The Middle East aircraft maintenance market has commanded much growth and development in the past decade, driven largely by the success of and other hubs. Market-watchers expect the expansion of air traffic volume and fleet sizes in the region to continue, and MRO along with them. By 2015, the UAE will have more commercial aircraft than Japan, now the world's third-largest economy, says Bill Lay, PricewaterhouseCoopers' Dubai-based partner.
Historically, much of the region's MRO work was sent abroad, but as local fleet sizes approach critical mass, it makes sense to maintain aircraft at home. At the same time, many of the region's airlines have reached a stage of maturity that has led them to question the value of contract maintenance. Flydubai and Emirates already capitalize on having MRO capabilities in-house.
In many cases, MRO growth comes via partnerships—joint ventures and special agreements with OEMs, other MROs and neighboring countries. MROs such as Turkish Technic, Abu Dhabi Aircraft Technologies and Aerostructures Middle East Services (AMES) attest to the benefits of collaboration.
Oil price volatility and political instability in the region have hurt the MRO business this year, given the airlines' sensitivity to financial and infrastructure upheaval. These challenges, exacerbated by the industry's cyclical ups and downs, have prompted airline-affiliated maintenance organizations, independent MROs and repair shops to devise strategies to stabilize and grow their business.
Joint ventures enable Middle East MRO providers to diversify while keeping an eye on their core business.
A veteran of using the JV approach, Turkish Technic has partnerships with OEMs such as(Istanbul's Goodrich Turkish Technic Service Center at Sabiha Gokcen International Airport) and with Pratt & Whitney (the Turkish Engine Center, also at Sabiha Gokcen) that provide nacelle and thrust reverser repair and rotable support, and series and engine repair, respectively.
Two partnerships taking shape now extend Turkish Technic's reach into new businesses. In December 2010, the MRO linked withand Turkish Aerospace Industries to launch an aircraft interiors company, Turkish Cabin Interior Systems (TCI). In late May, Turkish Technic, Turkish Airlines and Assan Hanil Automotive Industry and Trade Co. formed a JV to develop aircraft seat manufacturing in Turkey.
The importance of the look of the cabin to an airline's brand and customer perception makes interiors a smart investment for MROs, Dr. Ismail Demir, deputy chairman and general manager of Turkish Technic says, comparing the demand for constant upgrades in aviation to that in the IT world.
“Cabin interior products are always open to be upgraded, like [the] computer business,” he says. “They are not standard for every aircraft type, like wheels, windows, etc. If [the] product is really good in terms of aviation criteria, such as weight, cost and aesthetics, the market will come by itself.”
In the short term, TCI aims to deliver its first products—for a Turkish Airlines retrofit project—in the first quarter of 2012. New deliveries will incorporate them as well, beginning with-800s from 2013.
The seat-making joint venture will first target low-cost carriers, which are “on a clear upward trend in terms of their number and growth,” Demir says. He adds that the partners want to set up a “road show” for the economy-class seat and that they expect to introduce a prototype by the end of the year.
Abu Dhabi Aircraft Technologies (ADAT) also supplements in-house expertise by partnering with manufacturers. For example, on Jan. 25, it formed an exclusive relationship with International Aero Engines (IAE), which enables ADAT “to undertake work on certain V2500 engines that are included within IAE's aftermarket maintenance packages,” says CEO Jeremy Chan. ADAT's work on V2500 engines will start once the company completes all airworthiness and IAE requirements, an achievement he expects by year's end. ADAT also has had a broad strategic agreement withsince 2008, and its parent company Mubadala Aerospace signed one in July with Hamilton Sundstrand for components. Like Turkish Technic's JVs with Goodrich and Aviation, these arrangements give international companies a local face. OEM Goodrich works with customers such as Turkish Technic, but according to Joel Haldemann, VP for Europe, the Middle East and Africa, Goodrich's policy is to align with its customers' businesses as needed, rather than pursue alliances. “In terms of partnerships, we have a strategy to develop our own campus,” Haldemann says. “We will develop partnerships as needed, but we have no new plans as of now.” Goodrich's name recognition as an OEM is a particular plus in the Middle East, where “airlines, generally speaking, really like to work with the OEM” and “have more confidence with the OEM support,” says Antoine Succar, general manager of AMES, which, like Goodrich, repairs nacelles and thrust reversers. Partners Aircelle and agreed to form AMES in 2009, and launched operations in March 2010. In August 2010, AMES delivered its first overhauled thrust reverser for the engine to Gulf Air.
