Earl Exum, president of International Aero Engines, discusses the OEM's projections for the engine aftermarket in 2023 and why it is looking to develop a more diversified network of engine shops.
As we've entered the last quarter of 2022, have you seen a turning point in terms of shop visit activity this year?
I would say there's definitely been a turning point but this wasn't unanticipated, to be honest, as we're pretty close to our forecast. I've been with Pratt & Whitney for 27 years and, during that time, I've been through SARS, 9/11 and the global financial crisis in 2008. In all cases it's been the same pattern: a precipitous drop as a reaction to what's going on, but then followed by a steep ramp. I feel we got it right with the V2500 as we anticipated this ramp. We had the capacity in position last year and were very, very healthy in terms of supporting the ramp. We saw close to 100 shop visit increases year-over-year last year and we supported our customers really well. While this year has been more challenging because it's roughly going to be another 100 shop visits on top of that, by and large we are giving customers the support they need. We're managing it pretty well and so far we are seeing what we'd hope we would see.
How far off do you think we are from the industry returning to the pre-COVID levels?
No, we haven't yet reached it but I think it is approaching it. We continue just to have challenges: lockdowns in China, the [Russia-Ukraine] war, the costs and the labor issues of our customers—these have all dampened what could have been. I was hoping we'd have upside to our forecast but we're not seeing the upside because it continues to be headwinds. The U.S. is very solid, however, and this past summer we were up to nearly 90% there. Europe has produced similar results this summer. However, India still lags, as does Southeast Asia, while China is up and down. And then, of course, the war in Ukraine has dampened it with increased fuel costs and various things. So, we're not realizing all the upside, but our two major markets Europe and the U.S. performed extremely well this summer.
There appears to be satisfaction with how shop visits have been managed over the past few years, but given industry concerns about future MRO capacity, do you foresee more capacity additions to the V2500 aftermarket network?
We don't need more and we feel we have what we need to meet our forecast. Some things do need to happen, though. Number one, customers need to level load their shop visits. Customers can't try to fly all the green-time out of the engines and then need them all overhauled at one time. Most of our customers, particularly those that we have under long-term contracts, have a maintenance plan that uses the capacity that we have available now to have a nice, smooth, level plan to manage their fleets. There are at least a couple of operators that are relying on new engine and aircraft deliveries and also relying on utilizing green-time. I would say they're cutting it pretty close to the margin and if, in fact, they don't get the engines that they need or the new aircraft don't perform the way they need them to, it is going to be a challenge for them.
What we also need is for our repair and parts supply base to continue to perform. If I only had to worry about the V2500, then I'd feel decent about where we are. The dilemma is that the suppliers we rely on are also relied on by many other programs. This is to the extent that if they didn't plan effectively, then that could become a bottleneck. We're out there talking to our customers and our suppliers. Our forecast hasn't really changed: we have a steady forecast.
The last thing is we are encouraging our customers to approve as many shops as possible to give us lots of flexibility. We have 17 shops [and] I'd like to be able to utilize one or more of the other 16. I know it's a little more work to have by adding another supplier to your list and having to keep in compliance with the quality system, but it will give us the flexibility we need to handle what will be significantly more shop visits next year than in 2022.
The last few years have seen strong demand for hospital visits and quick turn services for engines. Have you seen a lot of demand for V2500 engines, and what investments have you made into those services with your partners?
Absolutely. We've done a lot of hospital shop visits and worked very closely with customers on the workscopes. We've approved specific workscopes that have been able to cut down shop visits by an average of 10 days. This has been a huge success. Infrastructure and tooling is in place and we trained sources. The modified work scopes have really helped our customers in this period. I believe the mix will be higher for full overhauls going forward. At the end of the day, you can only run out so much green-time. You can only do modified work scopes for so long before it's time to really refresh and refurbish an engine, so the mix will change to more heavy restorations.
How is IAE addressing supply chain challenges and what has been done to rectify some of these issues?
