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CAVU Café: Royboy’s Prose & Cons

*Note: The views expressed in CAVU Café: Royboy’s Prose & Cons blog are those solely of the writer and are not necessarily shared by the Aviation Suppliers Association or the Association’s staff, members, or Board of Directors.

 

   About Roy Resto

 

OEM ANTI-COMPETETIVE, MONOPOLISTIC PRACTICES IN THE AFTERMARKET

OEM ANTI-COMPETITIVE, MONOPOLISTIC 

PRACTICES IN THE AFTERMARKET?

By Roy Resto

 

What’s going on in the aftermarket?

read an article in the Wall Street Journal titled “Promised Monopoly Crackdown Fizzles.”1 The article highlighted the US Government’s acknowledgement that there needs to be more enforcement of laws against monopolistic practices. The aviation industry was not mentioned in the article, yet it triggered some thoughts: are there any such practices in the aviation industry?

To the point: Nearly every part flying on an aircraft is from an OEM supplier that has been awarded exclusive, sole-source rights. Are there classic monopolistic practices at play here?

The competition to settle that award was decided before the aircraft or engine went into full productionso there was competition, initially. Further detracting from the inference that these OEM’s are engaged in any sort of monopolistic practices in their manufacturing operations is the very nature of the Type-Certification process. It is meant to be vigorous and thorough in order to ensure the highest levels of safety. The process is so demanding that, although we card-carrying capitalists intuitively chaff at any hint of monopolies, we can be forgiven if we don’t apply the monopolistic standard here, in the interest of safety. Such vigor in the certification process necessarily implies high investment costs in research, development, and tooling. Of course the OEM’s have a fundamental right to recoup their investment costs and to protect their intellectual property. That is for manufacturing, but what about the aftermarket?

The manufacturing arena (you’re building it to fill a ‘hole’ on the aircraft/engine production line), and the aftermarket arena (spares, logistics, maintenance, repair, and overhaul) are two separate and distinct environments, each with their own set of players, business models, and regulatory challenges. Is it possible that in the aftermarket, OEM behaviors are contributing to a rising feeling that anti-competitive practices are in play? The European Commission (EC) is investigating just that prospect.

The EC, as published in an Aviation Week & Space Technology article titled “Under Review: EC investigates ‘alleged anti-competitive behavior’ in commercial aircraft maintenance2confirmed that it is taking a close look at the competitive atmosphere amongst MRO services in the European Union, as first reported in the Financial Times. More specifically, it is looking into alleged anti-competitive behavior. The article starts by sharing that “At industry trade shows, airlines perennially gripe about original equipment manufacturers (OEM) holding too much sway over the commercial aftermarket – and pricing their products accordingly”. An example which seems to quantify such assertions came from the International Air Transport Association (IATA) which stated that “…MRO represents 10-13% of airline costs, and those costs are rising beyond inflation despite efforts to rein them in.” 

Not holding back on articulating what is certainly reflective of their constituency, IATA Director General and CEO Tony Tyler said “Unfortunately, certain OEM Business practices drive up costs by blocking entry into the market for (MRO) services.” Further, “IATA is examining commercial, legal, and economic options where we may be able to contribute to efforts to rein in runaway aftermarket-related costs.” Pretty strong stuff indeed.

If the gloves have come off in regards to calling out alleged OEM behaviors, then perhaps we should be more specific about what the practices seem to be, which are contributing to the perceived anti-competitive assessments. How about these and their variations:

• Blocking independent repair station’s access to the OEM’s Maintenance, Repair, and Overhaul Data (AKA as Component Maintenance Manuals, Maintenance Manuals, and ICA’s – Instructions for Continued Airworthiness)How possiblycan these independent MRO’s compete without reasonable access to such data? I’d say ‘reasonable’ might include practically priced subscriptions, but outright denials?
• Maintenance Manuals whose instructions say to return the product to the OEM or their designated Repair Station affiliate. In other words, there are no available maintenance instructions available for operators or independent repair stations.
• Finding ways to charge below-list prices for piece parts to the OEM’s MRO affiliate, but the higher list prices to independents
• A parallel to that last bullet is that the OEM entices the operator with long-term (5 years) contracts with built-in, below-list pricing for parts, and caps on price increases despite any larger inflation increases. How possibly can independent MRO’s and distributors compete against that?
• Enlisting the help of an aftermarket confederate to buy all the spares (those in Overhauled, Repaired, or Reparable condition) in the aftermarket, and then take those off the aftermarket entirely. If you’re an operator and need a spare, then guess what? You have to buy a new part from…the OEM. By the way, what does the OEM do with those off-the-market spares? They give their OEM MRO affiliate exclusive access to them, further eroding the competitiveness of independents and aftermarket distributors. And oh-yes, guess what happened to the market price of any spares? In the ether…
• A distributor who engages in parting-out activities recently shared a frustration: it seems his parting out activity had introduced additional spares into the market which in turn brought down the average price of those spares. Guess what the OEM did? They cut him off from doing any business with them.

By the way, regarding those maintenance manuals, in an article titled “State-Level Proprietary Rights Do Not Trump Aviation Safety3, we’re told that “…we established that the FAA has rules that require design approval applicants to create ICAs. Those rules establish minimum standards for what needs to be in the ICAs.  And those ICA’s are required to be shared with certain parties, like properly rated repair stations.” So…where’s the enforcement of that?

Is it just the Airlines and independent Repair Stations affected by this? With a certainty, there is a trickle-down collateral effect upon the aftermarket distributor and broker community as well.

A famous line from a Godfather movie said “Don’t take it personally, it’s just business.” But are these activities just business, really? I suspect the EC investigation is going to open the door to increasing scrutiny as to whether any lines have been crossed.

On the other hand, make no mistake, our free market systems will respond to these OEM activities, actions which should not be underestimated. A few things that come to mind:

• As with IATA, expect segments of the industry to enlist their respective trade associations to pursue possible legal actions, editorialize the purported unfair OEM practices, and pressure legislators to enact ‘corrections’.
• Calls for reforms in the certification process to somehow increase competition among OEM’s. After all, in the aftermarket, they currently do enjoy monopoly status; competition would have a wonderful ameliorating effect on operator costs.
• Calls to increase PMA activity.
• Increasing parting-out activity.
• Calls for the FAA to enforce the rules making manuals available.
• An increase in independent MROs seeking to develop their own Process Specifications in cases where the OEM is not making available the MRO data, or has not written any. 

An economist would insist that the best solution is to increase competition among the OEM’s and let the market decide…

Let’s see where all this goes. As always, you’re invited to leave a comment.

Roy ‘Royboy” Resto

www.AimSolutionsConsulting.com

 

1 Promised Monopoly Crackdown Fizzles; The Wall Street Journal; November 9, 2015; Page A4.

2 Under Review: EC investigates ‘alleged anti-competitive behavior’ in commercial aircraft maintenance; Aviation Week & Space Technology; October 26-November 8, 2015; Page 30

3 State-Level Proprietary Rights Do Not Trump Aviation Safety; Aviation Maintenance; October/November 2015; Page 48.

Posted By Tony Brigham | 12/3/2015 9:31:26 AM
 

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