Engine MRO: Cooperation vs Competition

As cutting-edge technology renders powerplants exponentially more reliable—able to shun shop visits in a fashion earlier engines never could—cooperative agreements among OEMs and MROs are taking off. That is the irony of it. What forces are at work here? Consider the math: “The engines being produced today are staying on-wing anywhere from 5-7 years,” says Jonathan Berger, VP technical services and MRO practice leader for international aviation consultancy SH&E. Pratt & Whitney JT8Ds and like-minded powerplants of an earlier era stayed bolted to assorted airframes for “12-18 months on average.” At first blush, this longevity seems to work against cooperative powerplant pacts—the more reliable the engine, the less maintenance it requires. “They’re not coming off [-wing] for repair” nearly as often, says Berger. Designs, materials and technology are of “such high quality” that engines simply endure longer. “At a macro level, it is just driving down the number of shop visits.” Berger’s perspective is more than academic. Before going to work for SH&E, he was general manager of sales and marketing for Delta TechOps. He contends that today’s remarkable engine reliability comes at a price, a price that is just too steep for operators and leasing companies to pay for powerplants per se. Berger believes engine OEMs cannot price their product at time of sale steeply enough to recoup R&D costs. “That’s not how the market works,” he says. Perforce, the OEM must make up a considerable chunk of change “on the back end.” Among other things, says Berger, that means selling packaged maintenance deals at the point of purchase. The strategy accomplishes a couple of things: it ensures downstream revenue and “locks out competitors right away.” The OEM performs maintenance either in house, or—increasingly—via a partner MRO. That’s why partnerships, cooperative agreements and outright joint ventures are more important than ever, especially for MROs. Maintenance, repair and overhaul organizations are driven internally by the imperative to increase revenue and hang on to good technicians. “Yet,” says Berger, “you’ve got this dynamic where the volume is falling.” This means the MRO needs to grab a gifted partner and hold them tight. So does the OEM. “Absolutely,” says Tom Gentile, leader of GE’s service business. While today’s powerplants are more reliable than ever, the sheer number of engines flying around means they have got to see the shop sometime. Right now, 23,000 GE engines propel commercial aircraft the world over. They generate some 4,000 shop visits per year; 45% of those powerplants have yet to see the inside of a shop, and 65% have been there but once. “Over the [ever-expanding] life of an engine,” says Gentile, “you could have as many as five shop visits.” The issue is, where do you put them? Internally—via in-house shops in Kansas, Brazil, Scotland, Wales and Malaysia—GE has enough capacity to perform “about one-third” of those visits. That means it needs reliable partners. “We have to extend the reach beyond our internal footprint,” he says. The OEM’s solution was to forge links with like-minded MROs, “supplementing our internal coverage with partners who are aligned with us in terms of philosophy [as] to how serve customers and engines.” OEM vs. PMA Parts At GE, synchronizing philosophies is paramount. And part of the philosophy is MRO employment of OEM parts and components. Touting the benefits of “an OEM configuration,” Gentile insists parts fabricated by the manufacturer perform better, perform more reliably and are “ultimately…safer.” “What’s important to GE is that our joint customers, at the end of the day, are using GE OEM parts,” echoes Rob Mionis, president and CEO of StandardAero. Rival Pratt & Whitney takes a different tack. “We leave [parts] decisions to the actual operator of the engine and to the joint venture [partner],” says Tom Hutton, the OEM’s VP of operations for commercial engines and global services. Explaining that no language in Pratt & Whitney contracts precludes PMA parts, “We very much believe in choice,” he says. “As an OEM you have a hurdle—a stigma or perception—that you’re about selling these spare parts.” Hutton adds that Pratt & Whitney focuses on lowest cost of ownership: “We don’t want to be just an OEM that sells spare parts,” he says. “We don’t think that’s the recipe for long-term success.” Whether the service agreements that OEMs sell in conjunction with their powerplants contain OEM parts provisos or not, SH&E’s Berger says the manufacturers “have to make their money in the aftermarket.” What’s ultimately best for the operator, OEM or PMA? “That’s [up] for debate,” Berger says. “At a macro level, having more options and more suppliers is always better for the customers.” Despite that assessment, those espousing choice could be swimming against prevailing tides, Berger says. “Over the last 10 years, the OEMs have gained 35% [in] market share,” he says. In 2009, they enjoyed a fulsome 40% share. Critical to this ascent is what Berger calls “a material control strategy” on the part of at least some of the OEMs. Berger says engine OEMs enjoy an inherent competitive advantage in the parts arena. “They know when an aircraft is being bought and sold. They’re involved in it. They can bundle the aftermarket [support] with the purchase