Solid state

Assessment

General manager of Melbourne Airport based John Holland Aviation Services (JHAS), Ian Wolfe, believes the sector has “substantially recovered” from the GFC, but faces new challenges from overseas competition and some Original Equipment Manufacturers (OEMs) hesitant to work with aftermarket MROs.

“MRO worldwide trends are starting to really impact Australia. . . That’s airframe related, but also around components, with the OEMs increasingly playing a bigger [role] and leveraging their muscle in the aftermarket maintenance field,” Wolfe said.

Wolfe highlighted a return on intellec-tual property rights as the main reason for OEMs choosing to move into aftermarket support, territory that is traditionally taken up by the MRO sector. That in turn effectively isolates “MROs out of the aftermarket”, who are then forced to request access to the OEM’s technical data.

“We do see, however, a role for aftermarket fulfilment centres for the OEMs, and that’s been a fundamental plank in our business plan revision as well. The OEMs still require a regional presence, and some are looking for partners with which to fulfil the work that’s in this region,” Wolfe said.

For Bankstown based MRO provider Hawker Pacific, 2010 was a year of consolidation in addressing an overcapacity in the industry.

“We took steps to rationalise that,” said senior vice president, Australia and New Zealand operations, Doug Park, “which involved moving a lot of our heavy maintenance workload to our Cairns operation and reducing the scope of the services offered at Bankstown as a result.

“I think that from what I can see, the changes in the last 12 months…come in two parts. It’s how you see the whole industry being affected, as well as how Hawker Pacific is affected. I think it’s probably a general statement that the fly-in/ fly-out type of business really seems to be taking off. . . especially in Western Australia and in Queensland. ” Hawker’s Cairns base has benefited from that growth in the resources fly-in/fly-out, but has also been successful in sourcing work from across the wider Asia-Pacific.

“Certainly our Cairns facility is working to capacity at the moment, and that includes work from various operators all around Australia and through the South Pacific and Asian regions,” Park said.

“Cairns is also successful because we’ve got a good product mix there. It’s a Hawker Beech King Air service centre and a Bombardier Dash 8 service facility as well. So a lot of those aircraft types in Queensland are doing FIFO as well as charter related work. ” Meanwhlie a key player in the Defence MRO sector is Adelaide headquartered BAE Systems Australia. With its aerospace headquarters in Newcastle, head of strategy and business development, Dan Schroter, categorises the Defence market as far more stable than its civilian counterpart, with long term work and contracts available, although Defence’s Strategic Reform Program (SRP) efficiency drive is changing the nature of some of those contracts.

“We’ve been engaged with Defence to find innovative ways to address some of the cost issues and take those costs out, and we’ve been pretty successful in that area to date,” Schroter explained.

Another part of BAE’s strategy to improve its cost base in order to remain competitive has been the outsourcing of some particular skills to small and medium enterprises, or SMEs.

“It’s one of those things where you constantly evaluate whether you’re doing it cost effectively or somebody else can do it better for you. We’re fortunate in Australia to have some fairly good specialist niche SMEs. Good examples of that are the nondestructive inspection type activities, some of the more specialist engineering areas, and some of the equipment repair and overhaul type arrangements,” Schroter said.

Skills and Training

Australia’s MRO industry continues to suffer from an ongoing skills shortage in both the aircraft maintenance engineer (AME) and licensed aircraft maintenance engineer (LAME) categories.

Identifying this issue a number of years ago, companies like Hawker Pacific have moved to engage local specialised trade schools based in their area of operations to attract and bring through young people who are interested in an aviation career.

“Probably four or five years ago we were starting to see the signs of losing avionics technicians especially, and to a lesser degree mechanical tradesmen – ie engine and airframe people – to allied industries such as mining and those sorts of things,” said Park.

“This prompted us to strategise and identify if there was a quick fix to bring in allied tradespeople of our own to train up to aviation standards. We also looked at recruitment from the broader aviation industry, but of course, all you really achieve there, if one company’s poaching from another company, is to increase demand and start a wages push. ” Facing limited options, Park said Hawker engaged local trade training colleges, with the Queensland government backed training organisation Aviation Australia establishing an aeroskills centre in Cairns only a few years ago.

“I’m pleased to say that currently we’ve got 12 apprentices going through our combined Australian Avionics and Hawker Pacific MRO organisation at Cairns,” Park said, noting that the company accepted an exceptionally high intake of 22 apprentices in 2009.

