The two big airframe OEMs are working on expanding their service offerings beyond basic warranties. This will allow both firms to move into new lines of business that are almost certainly more profitable than selling airplanes. Airbus has a solution called “Customer Services”; Boeing’s version is called “Commercial Aviation Services”.
The common thread behind both OEMs initiating this line of business is not just creating a new profit center. Competition between the two is more intense than ever. Every opportunity to get closer to the customer is paramount. After all, the products these firms sell have a realistic lifespan of twenty years or more, far beyond the original warranty period. The OEMs have seen the growth in MRO work around the world and realize there is a lot of money to be made.
The engine OEMs recognized this some time ago, and moved to capture more than half of the MRO market through power by the hour programs. Rolls Royce has taken this to the next level, mandating an MRO contract with each engine sold for the Airbus A350. Of course, this does not set well with airlines that have established engine shops, and a pending deal with Air France has been delayed for some time until that issue can be resolved. But the trend is clear — OEMs are now moving to capture an ever-increasing share of the aftermarket.
With thousands of parts per airplane, they can’t do it alone, and must also be able to rely on their supplier base for repairs, exchange programs, and high quality services. But within the 200-400 rotable components that make up 80% of maintenance cost, it is quite feasible.
In our view, the obligation to stay close to the customer is important to the OEMs in protecting market share. Airlines are prone to business disruption by more factors than just about any other business. Imagine an airline’s reaction to an airplane that has broken down – an event that should never happen because all maintenance is strictly regulated, at least it is supposed to be. Even with constant upkeep, machines will occasionally break, especially machines that are sensitive and worked hard. No manner of regulation can ensure every airplane is “up” 100% of the time. Both OEMs like to talk about dispatch reliability because this is a critical yardstick. It is the number that demonstrates all the parts and pieces coming together to deliver a flight. Typically the number airlines want, and currently achieve for today’s aircraft, is over 99%.
Airbus and Boeing want to ensure their products are delivering the highest possible quality of dispatch reliability. The premier way to do this is enter the business of post-warranty services and support. Interestingly, this does not mean they can charge high fees. In an interview last week with Airbus’ Didier Lux, EVP Airbus Customer Services, he explained that there is significant competition from third parties. Pricing is tight. But he pointed out that Airbus is determined to support its global customers. Air travel is very reputation sensitive and no OEM (or airline) wants any negative image of their brand or products.
Getting into this sector was not a matter of simply starting a new department. Boeing, the earlier mover into this business, acquired Aviall in 2006. Airbus followed with market entry in 2007 and acquired Satair in 2011. Just like everything else in the business, the two big OEMs tend to combat each other’s competitive moves.
Today, many airlines have cut back on engineering departments and outsource the majority of their MRO, particularly LCCs. Those carriers are the initial targets of the OEM, who will attempt to take share from smaller third party MRO shops.
The Airbus solution consists of the following areas: e-Solutions; Upgrades; Fly-by-Hour; Consulting Services; Logistics and MRO. Their group consists of 3,000 people overseeing 7,500 aircraft. Part of this team consists of 290 support reps in 150 cities – ideally as close to key customers as possible. Downtime is among an airline’s biggest enemies.
The Boeing solution (called Boeing Edge) consists of Material Services, Fleet Services, Flight Services, Information Services, Integrated Services and Customer Support. Once again there is a close parallel between the two OEMs. Boeing offers a unique online portal for customers to access the latest data on their aircraft called MyBoeingFleet. Boeing also has teams ready to go (AOG Teams) with 24/7 dispatch ability to solve a problem within 24 hours. But 24 hours is an eternity in the airline world. However, when you get something like a push back tug impacting an airplane, not every airline has the internal resources to solve the problem.
The Electronic Issue
One of the arrows in the OEM’s quiver is the rise in e-Enablement (e2). This term describes the ever more digitally complex and connected airplane. The operation of e2 aircraft (currently Boeing 787 and 747-8, A380, A350 and Bombardier CSeries) is typically done in a secure environment, eliminating the need to send personnel to an aircraft carrying physical data storage devices (e.g. paper, CDs, USB sticks). It is one of the new big areas of promise from the OEMs.
The Star Alliance defines e2 as “the integration of aircraft IT networks with ground systems (e.g. Flight Operations, Aircraft Airworthiness & Maintenance and Cabin Operations) and IT infrastructure to enable new airline business processes and/or safety controls”. The new airplanes all feature some form of e2. These new airplanes are fitted with a myriad of sensors delivering staggering amounts of data on performance. For example, the 787 downloads 18Gb of performance and maintenance data when it completes a flight.
E2 is an excellent opportunity for the OEMs to secure their customers. E2 standards from Airbus and Boeing are not the same. This means third parties who want this business need to be knowledgeable about both systems. British Airways is about to discover that the 787 and A380 are going to add significant complexity to their fleet, rather than simplify it. The airline will have to support three fleet types with respect to information; Airbus e2, Boeing e2 and legacy fleet.
Airlines simply lack the required IT knowledge base and staff to handle e2. Airlines suffer from “silo-think” and e2 is going to prove tough to handle. The tasks required to support e2 demands people who understand flight operations, IT and maintenance. How many people does any airline have with all these skills? We are sure every airline is short on these people.
The creation of these new areas of business at the OEMs comes at the perfect time to ensure they grab and hold the long term relationships with customer because of e2. The MRO facility that will likely be able to provide the OEMs with earliest competition is Lufthansa Technik. Lufthansa is known for buying aircraft in a manner unlike any other airline. They fly almost every type of commercial airplane. One reason, we believe, this happens is because it enables its in-house MRO to have excellent capabilities to service any aircraft in service. Lufthansa’s Technik is top tier and undertakes its work at the equivalent level of the OEMs which is why it gets so much outside airline work. Delta Air Lines also has a world class MRO facility that would likely be following Technik in the e2 business. Another top tier MRO is SIA Engineering. But there won’t be many others any time soon and none have the breadth of Technik’s range of aircraft.
While the OEMs will be able to initially attract better than normal profits from their new customer support services as e2 enters the global airline fleets, it won’t be long before Lufthansa Technik and others enter the business and bring prices down. But the MRO game is rapidly changing with technology, and the OEMs are positioning themselves to grab market share from third parties with the next generation of airplanes.