Listen in as Aviation Week Network's Lee Ann Shay and James Pozzi dissect the recent financials of Lufthansa Technik, Rolls-Royce and MTU Maintenance and how they are looking to capitalize on the market upturn.

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Transcript

Lee Ann Shay:   Welcome to the MRO Podcast. I'm Lee Ann Shay, executive editor for MRO and Business Aviation for Aviation Week. And today's topic is recent developments in Europe related to some of the largest manufacturing and MRO providers. Joining me today to discuss this is James Pozzi, Aviation Week's MRO editor for Europe, the Middle East and Africa. James, welcome.

                       So let's start with Lufthansa Technik. It recently posted some very impressive financial results and had some interesting expansion plans. What's your take on the upcoming plans?

James Pozzi:     Well, Lufthansa Technik's strong financials are probably an indicator of, I guess, A, where the industry has headed in recent years, and, B, pertaining to Lufthansa Technik specifically, I guess it shows their improving health as a company. They are one of the big players in the MRO market, they are a giant of course. But obviously their parent company, Lufthansa Group, who previously have made overtures a while ago about maybe finding an outside investor for the maintenance business between 20% to 25%. I guess it's shown why they've looked to forgo this outside investor that they announced last year and kept the MRO business in-house because it is performing very strongly.

                       So let's just take a look at some of those numbers that Lufthansa Technik posted in their earnings call a few weeks ago. Revenues grew 18% last year compared to 2022, and I think that was posting 6.5 billion euros, which is roughly around 7 billion US dollars for 2023. Over that time, there's a thousand new contracts over the course of the year, and a total of 27 new customers. And that collective value is around 8 billion euros, again in US dollars, about 8.7 billion. The company said that is the second highest sales figure in their history.

                       So definitely a sign of return to health. What is impressive is that this was done, of course, against the challenging backdrop we talk about pretty much on every podcast we record over the last few years, no doubt. We all know about the ongoing supply chain issues and areas such as part shortages, and of course the rising costs, especially in Europe where Lufthansa Technik, of course, are headquartered in Hamburg, Germany. These costs have affected everything from labor to parts pricing. I guess, equally, if not more impressive that Lufthansa Technik have posted these figures in such a challenging environment.

                       So Soeren Stark, the CEO, he referenced this dramatic material cost increases specifically the company is seeing in the market. And that's an ongoing problem for so many MRO providers right now. It's not just an issue of cost, but also supply, with certain parts in short supply.

                       And the future plans are very interesting. So we can expect a lot of investment from Lufthansa Technik. It has outlined plans for a 1.2 billion euro investment across its business over the next four years, and it said it will find this financing whether it needs to find additional financing to make this happen. They're very buoyant about their current health and how that carries forward over the next few years.

                       And I think one figure worth mentioning before we continue is its long term targets are all built towards revenues of exceeding 10 million euros, I think by 2030, and earnings of 1 billion euros annually by around that time. So in summary, very big plans long term, and a lot of investment on the horizon by the looks of it.

Lee Ann Shay:   1.2 billion euros, that's a big investment number. Can you shed any further light on that, especially for Europe?

James Pozzi:     Yeah, absolutely. I think it's going to go across into several areas. There are plans, of course, they mentioned to expand their digital businesses. And of course this growing venture, this new venture that we can call it in the defense side, Lufthansa Technik defense business. Obviously they work already with the German Air Force, but that's very interesting to see how that will develop over the next few years.

                       But back to commercial MRO, they've announced some interesting plans to grow in a few regional areas of the world. So firstly, they plan to grow capacity to meet the greater maintenance demands, and they're looking to establish a new component repair facility by the year 2027. Now, they haven't said where exactly this location will be, but they've just said the southwest of Europe. So people can come to their own conclusions, really, I guess, about the location there. But interestingly, what really caught my attention was they said it's going to include capability for engine component repairs.