Today, AMES is gaining name recognition, but it requires ongoing effort. Says François Vitti, manager of operations and customer support. “Our name in the industry is known. I wouldn't say well-known, because we have to [keep working].” He adds that the ability to developDOA (Design Organization Approval) repairs through parent OEM Aircelle gives AMES an edge. Its other parent company also lends support: “As Air France is an operator, [customers] see us better understanding their needs.”
Other airlines with strong maintenance affiliates have looser ties in the region., for example, has projects under way to assist Middle Eastern airlines in developing their own maintenance capability. Oman Air and NAS Air in Saudi Arabia are two such airlines.
A little more than a year ago,Technik reached an agreement with NAS Air to help it grow its capabilities beyond light and routine checks for single-aisle aircraft. The project is running smoothly, confirms Wolfgang Reinert, director of international media relations. He says LHT's expertise, backed by on-site engineering and technical support, is helping NAS Air implement line and base maintenance. “So far, several line and base maintenance projects, plus some engineering projects, have been realized successfully.”
National carriers in the region also aim to acquire high-tech capabilities through partnerships. This June, Emirates announced plans to build a $120 million engine MRO shop to supplement its existing test cell, working with GE Aviation. It plans to start building the stand-alone shop in the first quarter of 2012, and to complete it by the fourth quarter of 2013.
“With a substantial increase expected in the number of [Emirates] shop visits, we would be left with a limited number of shops available to support theand GP7200, so we realized we needed to expand our capacity,” says Adel Al Redha, executive VP of engineering and operations for Emirates.
The shop will have capacity for 300 engines per year. In 2014, he says the GE90 and GP7200 engines that power Emirates' expanding fleet are expected to account for about 100 shop visits. Al Redha expects Emirates to fill the remainder with revenue-producing, third-party engines. “We believe there are opportunities to sustain lower costs for engine MRO, with opportunity in the market to pursue available third-party revenue.”
But Emirates has partnerships beyond engine maintenance. It announced in July that it will grow its training business with Canada-based CAE by building a second pilot and aircraft maintenance technician training center in Dubai. Derek Swan, senior VP business development for Emirates' sister company, Dnata, would agree with AMES' Vitti on the benefits of working with a recognized brand: CAE's global reputation as a training provider has boosted business. “We've been able to leverage their existing global customer relationships, skill sets and performance reputation,” says Swan. The formula seems to work. Only 10% of the CAE-Emirates training center's business is for Emirates; the overwhelming majority derives from external clients.
NAS Kuwait met several times with a reputable MRO; eventually, this MRO decided to dedicate its resources to another project and canceled plans in Kuwait, says NAS Kuwait Engineering Director Naser Fahad Al-Obaid. A second joint-venture attempt produced a feasibility study that led the potential partner to believe it could establish a local operation on its own. It also failed, Al-Obaid says. “From our end, we hold our horses for such projects, waiting for the right partner and time.”
Several airlines in the Middle East are investing in their internal maintenance departments. Emirates is a good example: While it is working with GE Aviation to set up its engine shop, it plans to run the shop independently. Once it has established the new capability, Emirates will no longer send its GE90 and GP7200 engines to external MROs.
Flydubai already made the transition: As of April, it had brought all of its maintenance, which Emirates Engineering had been providing, in-house.
“We initially chose to outsource line maintenance and engineering services to ensure a smooth start to airline operations, but once we had established operations and grown our fleet to 12 aircraft, it made financial sense for us to bring the operations in-house,” says Mick Hills, Flydubai's divisional senior VP for engineering and maintenance.
The low-cost carrier invested some $20 million in refurbishing its facilities, purchasing equipment and IT systems, and training and hiring staff. “We also invested in new technology to control our technical records and ensure we are scheduling maintenance and ground time in the most efficient way possible,” Hills says. Flydubai's maintenance team is using Swiss AviationSoftware's AMOS; Hills notes it was “one of the quickest implementations for a fleet of aircraft ever done by AMOS,” thanks to his team's dedication to the project.
The entire maintenance transition took six months. Today, Flydubai accomplishes “all manner of operations” from line maintenance to A checks, Hills says. The next short-term goal is “to explore advances in technology to support paperless maintenance systems,” says Hills.
