Sometimes partners, and sometimes competitors, the relationship between OEMs and MROs has changed over the years and has not been without controversy. Jason Holland investigates whether the balance of power is now shifting once more.
[This article first appeared in MRO Management October/November 2021, which you can read in full here.]
The way in which MROs and OEMs have worked together – or indeed separately – has evolved over time. Prior to the early 2000s, with the notable exception of engine OEMs, the roles of the two types of company were quite clear and distinct – OEMs “largely left the MRO market to aftermarket independent and airline-affiliated MROs”, as Joshua Ng, director at Alton Aviation Consultancy, puts it.
From the 2000s up to the present day, airframe, aircraft system and component OEMs have made strategic efforts to compete with the independent and airline-affiliated MRO suppliers, having “realised the value [in terms of] revenue and profitability of the aftermarket”, Ng says. “Given the outsized advantage OEMs have with intellectual property, design data and manuals, many of the larger MROs have elected to partner with OEMs rather than competing. Examples are material agreements, authorised service centres and distribution agreements.”
Singapore-headquartered SIA Engineering Company (SIAEC), for example, says it has set up a total of 23 subsidiaries and joint ventures across seven countries with OEMs and strategic partners including Rolls-Royce, Pratt & Whitney, GE, Safran, Collins and Jamco to develop a range of MRO capabilities.
“The customer is at the centre of strategic partnerships and for SIAEC and our partners, building an MRO ecosystem enables us to better serve our customers whether in Singapore or at our overseas locations,” the company says, when asked to reflect on the benefits of such partnerships. “Through strategic partnerships, SIAEC and our partners can leverage respective expertise and jointly deliver to customers a wider and deeper range of services, including capabilities on the latest generation of aircraft.”
US-based MRO StandardAero does business exclusively as an OEM-approved MRO provider to ensure “the highest levels of support, in terms of OEM training for our technicians, OEM auditing of our facilities, access to OEM repair schemes and rental pools, support of OEM warranties, and use of OEM parts”, says Alex Youngs, director of sales and marketing business intelligence, airlines & fleets at the company.
But StandardAero’s relationship with several OEMs goes beyond MRO licenses. “We provide offload support to multiple OEMs, whereby the OEM is able to use us to support its own MRO workload as capacity requires,” explains Youngs. “We also have partnerships to provide life-of-type services for several engine programmes, including the Rolls-Royce RB211-535 turbofan and the Pratt & Whitney Canada JT15D’s pay-per-hour support programme.
“Our StandardAero Component Services (SACS) business provides component repair services to a large number of OEMs, and on a wide range of engine platforms that include several outside of our regular MRO activities, such as the CF6, PW1000G, PW2000, PW4000 and V2500. Finally, our OEM relationships also include a partnership with GE Aviation on the Testing, Research and Development Centre (TRDC) in Winnipeg, in support of GE’s work on the LEAP, GENx and Passport engine families.”
As well as ensuring high levels of quality and support, Youngs says “the trust engendered through a strategic partnership with an OEM may also lead to additional opportunities presenting themselves, as the OEM becomes familiar with the MRO and its capabilities”. OEMs may also come to formally adopt repair schemes developed by MROs, he notes, “thereby reflecting the two-way nature of OEM-MRO partnerships”.
Such strategic partnerships are thoroughly vetted by both parties prior to finalisation, Young affirms, “which helps ensure their success by ensuring that the obligations involved are fully understood. The enduring nature of these partnerships, which regularly run into decades, confirms that they work well in practice.”
As noted, engine OEMs have a longer history of aftermarket involvement than their airframe and component counterparts. Germany’s MTU Aero Engines launched its MRO business, MTU Maintenance, in 1979 to provide aftermarket services for commercial engines. That gives the MRO company an interesting perspective on the relationship between OEMs and MROs.
MTU Maintenance says it has a “three-pronged” aftermarket strategy that includes work within OEM networks (via RRSPs from MTU Aero Engines), co-operations with airline partners such as with its joint venture facilities with Lufthansa Technik and China Southern, and independent business acquisition. “As such, we both work with and compete against OEMs,” explains Martin Friis-Petersen, SVP MRO Programs for MTU Aero Engines. “We typically work with Pratt & Whitney on narrowbody engines, GE on widebody engines and Pratt & Whitney Canada on regional jets.”
Assessing the benefits of forming a strategic partnership with OEMs, Friis-Petersen comments: “Our collaboration with OEMs ensures market access to newer generation engines. This includes licenses to perform MRO and access to manuals, for instance. As part of the OEM network, we perform engine MRO according to OEM guidelines and on behalf of the OEM. OEMs tend to benefit from more flexibility, both in terms of the packages they offer customers as well as network flexibility without investing in their own capacities.
