Shannon Aerospace Ltd. Business Information, Profile, and History

Company Perspectives:

Shannon Aerospace specialises in performing heavy maintenance checks on Boeing 737, 757, 767, McDonnell Douglas MD-80 and Airbus A320 family aircraft, as well as offering a comprehensive range of specialist services.

Its FAA and JAA Approved Shannon-based facility includes five maintenance lines, two painting bays and workshops. It also includes in-house training facilities which incorporate some of the industry's most advanced training methods.

During the past decade, the facility has attracted an enviable reputation for its reliable turn-around times and consistent record of releasing aircraft back to commercial service on time. Our approach represents a unique blend of experience, accountability and productivity, coupled with open and transparent customer relationships.

History of Shannon Aerospace Ltd.

Shannon Aerospace Ltd. specializes in heavy maintenance and overhauls of narrow-body airliners. A joint venture of Lufthansa and Swissair, its clients include SAS, Aerolineas Argentinas, and Malév Hungarian Airlines. In spite of its technical pedigree and continued growth, profits have been elusive, largely due to overcapacity in the maintenance and overhaul business.

Origins

In the late 1980s, Guinness Peat Aviation (GPA) had 100 client airlines around the world and was predicting the world's jet fleet would grow 60 percent by the end of the century.

GPA was the wildly successful leasing venture started by Dr. Tony A. Ryan. In July 1989, GPA Group Ltd., the holding company, announced plans for a new subsidiary, Shannon Aerospace Ltd., to manage GPA's non-airline businesses, including its 50 percent investments in aircraft painting company GPA Expressair Ltd. and Shannon Engine Support Ltd.

GPA also announced plans for a joint venture with Lufthansa and Swissair for a major maintenance and overhaul facility for civil airliners. In fact, it was this joint venture that became known as Shannon Aerospace.

Both Lufthansa and Swissair were recognized for their technical expertise. Lufthansa's existing technical unit employed 10,500 people, while that of Swissair employed 3,000. The two airlines each held 35 percent of the new company, with GPA holding the remaining 30 percent.

The lower costs of doing business in Ireland attracted Lufthansa and Swissair to the project. Dr. Tony Ryan was credited with bringing them on board. Like GPA itself, Shannon Aerospace was based on the west coast of Ireland, an area with particularly high unemployment. The Irish government was promoting the area as a center for high-tech business development. It was offering a tax rate of just ten percent for service industries through 2005.

TEAM Aer Lingus (TAM), a unit of Ireland's state airline, already conducted third-party maintenance operations on the opposite side of the country in Dublin. However, 18 percent of the Irish workforce was jobless, not counting the many who had left the country to find work.

A 110-acre aviation park opened at Shannon Airport in October 1991. The Shannon Aerospace facility cost IR £80 million (US$113 million) and opened for business in September 1992. The building, which consisted of a maintenance hangar and adjacent painting hangar, was the largest in Ireland under one roof, measuring 240 meters by 92 meters (788 feet by 302 feet). It eclipsed the US$60 million facility Team Air Lingus had built just two years earlier in Dublin.

The new venture targeted markets in Europe, Africa, and the Middle East. Its three owners were expected to supply at least a quarter of its business. However, Shannon Aerospace purported to be independent in its business decisions, particularly regarding pricing and scheduling. It announced US$10 million worth of contracts at the time of its opening, though some of these were canceled. Shannon Aerospace also served as GPA's line maintenance base in the beginning, while GPA agreed to send its Boeing 747s and MD-80s to Swissair for overhauls.

A Lufthansa Boeing 737-200 was first into the service bay. Shannon Aerospace initially specialized in Boeing 737s and the MD-80/DC-9 family of aircraft. It planned to soon add Boeing 757 and 767 aircraft to its repertoire.

Shannon Aerospace started off with 600 employees, with plans to eventually employ 1,075 workers. This made the company the second largest employer in the midwest region of Ireland after the De Beers diamond mining operation. Training was started in Ireland and completed on the continent, at Swissair, Lufthansa, and Austrian Airlines, a close partner to Swissair. Lufthansa and Swissair supplied most of the 50 managers in the beginning. Dr. Herbert Groeger from Lufthansa was chief executive.

Employment rose ten percent by 1993. Eighty percent of the employees were less than 25 years old; fewer than five percent were female. Irish girls generally could not take technical subjects in high school and were still a rarity in the blue collar workforce. However, a new program called New Opportunities for Women, funded by Shannon Aerospace and the European Social Fund, prepared women for further training as mechanics. Shannon Aerospace was still on target to meet its projected staffing levels. Its IR £20 million training scheme was the largest the country had ever seen.

Lufthansa subsidiary Condor Flugdienst operated many Boeing 757s, and Shannon Aerospace began servicing these in 1993. Other customers apart from its founders included Air Sweden and Ghana Airways. It entered a long-term relationship with the Italian operator Eurofly in 1994. In October of the same year, Shannon Aerospace beat out TAP Air Portugal to win a IR £5 million contract from KLM. The order provided for 10 D-checks on Boeing 737s.

