Sell 'hours and partnerships' not 'aero engines' to low-cost carriers in Asia-Pacific

The commercial aerospace engine OEM (original equipment manufacturer) industry is highly consolidated and dominated by three pure-play engine manufacturers- GE, Pratt & Whitney, and Rolls-Royce and two additional joint ventures CFM and IAE. Airbus global market forecast 2015 highlights 32,585 new passenger and freight aircraft deliveries by 2034 and a current flying population of about 18,900 passenger and freight aircraft, this equates to more than 75,000 aerospace engine flying population in the coming decades. The forecast is that 40% of the new aircraft deliveries will be to the airliners in Asia-Pac followed by North America and Europe.

One of the primary drivers of Asia-Pac growth is the low-cost carrier (LCC) business model, which has proven successful in the region with 24.5% average annual growth in the last ten years. As per IATA, carriers in Asia-Pac have accounted for one-third of the total increase in international traffic in 2015, with volumes up by 8.2% from the previous year. With the different growth forecasts, it is evident that LCCs in Asia-Pac will be a key future market for aircraft and aerospace engine OEMs to address.

Though the LCCs are growing in Asia-Pac, they face challenges in expansion including:

• The LCCs in the region depend on external funding agencies, who are not confident about funding them as most LCCs are inexperienced
• Frequent air travelers continue to have concerns about the safety and punctuality of these LLCs
• Though these airliners have one or two aircraft types, with a minimum fleet size they can’t afford to have additional spare engines to support an aircraft on ground(AOG) situation

In the aerospace engine industry, the current business model is to sell new engines at cost and then generate long-term revenues and profits through their aftermarket service offerings. However, this traditional model may not suit the LCCs in Asia-Pac due to the following reasons:

• Their need to reduce capital investment owing to massive ROE pressure from external funding agencies
• They want support from OEMs to build a brand of safety and timeliness, which the current business model doesn’t support
• They want OEM support in keeping the aircraft always flying as these are volume-based businesses with aggressive routing structure and fewer ground times

 To overcome the Asia-Pac LCCs challenge, OEMs should look for ‘hour and partnership’ selling business model an extension of existing aftermarket pay-by-the-hour models to new engine sales and partnering with LCCs for their success. In this model Aerospace engine OEMs can enter into a long-term contract with LCCs for mandatory minimum monthly flying hours. They can lease new engines to the airline after a minimum initial payment, and LCCs will pay hourly rates for the new engine, maintenance, and partnership cost on a monthly basis. After reaching the fixed period or agreed flying hours, LCCs can take over the ownership of the engine.

 The benefits of this model would include:

• Reduction of initial capital investment
• Reduced risk of buying an engine
• Increased brand credibility of the LCC due to the partnership, and the credibility of the OEM
• Assured engine flying condition
• Spare engine and spare parts availability
• LLC can consolidate their business and gain experience
• Maintenance decisions become easy

 From an aerospace engine OEM’s perspective, this model involves risk sharing,  but it is a risk worth taking because the engine is owned by the OEM till they recover the entire cost. OEMs have the assurance of aftermarket business against LCC approaching third party service providers. OEMs also get a premium from the partnership by selling beyond services and last but not the least; OEMs will create a base of loyal customers for the future.