The customer list of maintenance, repair and overhaul (MRO) specialist S7 Technics includes almost all Russian operators of Boeing and Airbus aircraft. It is no surprise then that the importance of this MRO-provider (until recently widely known as Engineering Holding) to the Russian commercial aviation business is difficult to overestimate.
In this interview with Russian Aviation Insider, Roman Fedorov, S7 Technics’ deputy director for finance, elaborates on the current progress of the Russian and CIS region’s leading MRO company, and shares his thoughts on several key topics, such as billowing airline capacities. Opinions about the air transport industry from such pivotal service providers can never be a run-of-the-mill thing.
AIRPLANES TO SPARE
Russian Aviation Insider: How would you describe the current state of affairs regarding the Russian and CIS aviation maintenance market, and how do you feel about the achievements of the MRO industry in 2017?
Roman Fedorov: Emotions are not what we need here. We’d rather have a candid, scientific analysis. When talking about the maintenance and repair sector, we should take a look at what is going on in the airline business in general, as well as the overall condition of the air transport market in the region. Because there are no actual signs in the market to indicate it will consume all the excessive capacities, there are currently no fundamental justifiable reasons for the significant fleet expansion.
Insider: Yes, but how will this development influence the MRO sector?
RF: The air transport market is facing a situation where the available capacities (ASKs) still remain high, and some airlines have tended to take unreasonable decisions. This trend will affect the MRO industry because all these factors influence, for example, the skilled personnel market.
We also see that a large number of airlines are trying to establish their own specific competences in the sphere of aircraft maintenance, which in most cases is unjustified from both an economic and operational perspective. And all of this is happening in the environment of general staff shortages. The consequence of this is the synthetic creation of a so-called manpower deficit and, as a result, we now have a situation where the average workload of technical specialists at an individual airline’s in-house line station is equal to literally half a flight per day – whilst the pay is often up to 1.5 times that of the industry’s average.
There are players which took risky decisions to excessively grow their fleets
It has also led to an artificial shortage of dedicated technical experts. As a result, highly qualified specialists are opting to work for those companies offering better pay and fewer hours. All this breeds a certain disproportion and creates an unstable market in which, on the one hand, it affects the MRO specialist businesses because as a rule they enjoy a greater staff utilisation rate compared to airline-affiliated service companies and, on the other, it becomes an issue for carriers: if there is insufficient business in a model like that, sooner or later it will fade away.
There is a situation where a vast number of airports not only host several airline-affiliated line stations but also provide maintenance services themselves. This adds up to a problem, because with that [small] amount of traffic volumes, all the jobs could instead have been efficiently accomplished by a single MRO-provider.
So, to my mind, the general trend is as follows: there are players which took risky decisions to excessively grow their fleets, while the share of the key player [Aeroflot group] has grown bigger – we are fully aware of that.
NEW AIRCRAFT TYPES AND ENGINES
Insider: What was S7 Technics’ main focus in 2017?
RF: Among other things, in 2017, supporting the growth of S7, our parent airline, was a big challenge for us. Apart from boosting its traffic, the company introduced new types to its fleet: the Embraer E170 and the Airbus A320neo.
So we set a goal to become Russia’s first and preferred service provider on these additional aircraft types – initially for our parent carrier, followed by support for third-party customers as well. We believe that the future belongs to these types of aircraft.
We have already initiated talks with aircraft manufacturers to discuss support programs for other aircraft types, but these will be steps that will follow. Currently, we are focused on the maximum extension in terms of the E170 and A320neo aircraft.
Insider: Perhaps there is something else?
RF: I guess it is also worth devoting a few words on those projects that we are currently implementing within our company. We are gradually moving towards launching another, bigger maintenance and repair shop for CFM56 engines at Mineralnye Vody airport, our second after Moscow. All reconstruction works at production facilities there were finalised in 2017 and new equipment was ordered.
Along with increasing our presence in the engine-servicing sector, we are also working to enhance the skillsets of our personnel and to mastering more complicated types of engine repairs than we currently provide.
For example, we have broadened the list of our services to include combustor chamber replacement as well as the renewal of the most thermal stressed parts of the turbine nozzle assembly and fan works. This all means we are gradually able to perform ever more profound engine repairs, depending on customers’ needs.
As for overhauls, or the so-called Core Performance Restoration, our Swiss partner SR Technics, the company that helped us with arrangements for the only maintenance and repair shop for CFM56 engines, is in charge of that. We do not intend to develop it further [into Core Performance Restoration] just for the sake of it. We have identified that the specialist works we have opted for are in great demand and we are determined to offer the market a unique and competitive product.
We have also grown bigger to include CFM56-3 services as we still see the demand there for this. Previously, we used to carry out maintenance works on CFM56-3s in conjunction with other MRO companies.
