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

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Cover Story - 2012: The MRO Outlook Expenditure $bn 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 2011 2012 2013 2014 2015 2016 2017 2018 2019 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
Cover Story - 2012: The MRO Outlook “Rather than fold an aftermarket model into their own, the OEMs should consider partnering with the aftermarket to establish definite lines of business that address legacy aircraft, engines, systems and components. Rather than remaking a business, they could learn to harness skills of the existing aftermarket that already addresses its nuances, and concentrate on appreciating its distinctive characteristics.” IF yOU CAN‘T BEAT ‘EM, JOIN ‘EM Rather than take the fight to the OEMs, other MROs have made the choice to work with them. The Mubadala Aerospace MRO network, comprising Zurich-based SR Technics, Abu Dhabi’s ADAT and the group’s financing arm, Sanad, aims to build groupwide deals through becoming a strategic partner with both OEMs and airlines. “The OEMs are very established in the engine aftermarket, and have extensive market share through their own aftermarket network and through the creation of joint venture partnerships with major airlines”, James Stewart, group CEO, told AviTrader MRO. “However, we are also starting to see this developing further in the component arena as well. In response to this, SR Technics and ADAT have recently entered into several partnership agreements with OEMs including Panasonic, James Stewart Mubadala Aerospace GE and Hamilton Sundstrand. We have also recently signed an agreement with Airbus to use their AMI system.” The set-up of the Mubadala Aerospace MRO network, announced last month, was constructed as a response to the changing global aviation service market, and is aimed at developing an integrated, value-added offering, covering technical services, technical training, supply chain management as well as traditional MRO services through its global operation locations. Annual Expenditure $bn 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 The near-term focus, according to Stewart, is to develop a single go-to-market strategy to benefit both customers and partners. “In addition to the ability to support liquidity in the current tough economic climate, both SR Technics and ADAT work with sister company Sanad Aero Solutions to incorporate engine and component financing elements into customer agreements. Unlike many MROs, we are also able to commit to forward purchases.” GO EAST, yOUNG MAN - AND SOUTH Which regions of the world will be the success stories of 2012? According to Charles Willis, China, Russia, India and South America are the areas likely to expand the most. “We’re putting more assets into China, Brazil and the Middle East,” Willis told the audience at a panel session at MRO Europe in September. ‘Only 10% of our business now derives from North America. There’s been an entire change in dynamic.” Wencor‘s Caldwell says that Latin America and India will “see some swing in MRO spend coming their way, but Asia is still the region to watch”. “China itself will continue to expand dramatically, and other countries like Indonesia, Malaysia, Singapore and Thailand are poised to take on much more than they do today. Material Spend by MRO Sector An Airbus A310 under wraps at TAP M&E Brazil’s Rio hangar. South America is earmarked as an area of MRO growth in 2012 and beyond 5.0 0.0 2011 2012 2013 2014 2015 2016 2017 2018 2019 Modifications Airframe (Heavy) Line/A-Checks Components Engine 15 Source: IBA Indonesia in particular seems ready to go to a new level in MRO. That is why we are devoting significant time, effort and resources into developing this region.” A word of warning from MTU: although these regions, particularly India, Indonesia and Russia, will experience very high growth rates, they are beginning from a far smaller base. As a consequence, “it may be difficult for these countries to set up in-country MRO facilities with sufficient economies of scale in the medium term, especially as demand is scattered among many operators, and the ‘cake’ has already been divided among various existing MRO providers.” So, in short, the key trends that will characterize 2012 are globalization and consolidation, as larger European and North American players look to extend beyond their hinterlands into lower-cost regions in Asia and Latin America. Airlines will increasingly demand integrated support services that outsource the risk and provide a predictable cash flow. Cost pressures on MROs will therefore be even more intense in the coming year. It’s not a pretty outlook, but the sector has survived rough patches in the past, and will survive again - leaner and missing a few members, no doubt, but stronger for the experience. AviTrader MRO - December 2011
Page 1 and 2: AviTrader MRO December 2011 - www.a
Page 3 and 4: Editor‘s Page 3 The good, the bad
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Page 9 and 10: Cover Story - 2012: The MRO Outlook
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Page 23: Industry People on the Move 23 AFTE

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