The European MRO marketplace has grown and thrived. In our annual foray into the European market segment, we are taking a two-part look at the region. We start, in this first part, with a look at Eastern Europe. Next issue we will delve into the Western European segment.
While the Eastern European MRO market is much smaller than its Western European counterpart, it is ramping up to new levels of capability. These companies are agile, ambitious, and hungry for business. They are clearly laying the groundwork for continued growth.
Eastern European MROs have traditionally been strong in heavy maintenance since they have relatively lower labor costs, says Richard Brown, principal with ICF. But Eastern Europe is growing stronger in engine maintenance and MROs are rapidly adding services such as aircraft painting, component maintenance, leasing, asset management, continuing airworthiness management organization (CAMO) monitoring, and interior refurbishment.
The region has challenges, such as rising labor costs and competition from lower-wage countries. But Eastern European MROs are enthusiastically adopting new technologies – from 3D printing to augmented reality — and are winning new customers not only in the East but in Western Europe and Asia Pacific.
Poland soon will host two major new engine maintenance joint ventures. In 2017 Lufthansa Technik (LHT) and GE laid the foundation stone for XEOS, which will focus on the next generation of GE large engines, says Robert Gaag, LHT’s senior vice president for corporate sales EMEA.
The second Polish JV, put together by LHT and MTU Aero Engines in December of 2017, is Engine Maintenance Europe, or EME Aero, which will focus on overhauling Pratt & Whitney geared turbofan engines. MTU estimates that EME Aero will have an annual capacity of more than 400 shop visits for PW1000G-series engines – the same that power the A320neo family of aircraft. The facility is slated to be up and running in 2020, says Leo Koppers, MTU’s senior vice president of MRO programs.
Eastern Europe is a beehive of activity with companies such as FL Technics (Lithuania), Magnetic MRO (Estonia), Aeroplex of Central Europe (Hungary), and LHT in Budapest (Hungary) and Sofia (Bulgaria).
Analysts disagree about the region’s near-term growth prospects. ICF projects MRO demand in Eastern Europe and the Commonwealth of Independent States (CIS) will expand from 2017 to 2027 at a 5.5 percent compound annual growth rate, beating the projected global annual growth rate of 4.6 percent over the period. MRO spend in this region is expected to grow from about $6 billion in 2017 to about $10 billion by 2027.
Other analysts paint a less optimistic picture, citing economic sanctions placed on Russia as a deterrent to stronger growth. Oliver Wyman, in its 2018-2028 global fleet and MRO forecast projects that Eastern Europe will grow at 2 percent annually over the period.
Forecasts aside, Eastern European MROs are doing the right things. They are winning new customers, adding new services, adopting the latest technologies, and expanding their footprint to other corners of the world.
Late last year FL Technics announced contracts with Lufthansa Group airlines, Germanwings, for base maintenance and Swiss International Air Lines for base maintenance, engineering, and Design Organization Approval (DOA) services. Earlier this year it announced a similar agreement with another Lufthansa Group carrier, Eurowings Europe. FL Technics also performs line maintenance, component support, engine and APU management, CAMO services, and technical training.
In addition to new business in Europe, Moldova, and Russia, FL Technics is looking to Asia, where it is already an approved spare parts supplier to Asiana Airlines, AirAsia X, Nok Air, Bangkok Airways, T’way Airlines, and Indonesia’s GMF AeroAsia. The MRO has a hangar in Jakarta, Indonesia, for base maintenance and plans to open base maintenance facilities in Thailand and China, says CEO Zilvinas Lapinskas.
FL Technics has employed LEAN philosophy for more than four years, which has resulted in improved turnaround times and re-engineered customer support processes, he says.
The Chinese firm, Guangzhou Hangxin Aviation Technology, completed acquisition of Magnetic in April 2018. “Following this … change in shareholder structure, we are creating substantial synergies and new business opportunities in Asia,” says Jan Kotka, Magnetic MRO’s chief operating officer.
Revenues have jumped from 50.5 million euros in 2016 to more than 90 million euros in 2017. Growth has been generated mainly from existing customers, Kotka says, thanks to new business models and services.
Magnetic’s newest facility is a paint hangar it opened in November 2017 at its home base in Tallinn, Estonia. The 2,853-square-meter facility features a “custom docking system” which can serve different aircraft types. The MRO provides commercial and VIP painting services for a range of aircraft, including the 737 MAX and the A320neo family as well as “all other narrow-body aircraft.”
Magnetic also has added asset management services through Magnetic Parts Trading Ltd., a JV with Crestline Investors formed in Q4 2017. The unit focuses on acquiring aircraft and engines for immediate part-out or short-term lease and subsequent part-out, Kotka says. This JV “has been our key leverage to support our expansion strategy to asset management … and to differentiate us from the low-cost, labor-intensive regional MROs.” So now Magnetic can not only maintain aircraft, but also lease aircraft and provide or lease new engines, he says. Magnetic qualified as a CAMO in 2015.
Magnetic already has booked 75 percent of its heavy maintenance slots in Tallinn for the 2019/2020 winter season to Austrian Airlines. The company also has added engine top case repair and bushing replacement, partnered with Kuehne+Nagel on global engine stand management, and teamed with Component OH Services for landing gear overhaul and repair. MAC Interiors, a UK company the MRO acquired in 2016, has provided entry to premium MRO services.
Aeroplex, meanwhile, provides base and heavy maintenance, line maintenance, aircraft storage, component repair, aircraft handover services, and even Wi-Fi installation. Recently it announced line maintenance capability for the A320neo. Its Bloomberg profile cites CAMO engineering, maintenance planning, and record keeping/archiving. The Part 145-approved station also performs major modifications of aircraft structures.
The top European MRO challenge is high labor costs, which put pressure on margins and force MROs “to reinvent their business models and strategies constantly,” Kotka says. But he sees “niche and growth opportunities for relatively small MROs like Magnetic through … agility, quality, and reliability of integrated services.” FL Technics also cites rising labor costs and a shortage of engineers and specialists.
Eastern Europe also faces keen competition for airframe maintenance from neighboring countries such as Turkey – with Turkish Technics and MNG Technic – and from the likes of JorAMCo (Jordan Aircraft Maintenance) in the Middle East.
Despite growing industry concerns about OEM encroachment, FL Technics sees opportunities for cooperation. The OEMs “are just too big to maintain a smoothly running global aftermarket support network on their own,” Lapinskas says. “It’s no secret that air carriers express concerns over parts delivery time, customer support flexibility, and some other issues.” What airlines expect from MROs is flexibility and efficiency – during both contract negotiation and execution, he says. “It’s not the size but the attitude that matters.”
FL Technics agrees that AI and big data analytics, as well as information security technologies like blockchain, will be key for MROs. Blockchain technology promises to play an important role in record tracking, preventing the use of counterfeit parts and ensuring that documents aren’t altered, Lapinskas says. It also can save time for lessors during aircraft redelivery.
“And let’s not forget about artificial intelligence-driven chatbots,” which can help HR teams in searching through multiple on-line job platforms for potential candidates, Lapinskas says. Chatbots integrated within platforms like Facebook Messenger, WhatsApp, Viber, and Skype “could automate many processes like AOG support, when the systems instantly react to an RFQ [request for quotation] with a quote and even allow [users] to order parts and set delivery locations.”
Magnetic MRO also is using augmented reality for livery visualization prior to painting, Kotka says. Besides introducing 3D printing into aircraft parts production, Magnetic is using HTC Vive virtual reality headsets and software to provide customers simulations of what the interiors would look like when changes are made.