Engine OEMs: Are They Taking a Protectionist Stance or Simply Protecting Income Stream?

OEM incursion in the aftermarket is becoming a more pressing concern for the many MROs. However, while some see this as a challenge, others view it as a opportunity for building stronger relationships and aiding growth opportunities. Daniel James, senior associate, gives his perspective on the issue. 

Almost exactly a year ago, the European Commission wrote to airlines and component manufacturers seeking information about terms within service and supply contracts which could have the effect of restricting choice when providing aircraft related services. Of particular interest to many of my clients are those terms relating to the repair, overhaul and trading of engines. However, for some time prior to the Commission’s involvement I was certainly sensing a groundswell of concern from clients and contacts in the industry.

Fast forward a year and at the ISTAT conference in Barcelona last month, the engine trading panel, comprised of engine OEMs (RR and P&W) and engine lessors (Willis and ELFC), discussed issues surrounding the perceived protectionist stance that engine OEMs are taking. The issue was also discussed a week or so earlier in Bangkok, at the IATA Maintenance Cost Conference. 

The criticisms levelled against a number of the engine OEMs are broadly that they have achieved, or are seeking to achieve, a dominant aftermarket position. I would hasten to add this is not the view of the European Commission, who are still looking into the position and have not made any decisions one way or the other.

Practices including, but not limited to, elimination in the use of PMA parts & DER in engine gas-paths, a marked increase in the number of flight hour agreements (such as RR “Totalcare”) and the perceived increased value and quality of OEM maintained engines as compared to others (such as CFM’s “TruEngine”) are all cited as examples of the OEM’s motives to dominate the aftersales market.  

One particular slide was shown at Barcelona, courtesy of a European MRO, which depicted the OEMs as a steam roller hurtling down the “competition road” with the hapless MROs stood in its path as the EU Commission and IATA looked on.  This may be somewhat dramatic but it certainly demonstrated the strength of feeling among the independent MROs.

So, very broadly, lessors are concerned about asset value and re-marketability, MROs are concerned about their ability to repair and support new engine models.    

The position of the OEMs, at least those expressed in Barcelona, is that these new engines and their associated technologies (which, let no one be in doubt, are amazing pieces of engineering) require huge capital investment and expenditure to develop. In order to attract investors and provide requisite returns, a longer term income stream needs to be derived from the engine. As such, the development of flight hour packages and OEM provided parts support for the engine over its life span bolt on to the underlying asset value.

RR also provided some news about a new “LessorCare” package designed to support lessors in relation to engines being transferred beyond the first lessor. The lessors seemed unconvinced.

This issue is likely to rumble on for some time but it is one very much at the top of my list to be monitored.

First published in MRO Network, October 2016

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