In Pakistan, Airblue also wants to bring in some maintenance. The private airline, which started up in June 2004, expects to operate 13 CFM56-5B-poweredin five years' time. To support its growing fleet, it plans a C check facility in Karachi, where it will offer the services to other customers as well, says Athar Ansari, director of engineering and maintenance.
Where to Invest?
Beyond personnel and IT systems, MRO providers in the Middle East look to develop flexible techniques and high-tech repairs.
AMES' Succar says that alongside capabilities for the Airbus(which is a “very important product for us,” given that Emirates is its largest customer) and the GE90 in the next two years, it's vital to develop on-wing repairs and deployment teams to keep up with the competition. His colleague Vitti agrees: “We are asked to do more and more on-wing services.” Vitti cites LT, which sends “flying doctors” to conduct repairs on site. “We have to have our teams to be ready to do that,” he says. “If you don't do it, you can lose a specific market.”
Egyptair M&E also has been going the distance for customers. In addition to heavy maintenance, non-destructive testing, defect rectifications and spare parts support for Russian customer Aerovista, Anwar says it has been releasing AOG cases at remote destinations.
Technical services will be a target for growth and investment as well, Anwar says. Egyptair M&E handles technical services for Georgian Airways, in addition to the comprehensive contracts under which it carries out narrowbody heavy checks and more for customers, such as Iraqi Airlines and Spain's SwiftAir in Cairo. Anwar says most of the work today derives from narrowbodies.
Turkish Technic's Demir cites parts manufacturer approvals (PMA) as a vital investment. Its new seat-manufacturing joint venture will pursue PMA parts, he confirms. “According to the statistics, there is a huge demand for cabin interiors equipment PMA parts, especially in Europe, where the year-by-year market penetration rate of PMA parts grows with steady numbers.”
Expanding its engine and airframe services portfolio is a key growth area for ADAT. In addition to its partnership with IAE on the V2500, ADAT aims to add full Trent 500 and 700 capability this year, Chan says. Longer-term investments include examining airframe capability on the Airbusand A380 and the 787; these products will be developed “in line with the fleet expansion of our cornerstone customers and regional fleet growth in general,” says Chan.
Beyond adding repair capabilities, ADAT is strengthening relationships with its sister companies,and Sanad Aero Solutions. On Aug. 3, the three Mubadala companies announced major component maintenance and technical training deals with . The first contract provides nose-to-tail, integrated component support for the airline's first two Airbus aircraft, which it received in May; the contract will cover at least five A330s up to 2013 as the airline grows.
Sanad's financing abilities give the trio an advantage, says CEO Troy Lambeth. As in the arrangement with Virgin Australia, they can eliminate the airline's burden of initial provisioning. Lambeth says the demand for financing arrangements like this one is as strong now as it was in early 2010. “Our view is that demand [for financing] is increasing,” he says. “Even for carriers with strong balance sheets and an overall increase in market liquidity since 2008, order books continue to swell at record levels, driving even more demand for financing solutions.” Based on the historical industry average of $1.5 million in spares requirements per aircraft, Sanad projects a minimum demand of $18 billion in new spares required to support current orders of the next 10 years—and that's a conservative projection, he says.
It may indeed be a conservative projection, as some analysts see spares availability struggling to keep pace in the growing Middle East market. Scott Thompson, PricewaterhouseCoopers' U.S. aerospace and defense leader, says, “The availability of spare parts is likely to be constrained as OEM aircraft production ramps up at the same time MRO is growing.” He and colleague Bill Lay would agree with Lambeth that component provision and financing are strong areas of growth. Thompson puts it emphatically: “We believe the biggest risk is the supply chain being unable to keep pace with demand.”
Ownership by Mubadala also is giving SR Technics an entree into new businesses. Given its HQ in the oil-rich Middle East, Mubadala counts expertise in VIP services as a core competency. SR Technics opened its Zurich VIP completions center earlier this year, and in mid-August, it inducted its first customer aircraft—a widebody completion for an undisclosed Middle Eastern customer.
Mubadala's know-how and connections are integral to its success. “With its good background and broad network, Mubadala is a strong partner to build up the VIP business of SR Technics,” says Andy Best, who joined SR Technics as head of commercial business in late May. All three of the Mubadala companies declined to comment on their potential merger or consolidation, even as rumors circulate about combined leadership in the near future. Sanad's Lambeth says, “We are working closely together to expand our integrated component and engine solutions offerings to the market.” ADAT's Chan's comments fall along the same vague lines: “The leadership teams work extremely closely, and our customers are increasingly working with all three organizations for wide-ranging MRO and financing solutions.” SR Technics refers to its work with ADAT under a “process of mutual cooperation” that began in 2009, and says it is “still in a process of evaluation as to what this closer collaboration will look like in the future.”
