Air France-KLM Sees Engine MRO Deal with Rolls Royce in 2013

By David Pearson

PARIS--Air France-KLM (AF.FR) said Thursday it expects to conclude negotiations with U.K. company Rolls Royce Holdings PLC (RR.LN) on an engine maintenance agreement in the first half of 2013.

The airline has ordered 25 Airbus A350 XWB wide-bodied jets and wants Rolls Royce to allow it to carry out maintenence, repair and overhaul operations on the Rolls Royce Trent XWB engines that will power the planes. Rolls Royce, however, wants to keep that lucrative business for itself.

Air France Chief Executive Alexandre de Juniac said: "We're not really in a hurry. The first A350 that we will receive will be in 2017. So the first half of 2013 seems reasonable."

Air France-KLM has also ordered Boeing Co.'s (BA) 787 wide-bodied jets, but has still to choose between Rolls Royce Trent 1000 or General Electric Co's (GE) GEnx engines. Industry observers say Air France-KLM is using this as a bargaining chip in its negotiations with Rolls Royce and would like to be able to carry out maintenance on several types of Rolls Royce engines for other airlines.

Air France is eager to expand Air France Industrie, its highly profitable maintenance, repair and overhaul operations that are helping to prop up the rest of the airline group. So far, the company has repaired engines made by General Electric Co. (GE) under licence, but the A350 is only offered with Rolls Royce engines.

De Juniac was speaking at an event to inaugurate a 43 million euro ($54.73 million) engine test-bed facility next to Charles de Gaulle airport north of Paris, which the company hopes will break even in about 3.5 years.

The group's maintenance division, the world's second-largest provider of multiproduct maintenance, repair and overhaul services, is expected to generate EUR3.1 billion of revenue and between EUR120 million and EUR130 million in profits this year, said Franck Terner, its president.

Terner said the market is very competitive, but is expected to grow at an annual rate of 3.9% over the next 10 years, with the bulk of the growth located in Asia. Chinese demand is expected to grow at an annual rate of 10%, compared to just 1% for Europe.

Air France Industrie plans to expand its operations in China and India to be closer to its customers, Terner said.

Write to David Pearson at [e-mail]

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