Rolls Royce and the aftermarket

Oct 01, 2013

Rolls-Royce seems like a United Kingdom anomaly: a global industrial powerhouse from an economy that ditched manufacturing for services in the 1980s. Yet dig a little deeper and one finds that Rolls, like its homeland, has also become a service-orientated business.

Alex Derber examines how the company has sewn up the repair business for its engines, the solutions it offers, and what the airlines think of its dominance in the aftermarket.

For evidence of how important services have become to engine manufacturers one need not look further than Rolls-Royce’s annual report. In 2012 the Derby, UK-based company recorded £6.4bn ($10bn) of civil aerospace revenues, 55 per cent of which comprised aftermarket services. This obviously meant that new equipment sales – of its Trent families of widebody engines – were less valuable to Rolls than its aftermarket interests.

Rolls-Royce is widely credited as the most aggressive of the big engine manufacturers in pushing comprehensive maintenance contracts onto its engine customers.  The main in-production engines from the manufacturer are the Trent 700 for the A330 family, the Trent 800 for the 777, the Trent 900 for the A380 and the Trent 1000 for the 787. Rolls has managed to bundle services contracts into an astonishing 92 per cent of Trent sales (including the Trent 500 for the out-of-production A340), a depth of market penetration that has seen sustained growth in its services business.

Last year services sales were up five per cent on 2011 and Rolls listed £1.3bn ($2bn) of TotalCare assets – fees due from customers with long-term service contracts – up from £956m ($1.5bn) in the previous year. The aftermarket is also a significant feature of Rolls’ offering for business jets, with 70 per cent of its engines for that market covered by CorporateCare contracts.

TotalCare

Almost every widebody engine that R-R sells is serviced via a TotalCare contract. These were introduced in the mid-1990s when Cathay Pacific’s first A330s went into service and other engine OEMs quickly followed with their own aftermarket offerings. Under a TotalCare deal, R-R typically assumes responsibility for most aspects of engine maintenance and the customer pays a dollar rate per engine flight hour, thus incentivising R-R to make its engines as reliable as possible.

When that contract structure was first introduced it rectified a serious anomaly in R-R’s aftermarket business, whereby it was rewarded mainly when its engine broke down. But aligning customer and manufacturer interests hasn’t been the only benefit, R-R says. Customers covered by TotalCare also profit from improved on-wing time, higher residual values of their engine assets, reduced risk and better oversight. That last benefit is the result of the reams of performance and reliability data that R-R generates from numerous service contracts – data that is then used to fine-tune engine health monitoring software to spot potential problems before they occur.

Almost every TotalCare deal will include engine health monitoring, overhauls, reliability upgrades and service integration. Customers can then choose from a menu of additional options such as spare engine support, engine transportation, technical records management and specialist line maintenance.

When an engine does need to go off-wing for servicing it will usually go to a maintenance shop specified in the customer’s TotalCare contract, and this will normally be at the nearest location to the customer’s main base. Sometimes, however, it makes more sense to use another maintenance site, and this is usually agreed by R-R and its customers on a case-by-case basis.

As part of the supporting infrastructure for TotalCare there are almost 20 such shops around the world today, either wholly owned by R-R or established as joint ventures with other parties.

The total control backlash

Rolls-Royce’s stranglehold on the maintenance market for Trent engines has inevitably bred resentment. Independent maintenance providers struggle to market their own services for the Trent and airlines that still retain significant MRO capabilities are forced to outsource work to R-R that they might prefer to keep in-house.

Due to the delicate relationship between supplier and customer, it is next to impossible to convince Trent operators to speak publicly about their concerns over TotalCare.

A spokesman for one major European airline told ATE&M: “The problem with Rolls-Royce TotalCare deals is that they cannot be compared to any competing offer because their business model allows no competition. So, we can’t tell if it is a good offer or not because there’s nothing to compare it with.”

An executive at another international carrier isn’t so sure that it was a good offer: “When we signed for the [TotalCare and other engine OEM aftermarket] agreements 10 years ago perhaps our expectations were higher than our experience has proven,” the person said. Disappointment was such that the airline chose to employ independent MRO shops rather than sign OEM- aftermarket deals for some of its later widebody engine purchases.

