Money Makers

Carriers in the region are seeking to turn their maintenance operations from cost centres into profit centres.

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By  Neil Denslow Published  November 4, 2004

|~|engineworkers_m3.jpg|~||~|Maintenance, repairs & overhaul (MRO) operations have traditionally been cost centres for airlines around the world, including those in the Middle East and North Africa. However, many carriers in the region are now trying to turn their MROs into profit centres by spinning them off into separate companies and then looking to win third party work. These new maintenance companies are also proving to be attractive propositions, pulling in investment from financial investors or European MROs. To date, the most successful airline in terms of commercialising its MRO in the region is Gulf Air, which set up Gamco in a 40/60 partnership with the Abu Dhabi government in 1987. The MRO provides all of Gulf Air’s heavy maintenance, and it has also become a profitable company in its own right, with a global client base that includes both civil and military operators. For instance, it has undertaken a number of C-checks for the likes of Canada’s Air Transat, First Choice, SriLankan and the UK’s RAF, as well as performing work for a host of other airlines from the Middle East and the rest of the world. Like other local MROs, Gamco has benefited from being able to gain certification from both the American FAA and Europe’s JAA, which then allows it to work on aircraft registered in these areas. The company attributes its success to its good geographical location, which enables it to easily service aircraft from Europe, Africa or Asia, close cost control, and a more flexible approach to slot times than other MROs. “Most major operators are very strict with slots, but Gamco is famous for allowing things to move by a day or two,” says Albert Bryson, Gamco’s head of quality, engineering & standards. Gamco’s facility in Abu Dhabi has also grown in line with its business over the last few years and it now has nine slots for aircraft, including an A380-sized hangar. This number of slots is set to nearly double, however, as the company grows its centre in order to support Etihad Airways’ rapidly expanding fleet. “Because of Etihad, we will have to increase our number of maintenance bays,” comments Bryson. “We are therefore going to add six or seven more slots over the next three years.” Emirates Engineering has outlined similarly ambitious expansion plans at its facilties in Dubai. Eight hangars, all big enough to hold an A380, are currently being constructed next to the airport. These will open by 2006 and combined with an engine test centre, which is being built in partnership with GE Aircraft Engines, the facility will be a huge maintenance centre. “This set-up is going to be the largest maintenance agency in the world, holding the most number of hangars within one location,” comments Adel Al-Redha, executive vice president, engineering & operations, Emirates. The expansion is primarily designed to support the growth of Emirates’ own fleet, but the company is also looking to use its facilities to provide support for other carriers — especially A380 operators — something it is unable to do at present because of the limited size of its current set-up. “I have no doubt in my mind that when the new facility opens, we will aggressively compete with other agencies based on a high quality product and the timescale,” says Al-Redha.||**|||~||~||~|Such work will help Emirates recoup its investment in the maintenance facilities, and other airlines in the region are also looking to turn their engineering centres into profit centres. Kuwait Airways, for instance, is currently investigating ways of selling off some or all of its maintenance & engineering arm, as are EgyptAir and Saudi Arabian Airlines. These plans are all still some way from being fully implemented, but other carriers in the region have already turned their maintenance centres into commercial operations. Lacking the resources of Emirates, these carriers have only been able to do this however, by attracting outside investment. Royal Jordanian, for instance, has spun off its maintenance centre and engine shop into separate companies, Joramco and Jalco, which are now being privatised. UAE venture capitalists, Abraaj Capital is understood to have secured the deal to buy 80% of Joramco, with the remainder staying with the airline (see page 14). Whoever wins though, privatisation will have the twin benefits of both securing capital for RJ and also attracting investment into the MRO. Furthermore, Joramco has already used the commercial freedom it had gained as a separate company to win third party business. “We have six bays, and they have all been full since the beginning of the year,” says Bashir Abdel Hadi, general manager, Joramco. While Joramco was expected to bought out by a financial investor, joint ventures with existing MROs are a more typical model in the region. Tunisair, for instance, is seeking such a strategic partner to help develop its maintenance operations. The airline issued an RfP earlier this year looking for a partner, and a deal is expected to be signed shortly. “What we are looking for is to be associated with a big company and to develop these [maintenance] activities so that we can work for other carriers,” explains Karim Helali, staff manager, Tunisair. “Selecting the right partner is not a question of money, but a question of