The good, the bad and the ugly: the shape of things to ... - AviTrader

Cover Story - 2012: The MRO Outlook
Expenditure $bn
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be reckoned with, as Turkey’s GDP growth is
expected to remain above 4% in 2012.
Further capacity and capability increases have
been announced at Emirates, Mubadala Aerospace,
SIAEC, Air India (through a joint venture
with Boeing) and other companies in the Middle
East, Asia and Latin America - all aimed at
accessing fast-growing markets, and most of
which are partly supported or subsidized by local
governments or airlines.
THE BATTLE FOR THE AFTERMARkET
There is no doubt that the OEMs will continue
to take a large share of the aftermarket - and
this share will only increase as companies like
American Airlines (which filed for Chapter 11
bankruptcy protection last month) face new
outsourcing decisions to remain competitive,
according to Jason Caldwell, executive vice
president of Global Sales and Marketing for
the Wencor Group, a US-based global distributor
of aftermarket parts. Large independent
MROs will also gain share from this shift, he
believes, and that will be critical to parts suppliers
like Wencor.
To capitalize on the shift, Wencor is investing
heavily in its international locations, putting
new leadership in place in the US, Europe and
Asia, where it is moving into a new larger facility
in Singapore and expanding its business
through its Wencor Huafeng joint venture in
China. “We believe much of our growth in the
next few years will come from our international
customers,” said Caldwell.
To that end, Wencor has also broadened its
product scope, investing in newer platforms
like the 737NG, A320 family, 777 and a few
other models which they see as critical for the
MRO market over the next five years.
The move of the OEMs into the aftermarket is
not a new phenomenon, particularly in the engine
segment. In fact, according to MTU, approximately
50% of engines are currently under
contracts to OEMs, either on an exclusive
Projected MRO Spend by Sector
Components Modifications Airframe (Heavy) Line/A-Checks Engine
Source: IBA
or non-exclusive basis, while closer to 90%
of some engine models, like the Rolls-Royce
Trent, are covered by an OEM Total Care-type
agreement, which to a large extent go towards
providing a return on the OEM‘s original
investment in developing and manufacturing
the engine. What is relatively recent, according
to GAMECO‘s Conrad, is the increased activity
of the airframe OEMs into the MRO market
space, as well as recent moves by component
manufacturers to “restrict technical data to try
to control the aftermarket“.
“This trend is mostly a result of the constant
‘tug-of-war’ for profits in the industry, as OEMs
look to aftermarket revenues to recover investments
(and make profits) from developing the
systems on new airframes,” says Conrad. “In
2012, we expect to see this trend continue.”
The continuing expansion of OEM activity into
the aftermarket has spurred aviation regulation
agencies like the FAA to sit up and take
notice. It is inevitable that the OEMs will look
for a return on their considerable investments
by exploiting the aftermarket, and an increase
in their activity, through point-of-sale packages
and other measures will only increase, unless,
as Charles Willis, president of Willis Lease, a
major engine lessor, points out, there is a pushback
from governmental authorities and / or
airline trade associations.
In fact, a move against OEM dominance in the
aftermarket has already occurred. In October,
the FAA issued a draft Policy Statement regarding
what it sees as ‘unacceptable‘ requirements
imposed by OEMs that publish Instructions for
Continued Airworthiness (ICAs), including language
that imposes ‘anti-competitive requirements
as well as language that undermines the
FAA’s safety regime’ (see story page 13).
Magellan’s Fessler recognizes the OEMs’ success
in ‘dipping their toes into the aftermarket
pool’, but says they would do well to appreciate
its ‘trading nature and nimbleness’.
14
The group are also writing to EASA, the European
aviation standards agency, to ask it to
adopt a similar position to that of the FAA,
the US aviation authority, which published
a draft Policy Statement in October seeking
to restrict OEMs that publish Instructions for
Continued Airworthiness (ICAs) from using
these or the ICA licensing agreements as a
means for implementing certain types of unacceptable
requirements.
This FAA’s draft Policy Memo lays down that
some language in the ICAs will be deemed
unacceptable, including language that imposes
‘anti-competitive requirements as
well as language that undermines the FAA’s
safety regime’.
The group also plans to meet with the competitions
authority at the European Commission
to discuss the legal ramifications of what
it says is an anti-trust issue. “These measures
adopted by the component OEMs are preventing
us from carrying out our business,”
said Sobral. “We have long-term fly-by-thehour
component repair contracts with customers
going back five to eight years. We
cannot now go to them and say we have to
increase our prices because the OEMs are
charging us more.”
MROs have also been told that repairs not
handled in-house cannot be subcontracted
out, but instead must go back to the OEM
for repair - at what they say are higher
prices. The group alleges that the OEMs are
also stipulating the use of Supplier Furnished
Equipment (SFE). “There is now less choice,”
says Sobral. “This shift in the landscape is to
the exclusive advantage of the OEMs.”
The implications for MROs like TAP M&E and
its fellow group members are worrying. They
believe a lack of choice leads to monopoly
control of the market by the OEMs. Prices for
OEM parts and services have been increasing
by 6-7% per year in any case. Stifling competition
and cutting off an operator’s ability
to seek out the best deal, at a time of record
high oil prices and a deepening European financial
crisis, could put many companies out
of business.
After meeting at Le Bourget in June and
Madrid in September, the latest round of
talks in Paris are expected to lead to action
early in the new year. “The OEMs’ move
into the aftermarket has created a number
of disadvantages for us,” concluded Sobral.
“But we do have some advantages too.
The MROs have the operational experience
that the OEMs lack.”
Harsh realities of a market in crisis - or a real
example of unfair trading practices? 2012
will be a year that could shape the face of
the industry.
AviTrader MRO - December 2011