Meanwhile, JHAS has taken a slightly different approach to the skills shortage, choosing to instead stage a global recruitment campaign in order to find sufficient numbers of LAMEs to meet demand for important contracts, such as its A330 program.

“This is a big topic because it certainly is one of the big issues, not just Australiawide, but globally,” said Wolfe.

“I think the clear issue for us is that where once upon a time it seemed to be a much more sexier thing to get into the aviation industry or aviation maintenance as an engineer . . . the interest seems to be a lot less, and certainly our discussions with the government have indicated that you can have the best facilities and the best training and everything, but if you don’t have the interest upfront, it just makes life very difficult. ” JHAS is also taking steps to retain personnel in an increasingly competitive market. One way that the MRO encourages personnel retention is through undertaking a broad range of training programs on different aircraft types within the Airbus A320/A330 and Boeing 737 programs, explained Wolfe. Not only do such programs keep AMEs and LAMEs interested in aviation, they also help to “broaden their capability and experience” on type. “We have the training capability to do that, so this a good thing for employees here who want extra [qualifications] or the business requires additional licences,” Wolfe added.

“We have in-house capability to deliver that and not many do. So that’s an attraction point. We can purchase type training from various suppliers for other aircraft types such as the A330, 737 and the 777, and we do. Again, these are good leverage points for us and for our people. . . If it’s good for the business, it’s also good for the individual and this definitely adds to our attractiveness, notwithstanding the inherent problem of just getting enough interest in the general population. ” BAE also trains in-house, with Schroter noting that 10 per cent of the company’s trade/AME workforce is made up of apprentices.

“We’ve been quite successful in taking those people pretty much directly out of school, through an apprenticeship and then through into our business, to the point where now some of those young guys and girls are now team leaders in our businesses.

And I guess because of this investment, we tend to be able to retain people,” Schroter said.

A key element of BAE’s training programs is its support of external colleges such as New England TAFE, which prepares prospective apprentices for a career in the aviation industry.

“So we’re trying to make sure that we get a good flow through of young men and women into the industry. We’re no different to everybody else, it’s just that we’re in a nice, stable position with a reasonably stable workload. ” Describing his company’s recruitment process for AMEs as different to the external TAFE based pathway used by other companies, Hawker’s Doug Park is a supporter of the current system which enables certified training institutions to take prospective apprentices under their wing and give them the basic skills required, before Hawker Pacific begins its own induction process. He again cited Cairns as an example of this.

“These days, most of the training organisations have like a…pre-qualification arrangement, where local kids go straight to the…institution. In this case, let’s talk about the Cairns Aeroskills Centre. They [apprentices] enrol and basically do the first 12 months on their own initiative and they don’t have to be signed up with a maintenance organisation at that point. So they are skilling themselves up at their own risk.

At the end of that pre-qualification period, for want of a better term, they start putting together CVs and send them around to industry, seeking employment. We then set up our interview panels with access to the most up-to-date knowledge of their competence and achievements so far. That helps us to gain a better overall understanding of their suitability for a career in aviation maintenance than used to be the case,” Park outlined.

“Now the good part of that is, they’re very much a known quantity. Firstly, the kids are eager to get ahead. They’re there because they want to be there and you’re able to judge them on their academic and practical achievements. ” Another key question is whether for those newly qualified AMEs who eventually take up a position with an MRO, is there incentive to encourage them to go on and become LAMEs, given that a great majority of those are nearing retirement in Australia.

Acknowledging that the average age of a LAME is now around the mid 50s, Park remains confident that CASA’s new Part 66 licensing systems will make it easier for AMEs to eventually become LAMEs, thereby reversing the current trend.

“In the days of old, an apprentice would finish his apprenticeship and then start all over again, sitting his basic and type exams to become a licensed engineer. Fortunately, this is becoming a thing of the past and I feel it will have a positive effect on the industry by encouraging more engineers to become LAMEs.

“But I think another reason we’ve got the ageing LAME workforce is that there are so many engineers who originally came out of the military and airline training organisations. I think between the military, Qantas, TAA and Ansett…they’ve probably contributed to certainly the largest percentage of the pool of labour that was available in the past. Of course, Qantas closing its training school in the late 70s or early 80s as I recall, and military organisations starting to outsource their support to civil organisations at around the same time, also contributed. ” With less of a need for LAMEs in the Defence sector, BAE is also relatively unaffected by an ageing workforce, given the younger demographic of its personnel.

“The average age of our workforce is well underneath the industry average. The majority of people are aircraft maintenance engineers rather than licensed people, which is the major differentiation between defence and the commercial sector,” Schroter noted.

