European regulators scrutinise aero-engine servicing contracts

By Sarah Young

LONDON, Oct (HKSE: 3366-OL.HK - news) 12 (Reuters) - European market competition regulators are gathering information regarding the maintenance and servicing policies of aero-engine makers and other aircraft equipment manufacturers in what could be a first step towards launching an investigation.

Engine makers Rolls-Royce and Safran (Swiss: SAF.SW - news) confirmed that they are in the process of filling out questionnaires sent to them by the European Commission regarding equipment servicing contracts in the aviation industry.

Shares (Berlin: DI6.BE - news) in the two companies fell 4 percent on Monday, on worries that the outcome of any investigation could force changes in the way they operate their vital servicing businesses.

The European Commission declined to comment on any specific investigation but confirmed that aviation equipment was an area of interest.

"The European Commission is closely monitoring competitive conditions as regards maintenance of engines and components for large commercial aircraft," Competition spokesman Ricardo Cardoso told Reuters.

Some airlines have previously raised concerns that there is not enough competition in servicing work.

On some types of plane, such as the next generation Boeing 737 and the Airbus A350, customers do not have a choice of engine supplier.

Britain's Rolls-Royce, which in 2014 generated about half of its underlying revenue in its civil aerospace business from services, said in an emailed statement that it was working on its response to the questionnaire.

France-based Safran (Paris: FR0000073272 - news) , which owns with General Electric CFM International, the world's biggest commercial aircraft engine maker in terms of number of engines sold, said it was also in the process of responding to requests from the Commission.

Haitong Securities (Shanghai: 600837.SS - news) analyst Edward Stacey said any investigation could be a worry for the companies but that if it concluded change was needed any impact on earnings would still be years away.

He also said that it was possible that the Commission could conclude that there was no cause for concern, endorsing the current model.

"There's good reasons why the airlines do like these contracts because it gives them complete visibility and it reduces the amount of down time," he said.

However, Willie Walsh, the chief executive of British Airways and Iberia's owner IAG, has complained about how equipment manufacturers operate.

"We believe that there is evidence to suggest that the competition between OEMs (original equipment manufacturers) is not as strong as it should be and that there are restrictive practices," Walsh said in July.

Earlier this month a senior Rolls-Royce executive said that the company planned to introduce more competition into the engine overhaul network for its Trent (BSE: TRENT.BO - news) engines that power wide-body airliners. (Additional reporting by Julia Fioretti, Tim Hepher and Victoria Bryan; Editing by Greg Mahlich)