From what I hear when I go to industry conferences and when I talk to customers, for us it's more of a risk than it is a challenge. We talk to our airlines and they can't get people to do what they need to be done. In some of our logistics supply chain, the turnover is extremely high. As mentioned before, we have 17 shops all over the world. So while we do have issues—like in China when they had a lockdown and that particular shop was unavailable—there were 16 other shops available. We have very good diversification within our supply chain. As indicated before, it's where we get to more narrow points in the supply where many programs use the same sources, for example for things like structural castings. They haven't been major issues for us up to now, but they're clearly a risk as shop visits come back for all programs. We've tried to do things like provision structural castings and increase the amount of inventory we hold to give us a little bit of buffer there but, obviously, that doesn't last forever.
Factors such as rising inflation and higher interest rates are affecting the market with MROs and airlines seeing price increases in multiple areas. Where are you seeing these cost escalations as an OEM and will these increases inevitably mean cost being passed on to the customer?
There's no question that we are seeing cost pressures. We're seeing it in our suppliers' labor force and our own labor force. We're seeing it in aftermarket network shops across the world, but it varies and isn't consistent in every location. At some of our shops which have unions, the labor forces are coming forward and saying they need to get paid more because of inflation. We are also seeing our raw material costs going up. In some cases, we're protected with long-term contracts, but there's an end in sight to those contracts and some of those costs we're seeing straight away. So, we're absolutely seeing cost pressures. We're doing everything we can to get more efficient and absorb what we can, but it remains to be seen how much of that we can we can absorb.
As an engine manufacturer, what impact did the Russia sanctions have on IAE's titanium supply?
We've been able to mitigate any ill effects, but we certainly had to work hard in order to mitigate them. We had suppliers that did rely on Russia. Fortunately, in the case of some of our first tier suppliers, we have contracts with other alternatives than Russia, which of course we leaned on. But then everyone wanted to go through those same suppliers, so we had to secure our supply while working with our suppliers to secure theirs.
What is IAE's strategy around labor and access to skills going into 2023?
By having multiple shops across the world, that diversification has really helped. Where we have seen issues in China, where lockdowns prevented people from coming to work, having a diverse network has worked in our favor. In that region [Asia-Pacific] we have a large engine center in Christchurch, New Zealand, which was somewhat isolated. COVID eventually made it to there but, at the time, this gave us a little bit of a buffer. Workforce continues to be a challenge everywhere. However, we've made our suppliers aware of our forecast multiple times and also worked with customers to try to level their production with the understanding that we can't guarantee perfection.
For us, it's more COVID impacting some of our sites than turnover of people. Our suppliers have held up. In Japan, for example, we're working to ramp up our suppliers. We have MRO shops there and we want them to do more work so we can get more diversified and get more customers to approve them. Ultimately, the key is going to be leveraging that large supply global supply base. If we might have an issue in one of our shops, we can shift that load elsewhere if our customers have approved multiple shops.
What are you seeing in relation to engine turnaround times for shop visits? Have these eased throughout this year?
I'm not happy with our turn times but I'd estimate that the V2500 has some of the better turnaround times in the industry presently. In the third quarter of 2021, we hit our turnaround time targets. The third quarter tends to be the time when the customer wants their engine overhauled as they've flown those all summer long and they don't want to take the engine off-wing during summertime. We saw that rush last year before we saw some of the labor shortages—some of it COVID-related—present challenges.
For instance, we do some of our maintenance at a shop in Singapore where a lot of the workforce is Malaysian. Singapore went into lockdown again and this prevented the Malaysian workforce from coming over the border to work. At the same time we were trying to ramp the business to support the growth. That was a big hiccup last year and we saw that lagging effect continue into the first quarter of this year when turnaround times went higher. However, this was never to the point where we were causing AOGs, but [it was] higher than we wanted. While I'm not happy with where we are, the trend is going in the direction. It would tie up less capacity for certain if we could do engines faster.
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