An Economic Aviation Battle (airline v. OEM) with Safety Dimensions

oem
Share this article: FacebooktwitterlinkedinFacebooktwitterlinkedin

OEM Anti-Trust

An anti-trust case, in its early stages, may have serious consequences on the future structure of aerospace manufacturing and perhaps even safety implications. The judgments, which may be made about the costing of these complex engineered products, may impact the ability of the OEMs to accumulate capital needed to develop them. The safety regulators might want to consider directly offering their expertise.

IATA has lodged a complaint with an investigation being conducted by the European Commission’s Directorate General for Competition (DG-COMP). The government body is investigating alleged abuses of dominant positions by manufacturers of aviation equipment. Tony Tyler, IATA’s Director General and CEO, said:

“This is an area of deep concern for our members. There are relatively few equipment vendors and our members are frustrated that there is little flexibility in negotiations for aftermarket services. Airlines do not have the leverage to resolve these concerns individually. So IATA is fulfilling its role as their global trade association and representing their interests as a complainant…

…Our focus is on the future. Our members want to be able to negotiate contract terms more effectively and with more options than the OEM community will entertain today. Our aim is to help re-balance the relationship so that airlines and OEMs can work together as true business partners in a normal commercial relationship.”

DG-COMP has been examining this alleged exercise of economic power by the OEMs (presumably Airbus, Boeing, RR, GE and a long list) since 2015. The EC competition body has already sent letters to the airline buyers to try to measure the control of the OEMs over the price of replacement parts and related issues. It is likely that if this process continues further, the US Department of Justice may join in the matter.

The economics/finances of both airframe and powerplant manufacturing are well known (See John Newhouse, The Sporty Game). The massive capital (for example, “P&W has invested 20 years of research and $10,000,000,00 to engineer the geared turbine”) of the plane and its engines requires years to recover (i.e. Boeing’s B-787 made its first dollar over its investment at year ten). If the fully allocated cost of Airplane #1 in a model line was charged, the cost would be immense. To make the initial deal more commercially viable, the manufacturers price their products based on the expected total value of initial charge plus the expected earnings stream FROM the aftermarket sales.

The DG-COMP will have to determine if the sale of the replacement parts are priced above their costs. Erudite cost accountants and micro economists will have to study whether this “bundled” price (original plus spares) exceeds the appropriate costs or whether the OEMs have used the limited availability of certificated parts as well as the restrictions on repair manuals and data) to raise their charges above some lawful number.

The restrictions pose an even more complex examination. When an OEM sells one of these large capital assets, certain manuals and data are part of the transaction. It has been alleged that the information so transmitted may not be adequate for the plane/engine owner to develop repairs and parts internally. The counter argument is that full disclosure would allow competitors to replicate the OEM products. If the OEMs cannot protect their intellectual capital, then their incentive to research will be diminished. If the consequence of the DG-COMP and/or US DoJ is to prohibit this practice, the result may be a diminution of safety.

oem

There are similar economic/safety tensions with regard to Parts Manufacturing Approval, an FAA method permitting a third party to reproduce the parts. The regulations are designed to assure safety, but there are complaints that the FAA’s standards are stringent and thus limit competition. The facts on both sides of PMA are murky. Prices might decrease, but what is the safety trade-off?

For these reasons, EASA and the FAA ought not to only observe this investigation. Their expertise should assure that the ultimate decision does not ignore SAFETY.

 

ARTICLE: Airlines Step Up Pressure on OEMs’ Aftermarket Model
Share this article: FacebooktwitterlinkedinFacebooktwitterlinkedin

Leave a comment

Your email address will not be published.