“We have very good relationships with OEMs, for instance on the PW1100G-JM programme, for which we have complete DAT capabilities at three facilities worldwide: EME Aero (a 50/50 joint venture with Lufthansa Technik), MTU Maintenance Hannover and MTU Maintenance Zhuhai. And we carry out parts repairs at two further locations: MTU Aero Engines and MTU Maintenance Berlin-Brandenburg.
“MTU Aero Engines’ RRSP share on the PW1100G-JM programme is 18 per cent and as such, we were one of the first worldwide to induct and perform initial maintenance on these engines in 2016. We have amassed a wealth of knowledge on repair processes and share this with the OEM, and this can lead to our processes being adopted into the OEM manual.”
On the airframe OEM side, companies have taken different approaches to the aftermarket, whether as a pure integrator or by taking a more active role in MRO work.
Airbus has developed packages like Flight Hour Services, covering components and aircraft based on a contractual fixed hourly-rate payment, ensuring maintenance services from qualified suppliers.
In a recent agreement, in April, Airbus signed a long-term component pool agreement with Turkish Technic for the A350 aircraft fleet of Turkish Airlines. The OEM will provide A350 aircraft parts with guaranteed availability facilitated by pool access service, on-site stock at Turkish Technic’s main base in Istanbul, and component repairs. Airbus said that to service this contract along with future Flight Hour Services business in the Europe, Middle East & Africa (EMEA) region, it would extend its existing pool in Europe to cover A350 aircraft components.
Boeing too has extensive partnerships with MROs to deliver lifecycle services. The company’s GoldCare programme was initially developed in support of the 787.
“Customers have access to MRO facilities around the world that deliver technical engineering services when and where it is needed to meet growing demand as the industry continues to recover,” Boeing says of its offerings.
“Commercial operators can access our internal commercial MRO capability and an extended network of third-party global MRO providers. This network provides the proactive solutions and immediate customer support resources required for airplane-on-ground situations. We partner with specific MROs to develop solutions aimed at increasing the overall efficiency of airframe maintenance for our airline customers.”
Looking at component programmes, Boeing leverages a variety of MROs including OEMs and independent or large integrators for its repair network. “Boeing also has strong, established relationships with highly capable MRO suppliers to complete modifications, line maintenance, heavy maintenance, and on-call service for our customers, as well as passenger-to-freighter conversions for cargo operators and lessors. These relationships are focused on ensuring safe and efficient operations for our customers,” the company says.
The exact approach taken by an OEM to the aftermarket will force MRO companies to act – or react – in different ways. “Where an OEM seeks to act as an integrator, there will almost always be a margin impact on MRO providers, offset to some degree by the scale economies associated with what effectively turns into an offload programme,” explains StandardAero’s Youngs. “Such approaches are also typically more complex, and can be less flexible as a result.
“By comparison, OEMs which engage directly with airlines will typically find it easier to tailor their offerings to meet the specific needs of the airline, albeit at the downside of having to manage multiple disparate service offerings. Airlines themselves are often able to negotiate with OEMs to set up their own internal maintenance facilities, though market shocks such as Covid-19 do typically lead to a portion of airlines making the decision to refocus solely on passenger operations, reassessing their appetite for auxiliary services such as MRO.”
Then there is the question of MRO companies who choose to remain independent of OEMs. Alton Aviation Consultancy observes that there is a “market niche” for such organisations. “The key for success is identifying the right value proposition for the airline customers,” says Ng. “Some independent MROs have chosen to go down the intellectual property route, leveraging PMA and DER repairs as an alternative cost savings solution for their airline customers.
“Others have chosen a more conservative route and prefer to collaborate, leveraging used serviceable material (USM) usage with OEM approved parts repairs to develop economical solutions for their airline clients.”
At the turn of the year, Alton Aviation Consultancy predicted that OEMs would begin to exit many of their airframe and component MRO investments this year, as they would see the importance of MROs as valuable suppliers and reassess their business models “with a back-to-basics theme focused on their core competencies of engineering design and manufacturing”.
“In general, I believe our predictions have been solid,” says Ng. “Airbus has exited its airframe MRO venture with Singapore Airlines Engineering Company. Boeing appears to have scaled back its previously aggressive aftermarket ambitions and vertical integration efforts. And moreover, we have not seen any recent announcements of new aftermarket initiatives. Time will tell.”
Youngs observes that if OEMs can make more money by focusing on their core competencies “then it stands to reason that they will do so”. He adds: “One interesting factor now facing OEMs is the strength of lessors, which now account for 60 per cent of deliveries: as such it is likely that lessors will be attempting to maximise their leverage with OEMs.”
