Markets

Locking customers in and competitors out? EU investigates anti-competitive practices in aircraft services industry

Locking in customers while locking out competitors is an integral and unchallenged part of most servitization strategies. Up to now that is, because the EU, following complaints by airlines, has launched a preliminary investigation into restrictive practices by OEMs in the aircraft maintenance industry – as the Financial Times reports.

It seems that this came about after a number of airlines led by IAG, the owner of British Airways and Iberia, threatened lawsuits over strongly increasing maintenance costs, including spare parts. According to the FT:

The airlines are uneasy about the power wielded by equipment suppliers, which are moving into a market traditionally dominated by third-party service providers. Several carriers accuse equipment suppliers of withholding crucial information on products — such as manuals and technical drawings — to ensure that only they or their partners can provide spare parts or carry out high-quality maintenance.

Furthermore:

Tony Tyler, the outgoing head of Iata, the airline industry’s trade body, complained last month that competition had degenerated to such an extent that airlines had “little alternative but to sign on to long-term . . . maintenance and parts agreements containing pricing escalations that are often above the inflation rate”.

So according to this take long term maintenance service contracts were not signed based on value generated, but because it was, more or less, the only effective choice offered – though given the situation it is best to discount part of this. Still, it may impact much touted business models, such as Rolls Royce’s power by the hour:

Rolls-Royce, the world’s second-biggest maker of aero engines, generates 52 per cent of its civil aircraft revenue from after-sales services. The service business is so lucrative that Rolls-Royce will sell its engines at a loss in return for a long-term service contract. Rivals GE and Pratt & Whitney are following suit with similar offers.

But the preliminary inquiry goes beyond engines to look at the market for parts and servicing of everything from auxiliary power systems to landing gear, flight systems and in-flight entertainment, where increasingly suppliers are copying the Rolls-Royce model.

Reality however, is probably more complex. According to the FT article a large part of the  >US$ 60 bill. maintenance market is controlled by airline technical services subsidiaries or affiliates which are probably feeling competitively squeezed by OEMs, who de-facto are or should be better positioned to manage support services, integrate into solutions packages and make use of IIoT technology, as we have repeatedly argued in various articles. Independent or customer captive service providers are inherently disadvantaged in this environment and must adopt their strategies. This applies not only to the aircraft, but to any machinery after market.

The shift threatens providers who have until now kept the world’s fleet of 24,000 aircraft flying. “We are seeing a new level of competition,” says Wolfgang Weynell, senior vice-president at Lufthansa Technik, one of the world’s top 10 maintenance repair and overhaul companies. “Manufacturers are intensifying their efforts to increase their part in the entire supply chain.

In a market where only a few large vendors comprehensively control supply chains this can  degenerate into anti-competitive practice, where prices increase rather than reduce. In the case of the aircraft service market which is undergoing restructuring as a consequence of a battle between competitive airline business models and approaches -and cost structures are hugely important- this can rapidly escalate.

Regardless of the outcome of the investigation (fines for anti-competitive behavior can be very large) it will probably fuel a debate about market control through servitization and possible dependency situations it creates -if competition is not preserved.

 

 

 

 

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