of the engine…and lock it up.” If OEMs can lock-in business, they also can get a far better look at what lies ahead—and that can improve efficiency. “By virtue of working so closely with the operator [through a JV or cooperative agreement] we gain a…unique, very detailed perspective on the engine itself and its operating environment,” says Pratt & Whitney’s Hutton. “It allows us to look upstream, to get very, very good visibility.” That species of intimate intelligence translates into the ability to plan shop visits better by pinpointing material provisioning, plugging in new repair schemes and such. Success Stories There are, of course, criteria aside from parts sales opportunities in choosing an MRO partner. “We look for technical ability,” says Gentile, “the ability to manage workscopes, repairs and overhauls in a way that’s technically competent.” Inherent in that competency are factors such as turn-time, on-time delivery and shop quality. One seminal metric is EGT (exhaust gas temperature) margin. The higher the margin, the better. If a powerplant has an EGT threshold of 1,000F and the exhaust temperature itself is 900F, then the margin is 100F. The higher the margin, the longer the powerplant lasts. In the world of engine overhaul, it is the most fundamental of metrics. Enrique Robledo understands. Iberia Maintenance and Engineering’s powerplant maintenance director considers a collaborative pact with CFM International to work on CFM56-5Cs, the most powerful engine in the line, a classic case-in-point. Because the potent powerplant produces between 31,200-34,000 lb. thrust, Robledo says, “the EGT margin is critical.” To that end, “some years ago, we started a best practices program with the -5C engine to try to improve the EGT margin,” he says. “We did that in cooperation with CFM and Snecma, mainly.” At the collaborative effort’s onset, the -5C’s EGT margin was about 30F. “Now, we are at 45F-50F.” Iberia boosted those margins with a stricter re-write of the engine shop manual. Robledo explains the concept: “[If] the engine shop manual says the limit for whether [a] part is repairable or not is 10…we put [in] a limit of 8. It’s a way of saying that the limit to consider scrapping this is more strict than the engine shop manual.” As prelude to this, “We got data from previous engine shop visits and made some correlations with critical points—either in the inspection of the part or the assembly of the part—to see what the influence was [on] the final EGT margin.” Then, Iberia sent the data to Snecma for analysis and evaluation. It is a classic instance of how cooperative agreements can work. There are others, and they are showing up all over. Here is a representative sampling: Gentile says GE Aviation saw a “20%-plus improvement in turnaround time over the last couple of years” with KLM Engineering & Maintenance’s handling of CFM56s and GE CF6s. KLM decreased turns by one-fifth through changes in “tooling, infrastructure and training.” Contributing to that improvement is continuing communication. “We send in a group of engineers and operations people that join with their [KLM counterparts] at Schiphol. They’ll spend a week in ‘Action Workouts’…brainstorming ideas, redesigning processes and making small investments. [It’s] all designed to improve quality and reduce time and cost.” Iberia Maintenance is working with both GE and Rolls-Royce “to develop a new procedure to repair compressor blades through laser cladding,” says Robledo. “It’s not anything included in the shop manuals…It’s a Rolls-Royce proprietary process.” Pratt & Whitney is working with Eagle Services Asia, a joint venture with SIA Engineering Co. Tom Hutton says an improved PW4000 fan exit guide vane repair illustrates the JV’s accomplishments. The fix is in-situ, performed on a fully assembled engine module. By avoiding teardown, Pratt & Whitney says it can save customers between $50,000 and $75,000 in labor and material costs per shop visit. TES Aviation Group also works with Eagle Services Asia, although with a different twist. TES Lease Manager Julian Rees says, “We purchase PW4000 engines, and ESA tears them down for us.” Among TES’s fleet management customers is Martinair, whose shop visits at Eagle Services Asia get managed by TES engineers. Rees says the set-up enables TES “to supply [a] significant volume of used material into those shop visits, saving our customer millions of dollars…per year.” Lufthansa Technik is working with GE on joint repairs. The latest example of this collaboration consists of reworking the turbine rear frame of CF6-80C2s. It is a large structural component located just aft of the powerplant’s low-pressure turbine. “This component tends to crack heavily,” says Norbert Arendt, manager of repair development in Lufthansa Technik’s parts repair group. Those cracks occur “from the struts to the outer shell.” He says the engine shop manual “just offered manual weld repair, [and] even after the weld repair, this component cracked even further—over [its] entire width.” The fix? LHT mills out the worn portion and replaces what’s been excised with “specially designed, customized new material,” says Arendt. That saves the part from the scrap heap, and—in the process—saves the customer a heap of money. “Our repair costs are one-quarter the price of a new component,” Arendt says. One of the highest-profile, new