FLIGHTGLOBAL ANALYSIS: The evolution of Mubadala's MRO strategy

Good summary from Flight Global on Mubadala's expanding aerospace MRO footprint.

07 JAN 2016 19:20 GMT+04:00 (LONDON) MICHAEL GUBISCH
Mubadala's bid to become a major global maintenance player began with a gradual acquisition of Swiss MRO specialist SR Technics from 2006. In 2007, the Abu Dhabi investment fund purchased Gulf Aircraft Maintenance, subsequently rebranded as Abu Dhabi Aircraft Technologies. But the absence of a parent fleet for these service providers posed a challenge to the ambitious growth plan. Airlines were outsourcing maintenance and spinning out technical departments as standalone businesses. But, especially in a consolidating MRO environment, established airline-affiliated service providers such as Air France Industries KLM Engineering & Maintenance and Lufthansa Technik had a clear advantage as their parent fleets provided a base workload. Scale effects, combined with leverage in negotiations with OEMs to access repair know-how, helped these competitors win third-party business. Abu Dhabi's Etihad Airways has been a central customer for ADAT, and SR Technics continued to support the fleet of its former parent Swissair's successor carrier Swiss, though some work packages were switched to parent Lufthansa's maintenance operation. However, there is – especially in regard to gaining access to manufacturers' repair information – a clear need for independent third-party MRO providers to co-operate either with OEMs or with airlines operating huge fleets, to facilitate support of new-generation equipment. Mubadala opted to collaborate with manufacturers such as General Electric, Honeywell, Rolls-Royce and – in the military arena – Lockheed Martin and Sikorsky. The investment fund additionally launched engine and component financing venture Sanad in 2010; merged the senior executive teams of ADAT and SR Technics, for further integration of the two service providers; and started using the Mubadala
Aerospace MRO Network brand for its commercial aftermarket activities.
There were plans to establish MRO sites in Asia and North America too. But – apart from SR Technics opening a component repair shop in Kuala Lumpur and partnering Indonesian carrier Garuda's maintenance division for the support of certain equipment – Mubadala did not expand its MRO footprint as planned.
Indeed, the group's MRO Network brand was quietly dropped and, in 2014, Mubadala sold ADAT's airframe and component maintenance activities to Etihad. These have been rebranded as Etihad Airways Engineering. ADAT's engine shop was meanwhile set up as a unit in its own right under a new
name, Turbine Services & Solutions, with a view to expanding overhaul capabilities for new-generation engines. Mubadala considered divesting SR Technics, too, and had offers on the table from potential investors, the fund's aerospace and defence systems executive director Grant Skinner told Flightglobal during the last Dubai air show in November 2015. Industry sources have said that Russian investors were interested in acquiring the Zurich-based MRO provider.

In early 2013, Russian flag carrier Aeroflot disclosed plans to establish two ventures for airframe and component maintenance in its homeland with SR Technics and state corporation Rostec. However, the proposals appear to have been put on hold as a result of EU and US sanctions against Russia over the political crisis in Ukraine and of the rouble's devaluation. Skinner says Mubadala has not ruled out a potential sale of SR Technics or parts of
that business in future. But he adds that the fund is "not actively" looking for investors or pursuing an "exit strategy". The maintenance subsidiary, he asserts, is still a "core" part of Mubadala's aerospace division. SR Technics has grappled with the Swiss franc's appreciation after the national central bank lifted a cap on the currency's exchange rate against the euro in early 2015. Zurich had already been a high-cost location beforehand, and the maintenance provider had struggled for some time to define a niche for its services. In 2010, management decided to conduct VIP completions on new business jets. But that activity did not generate sufficient volume, and the executive team reviewed its strategy again in 2013. A contract from SAS to refurbish the Scandinavian airline
group's long-haul fleet cabin – in tandem with heavy checks – brought an opportunity to combine high-end interior work with traditional MRO.
However, more sustained business is likely to come from closer co-operation
between Mubadala and Etihad. SR Technics will gain what is arguably the closest alternative to a parent fleet: Mubadala revealed at Dubai that the maintenance specialist will become "preferred service provider" for Etihad's airline group. As part of the deal, Air Berlin – in which the Gulf carrier has a 29% shareholding – tentatively extended an engine MRO agreement for its Airbus fleet with SR Technics by five years until 2024. This followed an earlier accord between SR Technics and Etihad, disclosed in mid-2015, which covers component maintenance for the airline's Boeing 787 fleet. Further work is likely to come from other partners such as Alitalia and Air Serbia.

Mubadala and Etihad plan to establish a maintenance facility in eastern Europe in order to consolidate heavy checks for the group's narrowbody fleet at a low-cost location. Neither a timescale nor a location was specified for the project at Dubai. However, Skinner indicates that Serbia is a likely location for the new maintenance site. "We really like Serbia," he says. Sources familiar with Etihad's technical operations tell Flightglobal that the airline has evaluated a co-operation with Belgrade-based maintenance specialist Jat Tehnika, formerly a division of Air Serbia predecessor Jat Airways. SR Technics established a subsidiary in the Serbian capital for administrative functions in early 2015, after the maintenance provider made 250 such roles redundant at its Zurich headquarters. In Malta, SR Technics opened a dedicated facility for heavy checks on narrowbody types in 2010. But the site has struggled to attract business beyond its main client EasyJet. With the UK budget carrier reviewing its maintenance strategy, SR Technics has evaluated the future of its Malta operation. The MRO specialist's commercial chief Andrew Best told Flightglobal in October 2015 that management would have clarity about the site by year-end. But in early January, SR Technics declined to provide detail. Skinner says the establishment of an additional narrowbody heavy maintenance centre does not automatically mean SR Technics' Malta site will be abandoned. At 2015's Dubai air show, Mubadala showed some progress of its planned engine overhaul shop in Al Ain. The fund signed an agreement with GE to "finalise" their planned joint venture to support GEnx engines. That partnership – alongside a similar accord with Rolls-Royce for Trent XWBs – had been revealed at the 2013 Dubai air
show. There was no visible progress in the meantime. Mubadala did not specify a timeline for the planned facility at either air show. Under the renewed agreement, GE will build a logistics centre for GEnx, while Mubadala's engine MRO subsidiary is set to expand its overhaul capabilities to include the type, which powers the 787 and 747-8. Skinner says Mubadala still intends to support Trent XWB engines and is holding "positive" discussions with Rolls-Royce. The fund's engine MRO operations also feature in Rolls-Royce's aftermarket plans as the UK engine maker expands its overhaul network to support the Trent XWB, the sole powerplant available for the Airbus A350. Since 2013, Mubadala and Rolls-Royce have separately changed their MRO strategies. Mubadala  oncentrates on engine support and Rolls-Royce has broadened its maintenance network to include more external partners. Skinner says further news about a co-operation with Rolls-Royce to support Trent XWBs will be disclosed in the "hopefully not-too-distant future".