Podcast: Magnetic On MRO Opportunities In 2022
Listen in as Risto Maeots, CEO of Magnetic Group, talks about the company’s rebrand and how it is approaching new aftermarket opportunities in 2022.
I'm James Pozzi, Aviation Week's MRO Editor for the EMEA regions. I originally spoke with Risto Maeots, CEO of Estonia based Magnetic Group about the restructuring of the company and its plans for the year ahead.
Just to kick things off then, it's been a busy 12 months as ever for the company. The business underwent a rebrand and change to its structure in October last year, Magnetic MRFO changing to Magnetic Group, and operating under four pillars. There was obviously the creative part of the business, which is design and manufacturing, one focusing on assets, then the maintenance business and then talent, which obviously is related to workforce and training. What was the thinking behind rebranding the business?
The logic behind rebranding is really as we are growing and also we are building a certain equity story, I mean, certainly we're going to see in the future a mixture of different shareholders joining us, who will support the growth story.
To better really understand what we are doing, because if you have all these sectors under one name and activity, it's kind of difficult to understand. And also from an investors' point of view, let's say the company valuations are very different in the asset business versus in the manufacturing and design versus in the maintenance business. So asset business is very large revenue driven business, while the equity valuation may be a bit lower compared to having a low revenue with the Airbus, for example, OEM.
So it's really to be closer and more understandable to the future investors and the growth story. And of course there is also an element just to be more understandable by any other customer, or company, or partner, or even you here, or your readers to truly understand what we do. Because if the name Magnetic MRO, the MRO in the end started a bit to limit our true activities and true nature.
Sure, absolutely. So that's a clear understanding really of how that's been separated and the intention there. Will it fundamentally change the way the business operates on a day-to-day basis?
Yes, it does. It used to be that, I mean, if we speak about management and managing the whole organization, it was very centralized and all the activities were really centralized under one leadership. Now, with the new structure, we are going to have four distinctive sectors.
As you just pointed out earlier, all these four sectors also have their own leaders or people in charge, which would leave more time and resources for the group level people to focus for the future opportunities. Which I'm sure all of your readers will also hear about us in the upcoming years, so what we are aiming to do and where we are actually going forward.
Obviously the crisis is still ongoing to some degree. You mentioned opportunities though, so it sounds like at management level there's certainly a lot of opportunities out there that the company is looking at actively. Could you share any insights on where you feel some of those opportunities live?
Absolutely. I guess there are business units which are getting bad impact by the COVID, and there are business units which are benefiting out of it. Who are benefiting? Certainly hangar business, because you have to park the planes, preserve and store them. What is suffering? Things such as spare part trading or even the line maintenance, so there's no traffic, there is no line maintenance.
But if you have the cash reserves or the reserves to take on new opportunities, then we have noticed some of the line maintenance providers pulling back because of the large stress, so we have the chance to take over the empty seat. To give you an example, we have signed almost with the IAG Group. We signed recently a cooperation agreement and we are now about to open the line stations in Germany. So we total will have six line maintenance stations in Germany.
Which before COVID would have been unheard of, just to go to Germany and open six stations. I mean, you had so many strong providers controlling the German market and the only way to get there overnight would have been probably a very expensive acquisition of some business over there. But COVID changed a lot and there we are. In total we're going to have 27 line stations, we already have by the way.
But also must say that despite the large number of stations, many stations are actually bleeding. So we kind of taking of course a weighted risk that, "Let's go and open these stations, support them despite their bleeding, and then hope that once the business recovers, the traffic recovers, the line maintenance will be doing fine." So that's just one example of line maintenance, but we see the same things in many other areas as well.
Yeah, absolutely. Those 27 stations, I imagine that a share of that does include the acquisition, I think, last year of Direct Maintenance as well when you took on-
Absolutely. And I must say as well that all the group line maintenance now is managed by Direct Maintenance. It has a very good strong management team led by Jacco Klerk is the CEO. And we even actually gave Magnetic MRO's line stations under their management, so all the line stations are centrally managed.