joint ventures involves Lufthansa Technik and Rolls-Royce. N3 Engine Overhaul Services is the entity set up to maintain, repair and overhaul large Rolls-Royce powerplants, most notably the potent Trent 900, the engine that powers the Airbus A380. The Trent 900 is assuredly new, but it builds on the three-shaft architecture of its predecessor Trent 500s and 700s. According to Lufthansa Technik, those two engines have racked up more than 30 million flight hours. That should render the learning curve on the new 900 a tad less steep as the 50/50 JV located in Arnstadt, Thuringia, Germany, processes the powerplants. Lufthansa Technik also is working with Volvo Aero to develop new repairs, primarily for structural parts of large commercial aircraft engines. “[Volvo Aero is] our risk-sharing partner,” says Arendt. The rationale for the collaboration is to join Volvo Aero’s know-how with its own. “As the engine is flying, and parts need to come back in to be repaired, [the component manufacturer] has the responsibility to think about [that],” says the LHT executive. “They have the responsibility, but they are [manufacturers] and are sometimes limited in their knowledge of how the component looks after service.” That’s where an MRO like Lufthansa Technik brings value to the proposition. “We have an old marketing slogan,” smiles Arendt: “The OEM knows the strength of the engine; Lufthansa Technik knows the weak points of the engine.” It’s precisely from such division of labor that successful collaborations are born. Partnership Pitfalls To ensure that OEM/MRO collaborations are not ultimately stillborn, experts outline some pitfalls of partnership. Remember Gentile’s assessment that partnership alignment is paramount? StandardAero’s Mionis couldn’t agree more: “The most important things are that the incentives are aligned, and that they support the end customer.” Mionis says he has engaged in JVs (not necessarily with OEMs) where the incentives were out of sync and didn’t support the end customer. The result was “dysfunctional behavior.” Consider some power-by-the-hour pacts where Mionis says, “one entity is incentivized [to see] the engine as little as they possibly can during the length of that contract. The other entity might get paid the more they see it.” He believes this sort of set-up can have rancorous results. “Incentives [can be] totally misaligned [as to] how people get compensated and rewarded. [Ultimately], those types of relationships fall apart.” Then there’s the matter of control. Almost by definition, collaborative agreements mean both parties relinquish some of it. “All of sudden,” says TES Aviation Group’s Julian Rees, “it’s not just you managing the asset; there is somebody else involved.” Depending on the strength of the relationship and the expectations of each party, tension can build. Provided all goes well, those tensions do not often make their way to the surface. Rees says, “It’s when times get a bit difficult” that they erupt—and disrupt operations. Virtually all agree the best way to prevent this sort of thing is to communicate continuously. “Yes. Absolutely,” says Rees. “It’s [a matter of] both parties understanding how the asset is being controlled and managed.” In making the collaborative effort with KLM Engineering & Maintenance work for all involved, GE’s Gentile says, “We have a bi-weekly meeting with them. We have quarterly face-to-face senior executive meetings.” Tom Hutton is also a true-believer. When O&M spoke with the Pratt & Whitney executive, he was on the U.S. West Coast talking with counterparts from China Eastern Airlines. “We spend a lot of time working with our partners, both formally in board meetings, as well as informally.” Absent that continual communication, constructive collaboration can collapse. Some see curtailed competition as a more pressing problem than collapse. They worry that collaborations can become so successful—particularly involving certain engine types—that they dominate the market. “Rolls-Royce in particular has been aggressively tying up the MRO side of the aftermarket,” says TES’s Rees. He contends that Rolls-Royce JVs dominate the overhaul market for Trent powerplants. “Potentially, there are some competition questions raised by this, where an operator will not have free choice of MROs.” Rees goes on to assert the possibility that it will be only “first-tier” operators, such as Emirates, for example, “who will have the power to insist on overhauling their own engines, or establishing other non-OEM MROs.” Rees believes the implications of potential barriers to competition could be long range. When the time comes for second- or third-tier carriers to fly those engines, the alternatives will be “very limited indeed.” He believes there also could be “asset value implications down the line on these types of engines.” Rolls-Royce declined to be interviewed for this story. Whether joint ventures and other patterns of partnerships catapult or curtail competition, alliances seem here to stay. And the reason why has everything to do with numbers. Engine OEMs simply do not possess enough internal, in-house capacity to service the number of engines out there—even if they are more reliable than ever. “Our internal network isn’t big enough,” says GE’s Gentile, “and we couldn’t expand it fast enough, to meet [the needs] of our growing fleet.”