Park added that the previous mining boom and subsequent drain of qualified engineers to the resources sector has also affected the MRO industry. Yet he believes that being able to adapt to such challenges as the skills shortage remains fundamental for any successful MRO business.

“Running a successful MRO organisation by definition requires having strategies to deal with the peaks and troughs of demand. Our Holy Grail is to be able to have a situation where we’ve got a known workload 12 months in advance, and knowing how many engineers we will need from one week or month to the next, but life’s not like that. ” While a far more stable area of the industry, the lure of lucrative jobs in the resources sector is also a threat to BAEs recruitment stocks, which has an average intake of between 10 and 20 apprentices per year.

“I think over time as infrastructure development starts to come through and mining continues to grow, it’s going to be difficult to attract a good pool of candidates… The issue for us is probably more in the engineering area to support our MRO activities, where a lot of the younger graduate people going into engineering in universities these days are probably starting to move away from the defence industry because of the uncertain nature of it, versus all of the infrastructure development jobs,” he cautioned.

“We obviously recruit locally to our facilities where we can. So in Townsville[for example], we tend to try and recruit out of the local community because it’s always easier to keep people who live in the area. If we do have any shortfall in a particular market, we’ll offer transfers from other parts of the business to those areas. . . I guess the key thing is to work to retain the people we’ve got. . . by providing career development programs for staff. ”

Corporate/Competition

Attracting a sustainable base of clients remains the lifeblood of any third-party MRO organisation. Harder still is being able to attract such contracts in the wake of cheaper or simply larger overseas competition in the industry.

Park categorises his company’s success in attracting business as “cyclic at times”, tied to the level of consumer demand for MRO work such as major aircraft modifications or heavy maintenance inspections.

“We’re doing an enormous amount of modification work for aeromedical organisations at the moment,” Park said.

“Over the last few years and for the next couple of years, for whatever reason, government health organisations and organisations such as the RFDS, are going through fleet renewal programs. So there’s a lot of that work going on at the moment, but in two or three years time that may not be the case. ” Adding to that is a host of heavy maintenance contracts in Cairns for King Air, Dash 8 and ATR aircraft, as well as various other “third level” maintenance being performed on aircraft such as Beech 1900s, Twin Otters, Cessna Citations and Caravans.

Hawker also has a string of programs on the military side, including its King Air B350 ILT program for the RAAF, and providing ongoing maintenance support in conjunction with Lockheed Martin for the Republic of Singapore Air Force (RSAF) PC-21 trainer fleet based at RAAF Pearce.

However, it is dealing with overseas competition in the heavy maintenance sector that presents the biggest challenge for Hawker. “I think it’s important to have alignment with the OEMs if you can do that,” Park noted when discussing the nature of maintenance operations.

“You’re always going to provide a better quality service if you’re working in conjunction or have a relationship with the OEM.

And from that perspective at Cairns, we have one of three Bombardier Authorised Service Facilities for the Dash 8 series worldwide,” he said.

“I think probably another real advantage is that we have various facilities certified to the European EASA 145 airworthiness standard. CASA is going through Part 66 licensing changes at the moment as part of the process to move closer to industry ‘best practice’ using EASA 145, so that could well create quite a shake-up in the industry.

Our advantage is that we’re already there.

We have had EASA 145 accreditation for years and we see that as an enhancement to the quality of offering that we’re providing to industry. ” Focusing on the major airline operators in Australia, JHAS categorises hangar maintenance, A-Checks, C-Checks, reconfigurations and defect work as some of its principal support services currently offered to customers. Future involvement in Defence may also be an option.

“That’s our core if you like, but as I mentioned, we’re really looking to ramp up the component part of our business plan by accessing these OEM partnerships,” noted Wolfe.

Cheap overseas labour remains a pressing concern for JHAS, where large base operations throughout Asia and South America, with a roughly 80/20 labour-material cost split, make a tempting proposition for operators looking to save money. The situation has seen a review of John Holland’s business plan, now with far less reliance on base maintenance.

“We’re now in terms of airframe work much directed at the shorter end, the AChecks and overnight defect work. And we find that there’s quite a niche in the market for that to be provided in the region. So that’s been a fundamental shift for us, and it’s been a good one,” Wolfe said.

Again, stability is a key theme for BAE’s assessment of the current Australian Defence market. However, as both Hawker and JHAS have noted in the civilian sector, overseas competition from OEMs keen to start their own aftermarket support operations that effectively take out the ‘middle man’, poses a significant challenge.

