How OEMs Will Approach The Aftermarket Post-Crisis
The past year dominated by the COVID-19 crisis was among the most challenging for the aviation industry in living memory. In April 2020, around 80% of the global aircraft fleet was grounded, which had a knock-on effect spanning production of aircraft and engines, maintenance and the aerospace supply chain, among other sectors affected.
OEMs in particular have had a rough 12 months. Orderbooks have been badly hit, as shown in reduced annual revenues and measures such as workforce reductions and tapping financial support from governments. Future strategies may also be forced to change. Pre-crisis, several manufacturers had ambitious designs on growing their aftermarket presence. These potentially shifting strategies were placed under scrutiny during an Aviation Week virtual panel discussion held in late April.
Chief among these companies is Boeing, the airframe manufacturer that launched Boeing Global Services (BGS) nearly four years ago with the lofty target of generating $50 billion in revenues by 2025. Seen as somewhat of a safeguard against any drops in production demand, the effects of the crisis on this business were immediately stark: In the second quarter of last year, BGS reported a $672 million loss.
“We’ve had a significant decline in our services business across the board,” says Bernard Hensey, vice president for commercial business at Boeing Global Services, who cites its ventures related to aircraft parts and modifications as being the most affected, while noting the uptick in its freighter business that has led to capacity ramp-ups.
But Hensey does not believe the crisis is over yet and sees Boeing and the wider industry as still in the middle of it. He cites influences such as the number of aircraft flying and hours flown, along with reduced utilization rates and load factors. “It’s a complex market at the moment, and I still don’t think we know how things are going to play out,” he says.
Boeing’s commercial business has since undergone a restructuring across its many facets. Hensey says the new key theme is “customer agility” as the company reacts to the new environment. That means focusing on Boeing’s freighter models while also investing heavily in its digital franchises and launching new services such as Boeing Digital Direct in November 2020.
Hensey sees the leasing segment playing a key role in the future. “We’re really investing in our support capacity for the leasing industry, as this segment will be key to help the industry reconfigure. . . . We’re supporting them with expanding our [used serviceable material] business, [quick engine-change] and landing gear support—it’s the elements of the industry that support aircraft liquidity,” he adds.
Alexandre Avila, vice president for strategy, programs and innovation at Embraer Services and Support, is confident its ERJ fleet will recover faster than other aircraft types after regaining around 80% of flying capacity in early 2021, but he says the Brazilian manufacturer remains cautious overall. In April 2020, because of the COVID-19 crisis Boeing terminated the proposed joint venture between the two companies, which would have seen it take an 80% stake in Embraer’s commercial business and encompass some aftermarket services. Now Embraer will focus on its existing services and support business established at the end of 2017, Avila says. “We’ll maintain focus on business growth in both the Embraer and agnostic businesses,” he says, highlighting its Portugal-based engine subsidiary OGMA having become part of Pratt & Whitney’s GTF overhaul network last November.
While the crisis has presented serious challenges, many in the industry believe it has been a good time to innovate for companies with the resources and will to do so—and Avila concurs. He says Embraer is looking to further enhance its digital capabilities in the long term. “The crisis is accelerating digital-solutions implementation, with user technology for online support and enhanced training one area we are strongly working on,” he says. “Data-driven analysis to improve aircraft efficiency and cost and areas such as artificial intelligence and data science bring a strong competitive advantage for the industry.”
In the wake of the crisis, the engine segment has been among the most adversely affected in the aftermarket, with operators either postponing or canceling costly engine shop visits to preserve liquidity. CFM International, which manufactures the world’s most popular narrowbody engine, the CFM56, with more than 16,000 models in service, saw this decline initially.
Donna Gerber, director of CFM customer programs at GE Aviation, which partners with Safran Aircraft Engines in the CFM International joint venture, says the recovery of aircraft and engine utilization is critical, and this is starting to occur due to fewer restrictions on narrowbody routes. She also sees narrowbody aircraft leading the market recovery. “The CFM56-5B and -7B both remain pretty young engines, and more than 50% of that fleet has yet to get their first shop visit, while 75% have yet to undergo their second shop visit, so there’s a long life on that engine yet,” she says.
Freighter conversion work has also extended to CFM56-powered narrowbody aircraft such as the Airbus A320, which Gerber attributes to increased e-commerce driving delivery capacity demand. “We see this also as a pause rather than a dramatic shape change in our particular space,” she says of CFM International’s position in relation to the crisis.
The relative stability of the CFM56 market has translated to some extent to its aftermarket. While shop visits for the engine dropped in 2020, albeit not to the levels anticipated by CFM’s March 2021 results, the company has made minimal changes to its MRO network for the engine type. It also is moving forward with bolstering its Leap aftermarket capabilities.
Pre-crisis, the OEM was looking to expand its overhaul sites worldwide to cater to the new-generation engine and had plans to add new locations by the end of 2019. Gerber says it used the period of reduced demand to assess its position and make sure it was ready for the anticipated market revival. “We now have seven locations that are full-overhaul-ready and have taken the opportunity to develop some of our other locations that do some of the surgical work and test only,” she adds. “These locations are ready to go when we need them.” Gerber is confident that capacity is ready in the event of a spike in demand.
With production of engines set to remain on the back burner in 2021 and potentially into 2022, the widebody aircraft and engine markets could take longer to recover than their narrowbody counterparts. Romain Chambard, vice president of marketing for civil aerospace at Rolls-Royce, which makes around half of its revenues from aftermarket services, foresees a gradual and more long-term ascendence for larger engine types. “What we’ve seen in the past year is the level of hours in our long-term agreements was roughly 43% of 2019 as a baseline. We are anticipating 55% for 2021 and then 80% for the year after, and we expect to come back to 2019 levels by 2024,” he says.
Rolls-Royce has had to roll back some plans to further grow its aftermarket network because of the crisis, Chambard says. “This is being slightly delayed and pushed back in order to manage the current crisis and the eventual recovery,” he says. “It is important to plan for the midterm rather than just the short term because we want the flexibility and can’t afford to carry too much cost; so it’s about finding the right balance,” he says of the company’s future strategy.
Similar to other OEMs, Rolls-Royce tailored new services aimed at customer needs during the crisis. These included developing services related to engine storage and repair solutions while also tapping into new technologies such as virtual-reality training to assist with engine changes and maintenance. The Rolls-Royce Innovation Hub arm also came up with the Intelligent Boroscope, an artificial-intelligence-based tool aimed at facilitating remote inspections, with the software enabled to help certain decision-making scenarios.
Rolls-Royce has also refined its products tailored for the leasing industry. “We have added services to this support during the transitions when the aircraft is out of service,” he says. It also is looking to adjust the nature of MRO agreements. “Because of a less-than-certain future, some operators are looking for a short-term insurance service on unforeseen shop visits,” he says. “As they may not be willing to commit for the long term, it’s about finding a solution to bridge that gap.”
Chambard says Rolls is doing work to facilitate the transition of used aircraft, too, highlighting those that are Trent 700-powered as particularly important in this area. “We’ve been doing a lot of work with lessors and other partners to facilitate the return to service of these aircraft in an efficient way, and despite the reduced flying hours last year, we’ve seen a number of transitions.”
Like CFM International, Rolls-Royce has noticed the cargo market spike, and it is undertaking work on Airbus A330 passenger-to-freighter conversions with Germany-based EFW. Chambard expects demand to be promising: “The next few years are pretty full in terms of what is going to come on the market,” he adds.