technology and the added value that they can give us.” The airline’s North African neighbours, Royal Air Maroc (RAM) and Air Algérie, have already signed similar joint venture deals with EADS Sogmera Services. First of all, RAM and Sogerma Services are set to operate a regional aircraft overhaul centre in Marrakech, which is due to open this month. Meanwhile, Sogerma Services is also working with Air Algérie to develop the carrier’s maintenance operations at Houari Boumédienne International Airport, which will help the centre better service Air Algérie’s fleet and also win third party work. “Our agreement with EADS Sogerma Services will allow Air Algérie to enter a new phase of development for its aircraft maintenance capacity — benefiting from the investments we have already made in our capable facilities at Algiers,” explains Mohamed Tayeb Benouis, Air Algérie’s chairman & CEO. The benefits that can be gained by both parties through such a joint venture are shown by Snemca Morocco Engine Services (SMES), a joint venture RAM set up with Snecma Services in 1999. The deal came about after the carrier decided to seek a strategic partner for its engine shop to transform it from a cost centre into a revenue-generating asset. “For Royal Air Maroc, the problem was that they already had a plant in Casablanca and a testbench, which represented a US $30-35 million investment on its own… And even though Royal Air Maroc is a big company, it did not have enough engines to overhaul in its fleet to justify this very big investment,” comments Antoine Vosluisant, general manager, SMES. Snemca Services, meanwhile, was looking to grow its maintenance operations to support the increasing number of CFM 56-3 engines flying around the world. As such, it expanded its two French engine shops, and also established a joint venture with Air China Southwest Company, to service the Asia/Pacific market, and another with Sabena in Belgium, which it subsequently bought out once the Belgian flag carrier collapsed into bankruptcy. The third joint venture it formed was with Royal Air Maroc. The carrier was an attractive partner for Snecma Services, as it was conveniently based in a French-speaking country a few hours flying time from Paris. It also had an existing fleet of CFM-powered aircraft, which gave the joint venture access both to a trained workforce of 20 people and to a solid bedrock of work to build on. “You can understand our common interest,” says Vosluisant.||**|||~||~||~|From this base, the joint venture, which is divided 51/49 between Snecma Services and RAM, has prospered. It has grown out of the North African market, and now services around 85% of the CFM 56-3s operating in Africa. The company recorded its first profit in 2003, and it is now undergoing an expansion programme, which included the opening of a new 3000m2 engine workshop in June. This allowed SMES to expand its range of activities to include disassembly and reassembly of engine modules, cleaning and de-oxidation of parts and non-destructive testing. The MRO is also planning a further expansion, which will enable it to repair and overhaul the new generation CFM 56-7 engines. “Our target is to be ready when the first –7 engines come in for shop visits… so we are focused on early 2005,” explains Vosluisant. A key factor in SMES’s successful expansion has been its ability to win work from outside of its home market. The carrier has worked on engines from Europe and even for US-based customers, including leasing company, AeroTurbine. SMES has been able to achieve this because of the global reach its has gained through its relations with Snecma Services, and also because its cost base, especially in terms of labour, is lower than MROs based in Europe or North America. Joramco has a similar advantage, which has enabled its win work from a number of European companies, including Debis AirFinance and Italy’s Volare Group. “We are concentrating more and more on attracting business from Europe,” comments Hadi. “The market in Europe is much larger than the Middle East and we can offer a significant difference in the price compared to European MROs. We advertise that we sell a Lexus at 70% of the price,” he jokes. Emirates Engineering also predicts that the greater labour flexibility it has compared to MROs in Europe or elsewhere will be a key factor in its favour when it eventually goes to market. “We are not bound by a lot of labour constraints,” notes Al-Redha. “We can easily adjust our working hours, for instance, providing we do not overstretch our employees.” This lower cost base should help MROs in the region to continue to win more work from European and North American carriers. This will also be helped by the fact that airlines in these regions, especially new start-ups, are expanding their use of third party maintenance suppliers more and more. The region’s MROs are also well placed to win work from developing markets. The liberalisation of India’s aviation policies, for instance, will greatly boost the number of aircraft needing maintenance from there, and Gamco’s Bryson points to Eastern Europe as another potential market for the region’s MROs. “A number of new airlines are launching in Eastern Europe, and more generally, the region is moving from using Russian-built aircraft to Airbuses and Boeings. This is obviously creating opportunities for maintenance shops that can support Western aircraft, including ourselves,” he comments.||**||

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