“Defence and more importantly the Defence Materiel Organisation as the contracting body, has of late tended to contract support of the platform as they buy it with the OEM. Or they tend to use overseas mechanisms like Foreign Military Sales out of the US,” Schroter said, citing Boeing as a key example of an OEM providing direct MRO/through life support to the RAAF’s C‑17s, F/A-18Fs and AEW&C aircraft.

“So the OEM has a natural advantage in that initial support period to win that work, which in most instances is not competitively tendered,” Schroter said.

“I know Defence is looking at that, trying to a find way to open the competition at the early stages of a new platform being introduced, but it’s very difficult and it increases the risk of transition to service if they go with a non-OEM provider, especially in that initial support period. So that’s our biggest threat. ” Where competition is open to non- OEMs, BAE has been very successful in Australia, providing a range of support services and deeper maintenance to ADF aircraft, including the RAAF’s F/A-18A/BHornet and P-3 Orion, Navy Seahawk and Army S-70A Black Hawk and CH-47D Chinook fleets. The one platform in ADF service it is the OEM for, the Hawk 127, it also supports for the RAAF.

“We’ve been fortunate enough to rewin all of our [current] platform work,” Schroter said.

“Defence has retested a lot of our support contracts in the marketplace to drive down the cost base. All of our major Hawk, Hornet, Seahawk, Black Hawk contracts, CH-47 Chinook contracts, were all competitively tendered by Defence, so we’ve re-won all the work we had previously.

That’s been our focus for some time,” he continued.

“I think the market’s pretty stable in defence. However, there will be another round of competition around the majority of platforms in 2012 and 2013. ”

Outlook

JHAS, Hawker Pacific and BAE all have a mix of different strategies for future growth.

John Holland, for example, plans to base its future business on shorter end airframe products and their associate components.

“Although we’re heavily into airframe maintenance at the moment, we are definitely looking at components and these sort of relationships with OEMs. It is definitely part of our business plan going forward, and so we’ll be looking to really drive this out in the next 12 months to three years,” Wolfe said.

As mentioned earlier by Wolfe, another key plank to their expansion strategy will rest with JHAS being able to partner with an OEM and work as a regional ‘fulfilment centre’ to provide sufficient through life support and service expected of an aircraft operator. The trade-off will be in JHAS being able to guarantee the OEM material flow, which itself is a major source of the manufacturer’s business.

At Hawker Pacific, Park says its decision to consolidate operations, including the shifting of heavy maintenance operations from Bankstown to Cairns, has been vindicated and capacity is now “about right”.

What remains a relative unknown though, is the ever-increasing cost of compliance and how that affects an Australian MRO company’s ability to compete with overseas players.

“I think one of the main challenges facing the MRO industry is the cost of compliance, and I mentioned before about the skills shortage…You obviously need to meet various regulatory standards to be in business and offer competitive professional services and all that sort of thing. Now I think from our perspective, in regards to CASA moving towards EASA 145, we’re already carrying a lot more cost than our competitors so in a way, it’s probably levelling the playing field to a degree,” assessed Park.

“If you’re adding additional cost of compliance to a business for no demonstrable benefit, then we’re just increasing our overall cost of doing business for no benefit. I think that’s an area that certainly concerns me,” he warned, also adding airport privatisation as another concerning factor in the industry.

BAE too has hinted at plans to expand its current offering of MRO services and branch out into the adjacent civilian sector, as they begin a reassessment of their overall market position.

“Obviously we don’t want to stand still, so we’re looking for ways to diversify our services into non-defence areas…We’re thinking to try and grow into those similar services which we do for Defence. That includes some of the areas where perhaps Hawker Pacific and Cobham tends to sit in – police air wings, air ambulance, those sorts of markets,” Schroter said.

“Our general call is probably about a 10 to 20 per cent contraction in the overall market space, but then long term a period of stability. ” Overall though, Schroter remains optimistic for BAE’s future in the Australian MRO industry, with the introduction of several “business improvement processes” and modern toolsets to better manage and reduce overall costs, particularly in light of Defence’s SRP. Yet on a broader scale, consolidation and competition appear to be key themes which ring out across all three MRO companies interviewed.

There are certainly interesting times ahead for Australia’s MRO industry, as the majority of third-party independent companies negotiate an ever-present skills shortage, battle OEMs moving into aftermarket support territory and realise their own plans for expansion into new market sectors.