                       Now, that decision on that location is due pretty soon, I think over the next few months, when that will be identified. Now looking further outside of Europe where I'm based, two other areas they pinpointed with North America and Asia Pacific. This could also progress this year. And I like the term Lufthansa Technik used about this growth, they're going to look for inorganic growth, and that means the possibility of acquisitions or partnerships in there too.

                       And another tidbit before we move on is the engine MRO market. Now, as we know that's around and will be consistently near the 50% of the whole commercial aftermarket, there's a lot of market to capture there and quite lucrative too. Lufthansa Technik, of course, has been seasoned in engine capabilities for a long time, but Soeren Stark said this is a bit of a priority in some ways, particularly he mentioned for the LEAP-A and LEAP-1B engines. That is going to hold the largest share of the new generation and narrow-body engine segment in the future as our projections go.

                       So it'll be interesting what Lufthansa Technik do there. I know they've already done inductions of both engines to varying degrees. I think very recently they did their first 1B induction, and they've had capability there for a while with those two. And also I think for the, when I mentioned the GTF, the Pratt & Whitney GTF, of course, they mentioned specific problems related to that engine, but they said they see an opportunity, as well as a challenge there across their joint ventures, for example. And the LHD shop is, I think, doing quick turn services in Hamburg. So I wouldn't discount that either, really. But certainly in the near term and maybe a bit longer, it seems like Lufthansa Technik, in the engine market for narrow-bodies, are really focusing on the LEAP-1A and the LEAP-1B.

Lee Ann Shay:   Since we're talking about engines, let's speak about another German aftermarket specialist, MTU maintenance, which also had some interesting news last week. What is your take about what they said around shop visit demand?

James Pozzi:     Well, based pure on shop visit demand, it seems MTU are going great guns. And it's interesting, they said they owe much to legacy engines re-entering shops in higher volumes. Well, that's based on the data they released. So the CFM56, of course, stole [inaudible 00:07:19] fleet, many decades on wing, saw the biggest jump last year. It was a 91% increase for -5B and -7B engines entering the shop. And now looking in the wide-body side of things, the GE90-110 and the 115B, they increased by 38%. That's a very healthy jump as well.

                       Newer generation engines, but also back in the narrow-body area, the Pratt & Whitney GTF, as we've just mentioned beforehand in relation to Lufthansa Technik, MTU saw a nice jump in inductions there in the 19% mark. So that would be interesting to see how that develops over time because of course that's the successor engine to the V2500, which saw a 29% rise last year in shop visits.

                       But of course overall, that is still MTU's most highest volume of engines overall, and that's something they've really built a reputation in being a specialist for, I think. Yeah, so it'll be interesting to see how those markets continue over next year, and whether there's capacity to meet that same volumes of or shop visits or any spikes, of course.

                       And just some more numbers to give context as well. So of the 1,300 shop visits that MTU performed across its network last year, the V2500 that I just mentioned account for around 400 of those. So that shows what they've, I guess, built up there in terms of capability and the shop visits going into their facilities for that engine type, of course, which is for the A320 CO aircraft. Yeah, some really impressive numbers there.

                       And also I think it's worth mentioning the joint ventures. Of course, there's EME Aero, which I guess nicely ties in not just MTU, but also with Lufthansa Technik because that's their joint venture, of course, in Poland. And that's continuing to ramp up for the, I guess, the PW1000, the GTF, and the variants there. And of course its Zhuhai business over the last few years has reported some really strong numbers in terms of shop visits. They're adding further capacity for the [inaudible 00:09:22], the LEAP, the GTF and the V2500. So really covering the spectrum there of current generation and new generation narrow-body engines too.

                       And just a word quickly as well for the leasing side of the engine industry, of course MTU have got a leasing arm, MTU Maintenance Lease Services, and that saw a revenue jump as well, 50%. And that demand, of course, they said is coming for spare engines. Now, it's no secret the industry is seeing a shortage of spares, it is very rare that a spare engine in demand will be kind of on the market for long. And, yeah, will be interested to see how that continues into this year. And I think there's probably a whole other podcast for that topic alone, Lee Ann, but I think the spare engine market is very interesting as well.