Although the number of aircraft powered by these types of engines is gradually reducing in the region, we sense that demand from airlines which still operate Boeing 737CLs is not yet fully met. In many cases, these aircraft are owned by their operators, so it is more economically viable for them not to fully overhaul the engines – but instead to support them through a wisely customised scope of repair works (in particular with regard to the remaining lifetime of expensive engine components) – and continue along this more economically viable path. What’s important is that we can eliminate almost all engine problems on our own and have the support from our partners should we need assistance with some other specific tasks.
In terms of engines, we also offer customised fleet management services. S7 Technics has created a department which, in addition to our engine repair services division, provides assistance in developing engine maintenance planning programs for airlines and for the establishment of a meticulous fleet operations strategy in terms of operational issues, reliability and economics.
Insider: What do you mean by ‘engine maintenance planning program?
RF: This is about planning the repair works on an engine over its lifetime with regard to predicting any potential operating limitations and return-to-lessor requirements. This service package defines an optimal scope of repair works to anticipate and eliminate engine faults, bringing in necessary upgrades, and omitting those components that are not in optimum technical condition and have a high residual operation time.
It is clear that proactively performing such repairs at our base often perfectly solves the issue of minimising maintenance costs throughout an engine’s entire lifetime, whilst at the same time providing enhanced availability and reduced heavy overhauls. Furthermore, in addition to the planned repair, if the company is interested in carrying out a simultaneous preventative upgrade aimed at enhancing reliability, it achieves another crucial objective: a reduction in the number of off-schedule events, failures and faults.
Where these options are not available, airlines more often usually have to send their engines abroad for overhaul, or take them off the wings even where there is a substantial remaining lifetime still in place. Today, S7 Technics is eager to offer optimisation of an airline’s single biggest cost item in the continued airworthiness requirements domain (engines can represent some 50 per cent of direct operational costs).
We observe that a remarkably large number of Russian airlines find themselves in a less than perfect situation with regard to engine maintenance issues. Thus, a helping hand of professional experts is certainly needed.
Insider: When the ruble depreciated some time ago, what we heard from MRO industry representatives back then gave the impression that Russian maintenance companies were offering some of the lowest man-hour prices available. There were expectations therefore that Russia could turn into an attractive venue for foreign airlines to have their aircraft serviced. Do you think S7 Technics has managed to achieve this potential?
RF: Actually our workload keeps on growing. However, the question of attracting foreign customers is still open. So far, because of political reasons and сustoms issues, there is plenty of room for improvement and development.
One could blame this on the overall political climate or other reasons, but it is clear to us that it is we who should first and foremost work harder to change the situation.
On the other hand, even with the ruble depreciation and, against all logic, a substantial number of Russian airlines, including those with state backing, have continued to carry out their maintenance checks abroad. The decision-making process in Russia is a mystery to me. It seems the lessons of the past have still not been learned.
It’s okay for a private airline, I guess. But when public companies subsidised by the Russian government continue to carry out a big part of their maintenance checks abroad, reasoning that it is allegedly quicker and less expensive this way and with a whole bunch of MRO providers fully approved to conduct base maintenance on foreign-made aircraft back home – it definitely raises flags.
Because S7 Technics receives its external orders on a 100 per cent tender basis, we know for sure both what we offer and what our competitors can offer. It looks to us as if there are some non-economic reasons that are influencing them to choose their partners. And these attitudes unfortunately are still strong. Not only do we think this is wrong, but it is not good because it also undermines the fundamentals of the industry itself. It distorts the situation, placing pressure on foreign providers and creates an improper perception of the Russian market in general.
Insider: Nevertheless, did the S7 Technics holding revenues grow in 2017?
RF: Of course.
Insider: And why? Could that be attributed to some more profound and complex projects?
RF: If we take a look at our repair works, we will see that the number of heavy checks has not changed much over the past two to three years. But the structure of our work has significantly changed.
We are becoming a centre of excellence in terms of the heaviest checks, for example six- and 12-year checks and their equivalents, such as lease returns. So our activity in terms of man-hours is growing.
This totally makes sense because we are in the process of an internal transformation. Currently, we are looking to broaden our activities and introduce new sources of income which will provide some extra revenue streams.
So we should not judge our results simply by looking at the man-hour figures. The revenues are going up. In 2017, they increased by 11 per cent over 2016 year-on-year.
With regard to 2018, we will see. We have deliberately included transformational projects, which I cannot unveil at the moment, as they are in research and development right now.
On the one hand, these transformations will lay the foundations for our future, especially in the MRO segment where there is plenty of room for growth right now. On the other hand, we expect the year of 2018 will resemble 2017 in terms of operating performance. This will allow us to conduct some of the internal transformation processes to secure our future growth from 2019 onwards.
By Artyom Korenyako
Russian Aviation Insider
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