Editorial CommentLegalMaintenancePartsRegulatory

Litigation wave poised to hit OEMs

By October 8, 2012 No Comments

Are you having a problem with OEMs starting to charge for intellectual property rights (IP) rights with regard to continued airworthiness? You are not alone. Component repair and overhaul is where the first salvo of litigation will strike this year in the battle to stem anti-competitive practices in our industry (forget the silly Boeing-Airbus WTO saga). As the OEMs move more and more into the aftermarket and squeeze out the smaller independent maintenance repair and overhaul (MRO) shops they diminish choice for consumers. Such a level of control also has an impact on financing as it channels the product back to the OEM and away from the independent financing sources as well as the MROs.

The Willis ABS deal of this past month, WEST II, is a good case in point. The deal raised a little under $400 million but this type of transaction would not be able to take place if the OEM’s continue to expand upon their restrictive aftermarket practices, which will impact financing as well as the entire MRO sector.

A few firms have taken the first steps to opening up the market but there has not yet been a wholesale movement, which is some way off. It is the airlines that can and are making the difference. Airlines must continue to put pressure on the OEMs to say: “Look, we pay you a billion dollars a year and overhaul with hour by the hour type fees, you cannot restrict other abilities to help us, i.e. with maintenance and overhaul and financing.” Because that is what is happening right now. The airlines are seeing financial services whittled away because of the way that the OEMs have stacked the aftermarket.

The OEMs are by their very nature big monolithic institutions and everyone has seen how they have attacked PMA. The OEMs believe that because it is they who put in the research and development they should receive 100% of the revenue streams for the entire life of the product. But the OEMs now have a serious issue with regard to anti-trust considerations. We are starting to see co-operation from some OEMs with their lessor clients but I’ve never understood why this didn’t exist in the first place as they are the ones that buy and finance their products. Nevertheless, they look at the lucrative aftermarket and want a piece of it. Given the low interest rates, they are also able to access capital at very low rates and even when rates go up, which is highly unlikely in the short term, it will have little effect on the OEMs. The OEMs are doing their job and doing it well and their shareholders should be pleased. If we were to approach this matter from the OEM point of view from outside aviation looking in then this would be a rave review indeed. However litigation is beginning and it will change the game and it will permeate all of the way through the OEM chain if the market wishes it.

There is a law firm at the centre of this process collecting contractual documents and correspondents of all sorts to show that some OEMs have at some point changed their practices regarding documents pertaining to the information for continued airworthiness. The suit will be based on a comparison between previous documents and new documents to show that IP information is now being withheld by the OEMs for monetary gain. In parallel to that, there is another memorandum going forward that concentrates on changes in OEM policy that state in order to support an aircraft/engine that is not in the OEM’s program or part of the OEM’s new “support network” fleet, airlines are required to pay an additional fee for IP rights.

A legal template has been created in France that is generic and subject to detailed information which can be targeted at any given OEM. There is currently a call out for information. Many companies from the UK through France, the US and other EU countries are answering the call and at this time one French-owned OEM and one US-owned OEM are in line to face litigation.

The lawyers can only target anti-competitive practices for which they have actual documents that show the practices have evolved and are not consistent with what was previously offered.

Nobody likes litigation and nobody likes burning bridges but surely a great many of you out there need to draw a line in the sand, stop arguing and start taking action that will be to the benefit of your business and the airlines that you serve. Can it really do for the majority to stand back and watch the few take the great leap forward?

See this issue of Airline Economics for further information on the matter.