I believe what we're trying to do here is pretty... It's not unique, but I think it will benefit the lot. I've noticed many competitors are running line maintenance, different management, different regions. What we want to do is a bit like customers will feel that if you go to McDonald's in Asia or US you get the same menu, same service. And that also in line maintenance, I believe, there's too much of these... You go to US, there is a different management, different style, different work wear.
We try to be really centralized and so that whatever customer, EasyJet feels that we have the same process in Germany, that we have in Dublin, that we have in Asia eventually. So pretty centralized. So all these stations are today managed by Direct Maintenance management.
Sure, sure. Okay, excellent. So moving on to some of the partnerships you've signed, they've been particularly interesting because some of them have had a technology kind of focus. One that comes to mind is the AerinX partnership to use mixed reality software.
What particularly are you looking for from some of these technology partners? Because another one that I've noticed is related to supply chain with SkySelect, which we'll move on to. But specifically the AerinX one, what have been some of the tangible benefits of that so far? And what are you hoping to get from that partnership long term?
Yeah. We just noticed that how do you get this pretty conservative hangar business more efficient and remain competitive? Obviously it's too early to speak about the robots replacing the engineers in the hanger shop floor, so what you can do is make their work as convenient as possible. Whether it's delivering the spare parts from the warehouse as soon as possible once they need it, to have paperless documents.
And I guess these automation, what you referred to, is all linked to this. And to minimize the time spent in [inaudible 00:08:22] charts and to simply make the whole work on the fuselage much faster, and just remain to be super competitive at the independent MRO.
And for sure everything that we develop today we aim to bring along wherever we expand in the future. And sure I'm giving a hint that we do have an appetite and we are looking into expanding our base maintenance business elsewhere as well. So in the future we try to basically bring all these great developments that are seen in the Magnetic today into the new facilities.
Mm-hmm (affirmative), yeah. And would that base maintenance, I'm sure you can't give too much away, but would that be geographically outside of Europe, or?
No, we're looking still within Europe right now. Simply because of the current demand we have, we have much more demand than we can satisfy from the existing customers. And we have with many of them MRUs signed where they reflect their strong interest to keep growing with us. And that's pretty much already secured work that we need to satisfy. But, as you know, to build the infrastructure is not an overnight story. But we are working in that direction and definitely there will be more news to come.
What we have said out loud is that our expansion in the existing location in Tallinn airports, that one is not a secret, very much in plan. And we're looking to build a larger facility. I'm not so sure if it has been in the media previously or not, but that we are doing.
But I guess for average reader that's not the big news. Bigger would be if we succeed to expand in central Europe, somewhere in Europe.
Mm-hmm (affirmative). Yeah, yeah. So there's more opportunities. Because I guess the Magnetic Group is sort of spreading further across the continent. Certainly obviously with some of your subsidiaries, the interiors business, for example, in the UK and obviously Direct Maintenance who I believe are based in the Netherlands. So that seems to have been the picture, so that makes sense.
Just about the supply chain then, it's no secret really that it's becoming more digitalized across the supply chain with various softwares and data tracking, for example, and operating real time data. I mentioned before the SkySelect partnership, how has that worked out? And how has it addressed some of the, I guess, supply chain challenges that have been a really common theme over the last two years due to COVID?
So SkySelect it's a great joint project we have with them. And the guys actually managed to ride... I mean, SkySelect alone, I think, deserves a separate [inaudible 00:11:36]. It's a local Estonian guy who has rise today significant money, I mean, talking about millions funding for the startup idea. And we were one of their good partners from the beginning. And I'm very happy they are expanding now globally.
So SkySelect really helped us to link directly into the... I mean, we all know about different software solutions such as PartsBase, et cetera, where you have to actually upload your material into the database. And once you forget to upload it basically becomes a due immediately. What SkySelect helped us to do is link us directly with the warehouses, such as Airbus.