One airline to have fought back against TotalCare is Air France, which has been in heated discussion with Rolls-Royce for almost two years over who will perform the maintenance on the Trent XWB engines for an expected order for 25 A350-900s. Such was the level of disagreement that the aircraft order was only finalised in June 2013 alongside a memorandum of understanding (MoU) for the Trent powerplants.

Under the MoU, Air France specified that Air France Industries KLM Engineering & Maintenance “intends to be on the market for the maintenance of these engines [Trent XWBs]”, though a final agreement on TotalCare and aftermarket support is still to be reached.

In contrast to Air France, Air New Zealand had opted to outsource much of its engine maintenance work.  “At time of aircraft selection incentives can be quite compelling to take the OEM’s service packages,” says Michael Burdon, Air New Zealand’s powerplant manager. “Unfortunately, over time such an active approach seems to be driving us into a monopolistic environment where the OEM is the only choice remaining.”

Burdon also disagrees with Rolls’ claim that an engine covered by TotalCare will command a better residual value, since lower-tier airlines that might buy ageing engine equipment could be put off by the costly manufacturer service packages that attach to them.

“As fleets move into the mature phase of their life-cycle the residual value of engines under these service contracts starts to become difficult to determine or accurately anticipate, as it’s tough to find the market. As airlines we need to keep our markets wide open and generate options through our choices,” he says.

The Rolls network

While it is relatively easy to source aftermarket solutions from independent engine shops for R-R’s older powerplants, notably the RB211-series used on the 747, 757 and 767, when it comes to Trent maintenance most of the work is performed in Rolls-Royce-affiliated centres.

A good example is Arnstadt, Germany-based N3 Engine Overhaul Services, a 50-50 joint venture with Lufthansa Technik that offers full maintenance capabilities on the Trent 500, 700 and 900. As Lufthansa operates all three engine types – on the A340, A330 and A380 – that airline forms the majority of N3’s customer base, though it does receive equipment from other carriers via TotalCare contracts.

The youngest player in the Rolls-Royce network, N3 opened in 2007 with only the Trent 500 in its service portfolio. One year later it added capability on the Trent 700 and in 2010 it was ready to handle the A380’s Trent 900, though the two newer engine types account for less than half of the shop’s workload due to their relative youth. First overhauls of the Trent 900, for instance, are not expected for two years.

“If you look at the maturity of the aircraft, there is currently a bow wave of maintenance for the Trent 500 and we are the biggest Trent 500 overhaul shop by volume,” says Stefan Sittart, N3’s customer business director.

This year N3 will manage about 100 overhauls, slightly more than in 2011 and part of a gradual ramp-up to its maximum capacity of 200 events annually. The current target for turnaround time is 65 days.

“We are still on a growth path so we are increasing our in-house repair capability gradually in line with market growth,” says Sittart.

In theory, that growth should be easy to forecast as N3 handles all of Europe’s Trent 500 and 900 maintenance, while sharing some work on the Trent 700 with R-R’s  central Aero Repair & Overhaul facility in Derby, UK.

“It’s is a very regulated and protected market and without the approval of Rolls-Royce no-one can build up capability. Thus there is no official competition and there is a lot of predictability in the Trent market in terms of workload expectation,” comments Sittart.

Another facility with a clear view of the future is Texas Aero Engine Services, an American Airlines-Rolls joint venture that markets itself as the largest RB211-535E4 shop in the world and the only approved Trent overhaul facility in North America. Within its capacity of 300 overhauls per year, much its work is dedicated to AA’s RB211s on its 757 aircraft and the Trent 800s on its 777 fleet. TAESL also provides on-wing engine support.

In Asia, the full line of Trent engines is overhauled at Singapore Aero Engine Services, a joint venture of Rolls-Royce, SIA Engineering and Hong Kong Aero Engine Services (HAESL). HAESL is itself a joint venture of Rolls-Royce and Hong Kong Aircraft Engineering (HAECO), and offers full repair capabilities on the Trent 500, 700, 800 and RB211-524 plus on-wing support.