Fix it and they will come
Can independent maintenance shops compete with OEMs?
ENGINE MAKERS will often joke that they do all the hard, complicated, technical work, while aircraft manufacturers build tubes and wings. This is unfair, but there is one area where engine manufacturers were the first to see a business opportunity: maintaining and supporting their fleet. Rolls-Royce trademarked the term Power-by-the-Hour in 1962 to support the Viper engine on the de Havilland/ Hawker Siddeley 125 business jet. Aircraft manufacturers, on the other hand, have generally been much slower to grow their maintenance business. Textron Aviation, which acquired Hawker Beechcraft partly for its services business, was one of the first to recognise the importance of aftercare and now has 19 owned facilities. Gulfstream – which acquired Jet Aviation at the top of the cycle for $2.5 billion in 2008 – also saw the opportunities early.
Now, in 2019, every aircraft manufacturer is focused on growing aftermarket revenues.
This makes sense. Aftermarket – maintenance and spares – revenues were extremely helpful when the number of deliveries fell after 2008. Although some maintenance spending is dependent on utilisation (which falls during downturns) and refurbishments (which are often driven by new owners refreshing aircraft), aftermarket revenues are still less volatile than aircraft deliveries. Good aftercare also helps OEMs win repeat orders.
The past year has seen three landmark deals demonstrating the appetite of OEMs. In April 2018, Jet Aviation agreed to buy Hawker Pacific for $250 million, in January 2019 Luxaviation sold its ExecuJet MRO business to Dassault. In February 2019 Dassault also bought TAG Aviation’s European maintenance business.
Alasdair Whyte is editor of Corporate Jet Investor. He has been a financial journalist writing about aviation for more than 20 years.
Hawker Pacific was sold by US private equity firm Britton Hill, which was founded by Jeb Bush, (which owned 65.82%) and shipping firm SEACOR (34.18%). Both did well on their investment. Although Britton Hill’s 2014 investment was not disclosed. SEACOR paid $25 million for its stake in 2010. The investors felt that the timing was right – especially with OEMs keen to grow in Asia. Jefferies, the investment bank running the sale, kept highlighting the fact that buying the 40-year-old Hawker Pacific was the last chance for someone to get significant market share in Asia through a single acquisition. Jet Aviation outbid Dassault at the last minute. So, Dassault went shopping. The French manufacturer approached Luxaviation, which had itself acquired ExecuJet in 2015. Patrick Hansen took the call – he does not like auctions – and was prepared to sell.
“It is clear that OEMs are seriously pushing into the MRO market and it is clear that ultimately this will be a very crowded market,” says Hansen. “We also wanted to make sure that any buyer was a long-term owner who would grow the business and live up to our responsibility to employees.”
“Maintenance was always a slightly special business compared to the other parts of the group and the sale makes Luxaviation easier to understand both for investors and for customers,” says Hansen. “We can now focus on growing our FBOs, charter and management.” There may be more deals to come – and Dassault is not the only manufacturer looking to grow. “In the last three or four months, we have had indicative offers for our maintenance division,” says Marwan Khalek, CEO of Gama Aviation. “But we are not interested in selling, we see services as a key part of our growth plan."
The same is true for many of the largest MROs. Some like Duncan Aviation and Constant Aviation in the US or Metrojet in Hong Kong are family owned and very much not for sale. Much of their unique selling proposition comes from their being independent. OEMs can of course also expand organically. Bombardier is doing this at Opa Locka Executive Airport in Florida where it is spending $80 million building a new 300,000 square foot facility. It has also bought two hangars at London Biggin Hill in separate deals. In 2015, Bombardier serviced just 28% of its fleet. By 2020 it wants to hit 50%.
At the National Aircraft Finance Association Conference in March 2019, Michael Amalfitano, president of Embraer Executive Jets, said that he is planning to use money from Boeing’s acquisition of Embraer Commercial Aircraft to grow services significantly. The Brazilian manufacturer recognises that it is behind in the area. But it is too early to write-off independent MRO shops.
“OEMs are definitely moving into maintenance, but there is still room for independent MROs - particularly in certain markets, like special missions,” says Gama Aviation’s Khalek. “We are not trying to compete with OEMs – they do hold all the cards – but there are certain markets where independents will always be needed.” Most independent maintenance companies expect OEMs to first target warranty work – maintenance that OEMs guarantee for new aircraft – except in regions where they do not have facilities.
MROs make a higher margin on parts than labour
“Unless they are prepared to pay more for warranty work, we are happy to lose it,” says one maintenance company CEO. “They squeeze you on the parts margin, squeeze you on your labour rate and squeeze you on the number of hours they think it should take. Sometimes we feel like saying can you send one of the superheroes you clearly have working for you to show our experienced engineers how to do the work in half the time.”
In the past, aircraft OEMs have grown support by establishing a network of Authorised Service Centres. Some engine OEMs, such as Rolls-Royce and GE, have tended to keep closer control while others – such as Pratt & Whitney – have broad networks of Authorised Service Centres. Now aircraft OEMs are following a similar approach.
As well as winning warranty work, Authorised Service Centres typically get discounts on parts – for engine components this can be as much as 35%. For aircraft parts it is typically lower.
“It is all about parts cost,” says one maintenance specialist, who worked for OEMs. “Labour does not make that big a difference – the costs are the same for everyone – so if you can control parts, you can control the margin.”
But things are not altogether bleak for independent maintenance shops. First, many owners are keen to support independents.
“We consider work done by a few shops, like Duncan Aviation, West Star Aviation, StandardAero and Constant Aviation as being exactly the same quality as an OEM,” says one American broker. “In fact, for pre-purchase inspections we prefer them as we see them as more independent.”
Second, with OEMs targeting newer aircraft and warranty work there are big opportunities with older aircraft. “We are actually seeing older legacy aircraft move from Europe to the US because the support here is not as good,” says one broker.
Even if OEMs want to eventually support 100% of their fleet – as some engine manufacturers do – it will take a long time to get to this. Textron – which supports Citation Jets, Hawker Beechcraft and Cessna turboprops – has delivered an astonishing 250,000 aircraft. OEMs will also remain keen to support good maintenance shops in emerging markets when fleets are too small to build new facilities.
But the rise of OEMs in services is, without doubt, a key trend. If you want more proof of the importance of services – and Gulfstream’s early recognition of it – you just have to look at the last two CEOs of the aircraft manufacturer. Mark Burns, current CEO, and Larry Flynn (his predecessor) both ran services before taking on the top job.