upp says. "We're fairly new to the nose-to-tail business."
With knowledge transfer, Lufthansa can do some 777 work for European operators, while United hopes carriers will bring their 777s to United's Oakland facility for heavy checks. Upp highlights knowledge transfer as the area in which United believes it can bring the greatest value, for instance in inventory provisioning, trend analysis, engine monitoring, even aircraft evaluation. United Services' MRO revenues, not including line maintenance services, are close to $100 million a year.
With ambitious players in MRO jockeying to expand their capabilities and snag remunerative contracts, the current churning is expected to continue unabated. A look at the industry a year from now may find a vastly different arena.
Source: Airline Business
