Airbus & MRO
Companies are often forced to rethink their strategies based on externalities, and we’ve seen a couple of examples of this in the aviation markets this week, at Airbus and SkyWest.
Airbus quietly announced that it was dismantling its MRO network, which it had initially begun some years ago to ensure that some of the best MROs in the world had the capabilities to maintain Airbus aircraft. Their network had 17 members, who have all now been notified that the network was being disbanded.
The operation was not commercial in nature, as Airbus never made any commitments to give work to the network members, but instead it was a process to exchange data and establish benchmarks for maintenance performance. The members of the network, a who’s who of maintenance providers, included Lufthansa Technik, HAECO, SR Technics, ST Aerospace. Of course, since they all compete with each other, those “secret” techniques for MRO were unlikely to be shared.
The reality of the situation is that there is little an OEM can do today in MRO unless they want to compete with those keeping their aircraft flying, which may not be an optimal productive strategy. Boeing has struggled with its Gold Care program, attracting few customers, and despite the OEMs’ unique role in the marketplace, MRO work is changing.
One of the key elements of that change is that component MRO has begun to be clawed back by OEM suppliers, who can offer by-the-hour maintenance contracts at attractive rates. For many suppliers, it is less expensive to exchange a failed unit for a new one than to overhaul it, as overhauls may be more labor intensive and include extensive troubleshooting. Margins for spare parts remain quite lucrative, and the OEMs are in the best position to provide MRO services, as they have ready access to both replacement units and spare parts.
Airbus, unlike Boeing, has not focused on the aftermarket as a profit center, but instead focuses on helping Airbus operators achieve low cost solutions that keep them as customers. By dismantling their network, they have opened the door to alternate approaches, including by the hour contracts with OEMs, which can be offered to their customers without having to give preference to their former MRO network partners.
The reality of MRO work is that parts provided by Boeing or Airbus, such as the fuselage, and its major components, rarely break. The bulk of MRO work is in engines and components, which can in many cases be most cost-effectively handled by those who design and make them. That has been the case with engines for many years, and is now becoming more commonplace with components.
What’s the next frontier? We’ve already seen airline alliances develop purchasing groups to bundle their purchasing power for supplies — but what about bundling their purchasing power for component MRO? Imagine the power of a Star Alliance, oneworld, or Sky Team in issuing an RFP for an exchange program for each key component, bid on by both independents and the OEMs? Prices would fall, airlines would be happy, and the winner of the contract would have sufficient volume to reap large economies of scale. But that would require a uniform maintenance standard among their members, whose technical departments may not agree.
While Airbus isn’t there yet, it has made the first step – moving from away from supporting a small group of 17 MROs to working with all MROs on an equal basis. The question now is whether Airbus will take the next logical step, and help its customers join together to obtain the best potential economics with a high quality standard acceptable to everyone, and thereby differentiate themselves from their competitor. The jury is still out.
SkyWest Examining Alternative in Wake of Potential MRJ Delays
It seems that nearly every new aircraft program faces certification delays, from the A380 and 787 debacles to smaller delays with CSeries and A350; getting a new program out on time is a challenge for the industry. Mitsubishi, with its MRJ, is facing similar challenges, and its early customers are becoming concerned, as they will need to find alternative lift if the aircraft can’t be delivered on schedule.
SkyWest has typically been clever in its contracts for new aircraft, leaving “out” clauses in case situations change. With a potential out, as they also are rumored to have with their Embraer E2 contract, SkyWest is now in a position to replace their MRJ order with a different aircraft if they cannot be delivered on time.
There are several options. With an order for E2s already in place, could Skywest attempt move them forward and consider ordering the existing model EJets, or would potentially examine an alternative such as the CRJ900 or the slightly larger CS100 from Bombardier, or the Sukhoi Superjet? Delays throw the entire game of fleet planning open, and the process could quickly restart, to a critical detriment for Mitsubishi.
Fleet planning isn’t an easy process, and entails much more than an examination of the comparative economics and pricing of rival aircraft. It also entails routes and fleet optimization, aircraft configurations, passenger and cargo revenue projections, fuel, crew, maintenance, and other operating expenses, financing, depreciation and tax considerations, training, scope clauses, and other factors. The easy part is determining the comparative economics for each aircraft. The difficult part is running through hundreds of iterations to determine what the likely optimal aircraft will be.
Just when you thought your fleet plan was set, and it was safe to go back in the water, a the lurking sound of a potential delays (dum, da dum, da de dum,….) emerges and the decision process starts all over again. Superjet, Embraer, and Bombardier are undoubtedly waiting in the wings with new offers.
For Mitsubishi, an additional delay, coupled with a launch order cancellation, could damage the credibility of the entire program. We haven’t seen much transparency in the program, in part due to cultural differences, but the MRJ team has “some ‘splainin to do” to its customers and the industry.
Having seen the A380 and 787 debacles, airlines expect aircraft programs to be on time unless given clear guidance otherwise. Because delivery delays are problematic for carriers, missing a delivery is one of the last things an OEM can afford to do.