We have a direct link to Airbus warehouse. We place an order in Tallinn, we don't have to log in and go into different other provider's website. It's connected directly with our ERP. We place an order, airbus sees that in the next minute. So no double work, no copying information from one system to another. And that model can be obviously expanded. And SkySelect is basically connecting that with different providers.
I think it's a fantastic idea. I think eventually that brings us very much closer into having literally a virtual consignment stock. That if you have such convenient access to the stocks and warehouses globally, you can really start having confidence that do I really need to have everything physically on site? So that's why I'm calling this is a virtual consignment stock.
And I believe MROs and many companies in our industry have had the tough time because of the painful impairments, writing off the standing stock, et cetera. And with this COVID it is becoming especially big issue. So I think we're all coming out of this crisis much smarter. And next time we're going to place an order for spare parts to our onsite stock for just in case purposes, we will have second thoughts about it in the future.
So I think SkySelect is really helping to fill that void. But there is a lot to do further obviously on the supply chain as we go forward with the UK Brexit and all these issues.
Yeah. Do you think there's certainly more readiness from the Magnetic perspective? Touch wood that they don't occur, but the world we live in will kind of dictate that they do. Do you think there's more readiness from the company to deal with some of these disruptions? Maybe not on the scale of COVID, but future events perhaps, that you there's a better readiness now?
Yeah, I think there is. I think there is, but we can't avoid that we are reaching a certain limit. Where we talk a lot about technical measures that are needed to get through these difficult times, but we are really starting to get into the softer issues and the emotional side, like how long people will stand.
And it's a tough pressure. I mean, there are sectors which are much, much more sexier than aviation right now. And there is a huge salary pressure. We're looking at smart people who can change the industry, how is their emotional wellbeing? Obviously how long they can stand another crisis.
So I think technically we are strong and we can get through it. But yeah, it's just what I more would emphasize here is actually people are getting tired and that's the tough part of it, so...
Mm-hmm (affirmative). Yeah, yeah. I imagine with these expansions or the possibilities of expanding, the workforce will obviously need to increase to meet this. What are you looking at for 2022? Do you think there will be significant hiring from the company for this year? Or what do you think?
Yeah. We already actually, I mentioned earlier, that we are planning the new hangar or expanding the hangar slots in Tallinn. For that project we actually already are taking new people, in 2021 we already started. In 2022, the year we are right now, we are looking at almost €750,000 extra cost in our base maintenance as an investment into people, and their trainings, and their hiring just for the sake of securing them for the future of hangar.
So we are really planning this, I wish to say, well in advance. We don't rush to hiring and only rely on contractors once the hangar is ready, three months before that we start hiring. In total we would create 120 extra jobs in Estonia once this project would successfully fly. And that's a tough margin, that's a tough target to reach. That's why we are starting very early.
But we know what we do here in our main base right now. Personally, I'm more engaged and more focusing today for the other opportunities in MRO field. And that's also the new structure, which we earlier mentioned, really supports me now more focusing on these opportunities. So I think we are very well structured what is about to come, at least as an organization.
Sure, sure. So yeah, those changes, you'll be hoping obviously will serve you well. But how do you see, on sort of a broader scale, how do you see the European aftermarket recovering? Because obviously last year it was fair to say it was quite a stop-start year for the region in many ways, some parts of it were maybe recovering better than others. Obviously the travel restrictions still in place and the virus peaks, and going sort of up and down.
But in 2022, where do you see the recovery for Europe's aftermarket? Are you optimistic or are you maybe a bit more pessimistic about it? Where do you stand?
Yeah, I mean, really 2021 I wasn't so optimistic that it will recover so fast, then I don't know, I have some awkward feelings on the spring of 2022. Because of many things, that the medication has come out now, and I think from January this month that we will see more COVID medication spreading around into hospitals. We'll really see how it will act, I doubt that it's not useless, I think there is a use.