Lee Ann Shay:   I totally agree, so stay tuned for a future podcast on that. Good idea. And before we close, I think we'd be remiss without addressing the wide-body segment. Let's talk about Rolls-Royce because it has also made some capacity plan changes. What's your take on that?

James Pozzi:     Rolls-Royce, of course has had its challenges as a business over the last few years, of course. But, yeah, some people are talking about the aftermarket renaissance at Rolls-Royce, and certainly there's a lot in that, I think. You just have to look at how it contributed to some of the overall business results, I think, they released only a few weeks ago.

                       I mean, the operating profits rose 1.6 billion, that's in UK pounds compared with 652 million in 2022. And what makes it quite impressive is the wide-body market still isn't really back to pre-pandemic levels yet in certain areas. Although it's not far off now, it's fair to say, and we are seeing a lot more fleet reactivation of some of these wide-bodies that have been in long-term storage or maybe off-lease.

                       And it's a market turnaround even to a year ago. I mean, Rolls-Royce's CEO, Tufan Erginbilgic, talked about the unsustainable performance of the company over time. So that could be very pleasing to them.

                       Now, as you mentioned, I was going to be off on a bit of a tangent there about the financials, but certainly, yeah, let's get to the capacity. So Rolls-Royce is, I guess, capitalizing on this returning demand for wide-body engines, and it's going to invest in additional engine assembly test and shop visit capacity. Two sites, firstly in the UK at its home base in Derby, and Germany, in Dahlewitz, where it's operated its business, since 1995 it's had a presence there. It's going to be... For 55 million pounds, roughly around 70 million US dollars, that is going to look to add a few functions as mentioned.

                       So let's start with Derby. It's targeting growth of its engine build capacity there. It's going to aim to deliver an additional 40% more new engines annually from next year compared to average deliveries over the last 10 years. So there's going to be a big jump there. And it also is tacked onto that it's going to increase its services capacity for the Trent engines, which of course is their main large civil engine. The Trent family, of course, next to... That dominates their portfolio in that sense, I think there's only the RB211, really, that's the other one.

                       So, yeah, it'll be interesting to see where that leads because there's a lot of demand in wide-bodies. Aviation Week data suggests this mostly comes from Asia-Pacific and Western Europe for Rolls-Royce wide-body engines.

                       Now, let's look at the Germany facility. It's going to target the utilization of existing engine test capability on large engine platforms and civil ones to support near term services demand. So looking ahead to 2026, it's going to transition to the assembly and testing of the Trent engine, the XWB-84, of course, which is one of two XW power plants for the Airbus A350 family aircraft, of course, one of the big wide-bodies of today and of the future too in terms of fleet numbers.

                       So the capacity ramp ups will lead to the creation of 300 new jobs. They've just described this as frontline operations, but yeah, the engine maker, of course, says around half of the investment and about two thirds of the jobs will be created in Derby. So that will see the lion's share of that. But, of course, Dahlewitz in Germany is also going to be ramping up too.

                       So, yes, I mean Rolls-Royce have a, obviously, a huge share of the wide-body market with their Trent engine mostly, as I mentioned. So yes, it's interesting to see, I guess, the speed of... It was always inevitable the wide-body engine market would really pick up eventually, and the projections are kind of in line with what we've thought over the last couple of years, it was kind of around 2024 through to 2025 when this would be the case. But it'll be more interesting to see at what speed this is going to continue going into, obviously, next year and maybe even beyond, especially given some of the new aircraft set to enter the market too in the next few years. So, yes, the wide-body market is coming back very strong indeed.

Lee Ann Shay:   We've got a lot of things to follow up. This is a very happening market. So, James, thank you for your insights as always. And we've run out of time so that's a wrap for this MRO Podcast. Don't miss the next episode by subscribing to the MRO Podcast. And one last request, if you're listening in Apple Podcasts, please consider leaving us a star rating or writing a review. Thank you so much.