Perspectives on Growth
All of this collaboration, development, and demand suggests that business is truly booming at Middle East hubs. The region certainly is at the center of the air transport world in many ways. As Goodrich's Haldemann says, his site provides a wide swath of aerostructures support; items travel to Dubai from as far away as South Africa. And new developments, such as Habom in Istanbul, should attract even more MRO dollars.
Beginning in the last quarter of 2010, as the aviation industry began to recover, “the trend for demand went up drastically,” says Demir. He expects heavy maintenance, component pool services, aircraft and cabin reconfigurations, major repairs/alterations/modifications, and part and repair design and manufacturing to grow the most in the near term. Under Turkish Technics' growth plan (which assumes the Habom project is completed as planned), the total number of worker hours per year will increase from 1.8 million this year to 2.8 million in 2014 as the company's staff grows from 1,345 licensed technicians to more than 2,000.
But there are limitations. Political instability presents obvious, complex challenges. While Goodrich's Haldemann and NAS Kuwait's Al-Obaid say they saw minimal impact from the so-called Arab Spring, others were more affected. In Beirut, Mideast Aircraft Services Co., or Masco, “has seen a slowdown due to these changes,” says Executive Director Yassine Sabbagh. “Attention has switched to other areas with more stability.” Sabbagh says most of Masco's work still comes from lessors, though new aircraft orders have picked up. “That's encouraging for us as MROs because we see new opportunities for business.” But political and financial turmoil unavoidably staunches growth. “The instabilities made us explore new ways of attracting business and setting strategies. We're planning for the short term without losing focus on the long term, but with flexibility to adjust just in case,” Sabbagh says.
A political coup in Egypt upset business there in late April and early May, but Egyptair M&E says it has done its best to mitigate the damage. “We are doing our best to minimize the bad impact of the political turmoil by effective marketing campaigns and improving the contractual terms,” says Anwar.
Planning for MRO projects in Oman also is on hold. In November 2009, Lufthansa Technik and Oman Air signed a letter of intent to set up a maintenance base at Muscat International Airport. The project comprised a hangar large enough to house two widebodies and two narrowbodies, with services up to light C checks expected to focus on Airbus A330s, Boeing 737NGs,and aircraft. In February, the MOU appeared firmer when the two extended their partnership with a contract for Boeing 737 base maintenance.
But the restructuring of Oman's government means the project has been put “on hold, as simply institutions were not available to talk to,” says Lufthansa Technik's Julia Michaelis. “However, we are very keen on this project and hope that by the end of the year we can resume talks.”
Other aspects of the business climate can be problematic. As AMES' Vitti points out, airlines in the region strongly prefer doing business with OEMs—a formidable barrier for independent providers.
And the trend to bring services in-house makes the market less attractive to newcomers and can discourage investment, says NAS Kuwait's Al-Obaid, who says he feels that growth in the region likely will be limited to large operators, with whom the “feasibility” of doing business is clear.
Asked about growth in line maintenance, Al-Obaid says candidly, “Probably you would expect an answer something like, 'Excellent growth and demand'—the fact is, it's not!”
He says that as aircraft manufacturers improve maintenance plans, aircraft fly for more hours between checks. While “the current need is reasonable and sufficient to support the high cost of running line maintenance,” in order to grow, NAS Kuwait is looking at setting up a line station outside Kuwait. “We believe that the Gulf area market is saturated with this business,” says Al-Obaid.
In other areas, however, analysts see strong underlying factors mitigating the potential for overcapacity. PwC's Lay notes that pockets of overcapacity may exist, such as in commodities or sunset airframe work, but he says that world-class capabilities (he notes the Airbus A380, in particular) and supply-chain solutions in development make the Middle East “well-positioned to draw demand from other regions.” Rather than seeing overcapacity issues in the region, PwC tends to believe that the industry will be challenged to keep up with demand.
“This region has capital ready to invest in an industry that has traditionally been constrained here,” Lay says. “In MRO, many options appear when you have strong capabilities to add to a network, such as financing spares. Players in the UAE are bringing that to the market and even offering that to airlines outside the region, which is clearly a business advantage.”