On paper, at least, the case for outsourcing aircraft maintenance has probably already been proven beyond reasonable doubt. Few airline boardrooms today would seriously argue that maintenance, in theory, could not be just as safely, and perhaps more economically, placed in the hands of a third party. Yet in practice, few have actually done so. What has been missing, it seems, is the kick start needed to start turning interesting theory into hard reality. But the impetus could soon arrive in the shape of the aerospace manufacturers, who, led by Boeing, appear ready to make the airframe aftermarket their own, just as engine makers have already done before them.
A glance over the page at the ranking of leading airline maintenance operations, compiled jointly by Airline Business and the Roland Berger consultancy team in London, demonstrates the potential attractions. Even allowing for a little double counting and the inherent guesswork involved in compiling such figures, it is a fair bet that the world market for airframes and engines stands somewhere in the region of $30 billion a year.
If anything, Boeing has been a pains to talk up the numbers, as well as its own plans to grab a sizeable share of them. Throwing in a collection of other related activities it reckons on a potential airline services aftermarket of close to $90 million. That, it notes, is larger than the annual tally of new airliner sales.
Conditions in place
To date there has been more talk than action. However, Kevin Lynch, a senior partner at Roland Berger, points out that the necessary conditions are all in place for the aerospace players to make their grand entrance, and a potentially rapid one at that. Airline boards have long had maintenance costs in their sights, hoping to instill a little more commercial sense into what have been persistent cost centres. Neither is it certain that carriers will have any clear idea of what these cost truly are. "The airline side is often writing blank cheques to their engineering department," says Lynch.
One answer has been to transform engineering departments into standalone businesses in their own right. Lufthansa and SAirGroup led the way in Europe with the creation of their two sizeable technics. In Asia, Singapore Airlines has now steered SIA Engineering to full independence and Cathay Pacific's sister company HAECO has continued to thrive. By the time it had completed the Ansett Australia acquisition, Air New Zealand had already created a combined engineering business. And Air Canada too gave maintenance a profile in its post-merger plans for Canadian Airlines. Time was when engineering was the last thing on the agenda when companies came together.
But few other carriers have the scale to follow suit. For them outsourcing would seem the logical alternative. But first there are two areas of "stickiness" to overcome says Lynch. First is how to dispose of legacy assets, although that, he believes, is not an insurmountable barrier in today's more buoyant market. The second and more formidable legacy is in the power of labour unions. That has caused a good deal more hesitation. Witness the embarrassment last year at US Airways when rumblings in the hangar caused it to run short of aircraft. Equally telling is the fact that 20 years since the mergers which created it, US Airways has still to tackle the consolidation of its disparate engineering operations. And it is not alone.
Given these realities, the push towards outsourcing is unlikely to flow freely from the airline customer. Even if one of the major carriers did choose to take the plunge and outsource a healthy slice of its fleet maintenance, there are precious few independent suppliers currently capable of suddenly taking on that scale of work.
The third party market will have to look to new entrants to provide the necessary impetus, believes Lynch. And the aerospace manufacturers, whether airframers or otherwise, appear to be the brightest hope. There is already a handy precedent in the transformation that has taken place in engine overhaul.
General Electric led the charge around five years ago with a sustained acquisition spree, building up a repair and overhaul business now estimated to be turning over close to $5 billion a year. Rolls-Royce and Pratt&Whitney too have breached the $1 billion mark, with others such as Snecma and MTU in hot pursuit. The result is that some 60% of the engine maintenance market is in the hands of manufacturers, with fully captive airline repair shops virtually cut out of the business. By comparison, airlines still hold some 75-80% of airframe maintenance firmly in-house.
Engine outsourcing
It is true that engine makers were highly motivated in the grab for maintenance, seeing not only the value to be added by offering aftermarket services, but also in securing the flow of spares, long the most lucrative part of their business. P&W's helpless distress when demand for JT8D parts dried in the early 1990s was a warning to all.
"What the engine people understood well is that the whole aftermarket hinterland is controlled by the shop technicians," says Tim Longstaff, a consultant at Roland Berger. By buying up the airline engine shops, famously including that of British Airways, GE also captured access to a flow of parts, he argues.
Airframe overhaul admittedly has a different dynamic. Only 30-40% of the airframe aftermarket comes from parts, compared with perhaps 60% in the engine business. But Boeing and its aerospace peers have their own equally strong reasons for wanting to dominate in the aftermarket.
For Boeing getting into heavy maintenance certainly gives a chance for growth that is otherwise lacking in an airliner market which has settled down to an even battle with Airbus. It could also prove a way to unlock some of the brand capital locked up in the Boeing name for safety and solidity.
Like the engine makers, Boeing too is looking at the value to be had from lifetime asset management, from mid-life modifications to leasing. "Heavy maintenance could be the business portal that allows access to those other revenue streams," believes Lynch.
And if the aerospace primes are to win the necessary control of heavy maintenance, then the route would almost inevitably have to be through the acquisition of some sizeable in-house airline assets. On present standings, the acquisition of all the world's independent third-party airframe operations would barely create a $1 billion business. That could be achieved at a stroke through an acquisition or partnership with any one of the leading US or Japanese airline majors.
It is not only the airframe primes that are taking an interest. Other aerospace suppliers too are brushing up their aftermarket strategies. Lynch adds that the emergence of new online procurement ventures also is providing "real opportunities for e-business to shake up the value chain". The new breed of e-commerce parts suppliers and inventory managers might also choose to add a touch of bricks and mortar to their business models. If they do, then perhaps that too will help the outsourcing debate move a little faster.
Source: Airline Business
