OEM ANTI-COMPETITIVE, MONOPOLISTIC 

PRACTICES IN THE AFTERMARKET?

By Roy Resto

What’s going on in the aftermarket?

I 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 production; so 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 maintenance”2, confirmed 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:

By the way, regarding those maintenance manuals, in an article titled “State-Level Proprietary Rights Do Not Trump Aviation Safety”3, 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:

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.