Plus we are all used to more live with this and each spring we see that there is a good positive recovery. I think this spring there will be more, so really high hopes on that one. So I have a good feeling in 2022.2021, I was immediately... I wasn't expecting anything good to come really. And 2022 I have much more.
Now, are we doing any spendings already because of our good feelings? No, we are not. It's just a feeling level. We try not to live on hopes only. But yeah, somehow we have a positive feeling on that one.
Definitely we see that the brokers of spare parts and the small companies that used to live very well, I think they have very tough times because the airlines are now really looking to work with the selected suppliers. The same with us, one of the biggest target when the COVID hit was that we need to avoid brokers and we need to get to the end users. We even had a target that 65% of our revenue in the spare part trading, which we made in 2021, around 20 plus million in revenue, has to come from the end users.
It was a shock in the beginning, but the team got it pretty well, and we reach that. And I think this logic makes the life of the brokers much tougher. So really the winners are the ones who have this end user network built out.
Yeah, absolutely. Yeah. So bigger picture though as well, just a final one to end on. I've been talking to a lot of MROs recently about where some of their concerns and challenges lie this year, we've touched on some of them already. But some of the ones that have come up a lot have been obviously workforce shortages going forward, people who have left the industry, perhaps due to the crisis over the last two years. Capacity, which we mentioned earlier. And obviously the supply chain disruptions. They seem to be the three that are consistently coming up. But where do you see as, going forward, the main key challenges for a company like Magnetic in the market?
Our main key challenges? I think one of the topics we definitely pointed out is retaining their staff during this really destructive time and keeping them and attracting more young talent into the sector. So that's certainly one of the biggest one.
I think second one I could point out, definitely for those who are seeking aggressive growth is that the aviation is by far as sexy as it was before the COVID. And new investments, investors in our sector are... I mean, there is definitely money, but it's not the same situation that it was before. So to attract capital again back in the Magnitude that it used to be, it will be a tough one, definitely. So that's certainly what's going to be a challenge for us as well. So you have to obviously show returns before you're going to get the capital on board.
And what is happening today? I mean, I see that investors are also starting to lose their trust, that whatever you predict can be turned around tomorrow when there is a new version of virus coming out. And that obviously impacts their behavior. So the capital, I think the people, the capital, definitely different hemisphere.
But certainly still a lot of opportunities. We see some stressful assets out there, whether it's assets, whether it's organizations, that could be taken, could be acquired. So certainly this crisis will promote both vertical and horizontal consolidation of the businesses. The smaller ones either disappear or are taken over by the bigger ones, so this consolidation continues.
Now, I see this also as definitely a threat to the industry because the smaller players, always you need competition. And the more you have bigger players, the worse it is. OEMs has become too strong, et cetera. So I really hope that we will have this enthusiasm to have the smaller players still continuing. But there is definitely a tendency and I see that consolidation happening very strongly.
Yeah, absolutely. Probably the consolidation, it's fair to say, I think we were talking about it back in 2020, nearly two years ago, amazingly. And maybe it didn't occur as fast as first predicted, these distressed sellers, maybe they were benefiting still from the funding available so they weren't in that position where they had to do it. But you think the consolidation could happen? Are we talking this year, or next year, or?
Yeah. Yeah, I mean, I won't expose the names, but we do see some of the companies that are right now in a much more difficult situation because of the same, what you referred to, the government aid or supports are becoming due, or they have lost the airline customers who have also lost or stopped getting the state support.
So you see this circle actually now ending and simply there won't be more support. So we are looking a couple of companies right now sitting on this stressful situation. So you're right, we all expected that there will be a turmoil in the beginning, but it wasn't largely because of the support funding. But it is getting due now, and it's not really there anymore. And that definitely speeds up the consolidation topic for sure, right?
Yeah, yeah. Certainly one to look out for, for this year.
Risto, thank you for joining us today from Tallinn. And thanks for your time. And we'll keep an eye out, no doubt over the course of the year, to see what Magnetic is up to next.
Thank you very much, James. Keep up the good work.