By now we're all pretty familiar with the challenges airlines are facing amid the COIVD-19 pandemic, and as the lull in airline travel continues, related industries are struggling to find other avenues to recuperate revenue, weaknesses in their business models are coming to light.
Engine maintenance providers - both manufacturers and third-party MROs - have seen a sharp fall in demand for as airlines reduce their activity amid the pandemic, which as exposing a weakness in the industry's overall business strategy.
Maintenance is a key revenue source for manufacturers. Engines are usually sold with substantial discounts through aircraft deals, and they depend on aftermarket services - like overhauls and engine maintenance - to recover the development and production costs.
Long-term, flight-hour-based service agreements are usually arranged with flat-rate fees to manufacturers for engine support, whether action is required or not. In return, the manufacturers support the financial risk in the case of an engine failure. When a failure occurs, the OEM must provide a spare, get the aircraft back in the air, and repair the engine.
As more airliners are parking their aircraft amid the pandemic, engine makers’ aftermarket business has also stopped short.
Cirium data shows daily flight-hours were down 51% for narrow-bodied aircraft and 71% for widebodies on September 30 compared to the year before.
For the flights they do operate, airlines are using their latest, most fuel-efficient aircraft to save money. Most of these aircraft engines are covered inder long-term service agreements with OEMs, so shop visits have dropped.
Cirium reports that work volume at a major European engine overhaul facility has shrunk by 75 percent, and another third-party overhaul shop lost virtually all its scheduled appointments within weeks.
MROs similarly depend on engine overhauls, as they rank among the most profitable services in that business sector.
Roland Gerhards, chief executive of German aviation research centre ZAL, said the competitive MRO environment will “definitely change”, partly because low aircraft utilisation has put manufacturers and their hour-based service agreements in a “weak” position.
“The engine manufacturers really stand with their back against the wall and are in a bad negotiating position,” Gerhards says.
OEMs are keen on renegotiating the service agreements that mainly work in airlines' favor, based on the hours actually flown. The airlines however, since they are struggling to survive with less flights and fewer flight hours, are in no position to pay higher maintenance fees.
This was made increasingly clear by Rolls-Royce's announcement on October 1 to raise £3 billion ($34.9 billion) of capital through new shares and a bond offering. However, it will not make a fundamental review of its hour-based aftermarket services.
Rolls-Royce told Cirium: “We continue to believe in the benefits our TotalCare agreements offer our customers and we have no plans to change the shape of our service contracts. Rolls-Royce has pioneered long-term service agreements under the power-by-the-hour model in civil aerospace since the late 1990s and it remains very popular today – around 90% of our customers have chosen TotalCare coverage on new to mid-life engine programmes.”
The UK-based manufacturer said on October 1 that it was “re-phasing” investment in its UltraFan future engine program – which involves a geared-fan architecture and new materials.
Many manufacturers need investments to develop new technology for future aircraft generations, and with this drop in crucial aftermarket revenue, the timeline for full- or hybrid-electric or hydrogen-fueled power systems has been lengthened.
For now, MROs can count on a significant change in industry business practice.
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