Competition and Covid-19
In any competitive industry, of course, there will always be some form of tension between manufacturer and supplier given the dependency for parts and data – and this is not unique to the aviation industry, according to Ng.
The OEM-MRO industry is notorious for ‘coopetition’ – a combination of cooperation and competition – according to Boeing. “This healthy collaboration not only benefits the OEMs and MROs, but also the airlines and the flying public,” the company says. “We’re focused on creating a space for cooperation where it leads to innovation, but we also require competition to encourage investment and innovative thinking. The goal is finding the right balance that is critical for all of the participants in the MRO value stream.”
And it seems competition has been put on hold for the time being, as the aviation industry struggles to recover from the Covid-19 pandemic, says Ng. “In the engine MRO space, there is more collaboration between MROs and OEMs, especially in light of recent IATA-brokered agreements,” he states. “In the component MRO space, we continue to see significant consolidation and M&A activity in an effort to shore up balance sheets, reduce competition and increase buying power.”
SIAEC believes that the Covid-19 crisis has emphasised the need for all stakeholders within OEM-MRO networks to work closely together “as we jointly determine how best to navigate the post-Covid aviation landscape. We believe that this will only help to strengthen the relationships making up the aftermarket networks.”
StandardAero’s Youngs expects that the market’s recovery over the coming years will see OEMs ramp-up deliveries, “which will in turn emphasise the importance of strong global support networks to keep operators flying. OEMs themselves typically generate higher margins from parts sales than MRO work, and from a comparative advantage perspective it therefore makes more sense for them to focus on the former.”
Youngs says the impact of Covid-19 on OEM aftermarket networks was primarily one of reduced demand as airlines suffered from a large fall in passenger numbers. “Some MROs will also have inevitably seen OEM offloaded business fall as the OEMs’ own available capacity rose,” he notes. “While Covid-19 has not had any fundamental impact on the rationale behind OEM aftermarket networks, there will likely be some degree of consolidation due to the financial fallout of the pandemic.”
New trends and technologies
As OEM-MRO partnerships continue to evolve, they will need to consider new trends and technologies. While parts and data remain the primary reason for partnership, the data element has expanded somewhat, according to Alton Aviation Consultancy’s Ng. “Data would have traditionally referred to component repair manuals or technical information,” he explains. “However, data today would also refer to airline-generated data for predictive maintenance and data analytics. OEMs and MROs are in the midst of positioning themselves in this space, and having the data helps test and develop these new applications.”
He sees predictive maintenance partnerships as “nascent and slowly evolving, but not with the same sense of urgency in terms of investment and resource allocation as pre-pandemic. It’s just not a priority right now, which is completely logical given the industry situation.”
For its part, Boeing says it continues to invest in digital solutions. “We offer a portfolio of predictive analytics tools which help convert potential unscheduled maintenance events into scheduled ones using in-flight real-time and prognostic alerts. We have changed our focus to become more flexible in the services we provide by offering a suite of engineering services with targeted solutions. This helps customers improve technical reliability and reduce repair costs by providing customised predictive and prescriptive analytics solutions for their maintenance needs.”
Is the balance shifting?
This article has shown how OEM-MRO partnerships have and continue to evolve. Although competitive tensions exist beneath the surface, relationships between companies have now often got to the point of seamless co-operation and efficiency. The question of whether the balance of power is now shifting from OEMs to MROs in light of the Covid-19 crisis remains.
“OEMs have been doubly hit during this crisis, with production rate cuts and aftermarket contraction, compared to MROs [who have suffered] aftermarket contraction only,” says Alton Aviation Consultancy’s Ng. “Given the expected slower recovery of production rates, coupled with a probable slowdown in new aircraft platform development, OEMs will clearly take much longer to recover from this crisis. Whereas financially stable MROs with solid access to a capital should be in good position to survive and thrive in the near-term.”
That means MROs’ bargaining power should improve. But the best approach might not be to see these relationships in terms of a power struggle. When OEMs and MROs successfully work together to common goals – along with all other stakeholders – then a positive result becomes much more likely. “MRO-OEM partnerships are here to stay,” as SIAEC puts it, “and we will continue to nurture our ties with our OEM partners as these are mutually beneficial relationships which ultimately allow OEMs and an MRO like ourselves to better serve our customers across different regions.”
Boeing agrees that relationships between OEMs and MROs will continue to evolve. “To think of them as purely channels for sharing, providing or gathering data or as a delivery stream for parts is limited and not the primary function of any MRO,” the company says. “We’re focusing on collaborative ways of driving standard work, efficiency and safety into the global delivery of MRO services and encouraging MROs to share advancements in safety and efficiency that will benefit the operators.”