D-checks were performed every ten years and took 28 days to complete, including paint. I-checks were done every five years. C4-checks were also considered heavy maintenance. According to Air Transport World, Shannon offered clients 'full transparency' regarding work in progress via a state-of-the-art data processing system.

Rescued in 1995

Even as the first planes were rolling into Shannon Aerospace's hangars, conditions were developing in the world market that would nearly lead to the company's collapse in the mid-1990s. The world's airlines lost billions of dollars in the wake of the Gulf War and the hesitancy of many travelers to book international flights. The latest generation of commercial jet aircraft also required less maintenance. Finally, oversupply in the market, including new facilities in low-wage regions, kept considerable pricing pressure on the company.

By 1994, Shannon Aerospace's Irish owner, GPA, was suffering serious financial trouble in the wake of its failed 1992 flotation. GPA's fleet accounted for more than a third of Shannon Aerospace's contract work. Swissair's profits were also falling.

Shannon Aerospace had hoped to break even by 1995. While the company was still growing, with a client base of two dozen airlines, it needed still more business to reduce unit costs. It had more than 700 employees and 150 trainees; by then, 40 percent of the workforce was female.

In 1995, Shannon Aerospace asked the Irish government for IR £12 million as part of a restructuring plan. The government, which had already given the company IR £23 million through the Shannon Development Authority, asked for its continental partners to invest more cash as well. Instead, Lufthansa would have preferred to transfer its Boeing 737 maintenance work to Shannon instead--a prospect which angered German labor unions.

Under a rescue plan announced in late April, the government did decide to invest another IR £12 million in Shannon Aerospace. It had already rescued its rival, TEAM Aer Lingus, putting it in the curious position of subsidizing two competitors. Not surprisingly, both British aerospace companies and German trade unions objected to the rescue package.

Lufthansa and Swissair required GPA to also pay IR £12 million as well as give up its 30 percent shareholding. GPA would have had to pay a similar amount had Shannon Aerospace been liquidated. Neither airline invested any more of its own cash, but assumed GPA's share of liabilities.

Lufthansa finally agreed to transfer its Boeing 737 aircraft work to Shannon Aerospace beginning in 1998. Lufthansa Technik Aktiengessellschaft was then obliged to lay off half of its 380 maintenance staff at Berlin's Schonefeld Airport.

In August 1995, after a detailed audit, Lufthansa and Swissair agreed to each acquire half of GPA's interest in Shannon Aerospace. Lufthansa Technik's Wolfgang Godhe was then named CEO, with Swissair's Martin Kaiser as his deputy.

Both Lufthansa and Swissair planned to transfer their narrow-body overhauls to Shannon through 1999. At the end of 1995, Lufthansa Technik also bought out Shannon Turbine Technologies, a joint venture between GPA and Sulzer, the Swiss engineering firm.

Although Shannon Aerospace focused on narrow-body aircraft, it added the Boeing 767 in December 1995 since it was so closely related to the Boeing 757. The company had also decided to add the Airbus A319/320/321 family as MD-80 work began to taper off.

New Techniques in Late 1990s

Swissair and Lufthansa decided to exit the narrow-body heavy maintenance field in the late 1990s. By this time, Swissair's SR Technics AG subsidiary (formed from its Technical Services Division in 1997) and Austrian Airlines had also stopped working on MD-80s.

The Danish Group FLS bought TEAM Aer Lingus in late 1998. Shannon Aerospace had 750 Irish workers at the time, with plans to increase employment to 900 within a year. It was also investing IR £5.5 million in extending its workshops and upgrading its information technology infrastructure. It planned to add another production line or two to accommodate a new contract to overhaul 100 Airbus aircraft for Lufthansa. Revenues for the year reached IR £38 million (US$52 million). In February 1999, Lufthansa Technik announced plans to open a commercial airliner painting facility (Lufthansa Aircraft Painting Shannon Limited) at Shannon Airport within a year.

A new area of expertise was that of non-destructive testing. Airbus Industries designated a quarter of each operator's Airbus fleet as 'sample' aircraft requiring four times the number of inspections during their D-checks. Shannon Aerospace also began conducting transit checks for transatlantic operators flying into Shannon, beginning with Continental Airlines.

Martin Kaiser was appointed managing director (chief executive) at the end of 1999 as Shannon Aerospace continued to expand. Some new clients added late in the decade were Aeroflot, the Dutch airline Transavia, and North American Airlines. In May 2000, Shannon Aerospace announced ambitious plans to recruit 300 more workers in the next three years. A two-year order backlog certainly justified the move.

Principal Competitors: Air France Industries; Braathens Technical Division; Cargolux Airlines International S.A.; FLS Aerospace Holding Group A/S; Heavylift Aircraft Engineering; Icelandair Technical Operations; Jet Aviation; KLM Engineering & Maintenance; Monarch Aircraft Engineering Ltd; Sabena Technics NV/SA; Shannon MRO Ltd.

Chronology

• Key Dates:

• 1989: GPA Group plans maintenance venture with Lufthansa and Swissair.
• 1992: Shannon Aerospace opens for business.
• 1995: GPA bails out and the state gives IR £12 million to rescue the company.
• 1998: FLS buys rival TEAM Aer Lingus.
• 2000: Shannon Aerospace accelerates recruitment due to two-year backlog.