Air Canada Technical Services is seeking to join Lufthansa, Air France and Singapore Airlines in creating a giant, world-class maintenance business
In the process of revving up for a substantial amount of maintenance work from two big new US airline contracts, Air Canada Technical Services (ACTS) is also looking at expanding its facilities well beyond Canada.
“The strategy of ACTS is to focus on the Americas, but also the right parts of the globe,” says Bill Zoeller, ACTS president and chief executive. ACTS is based exclusively in Canada as of now and Zoeller says the company’s “heartbeat and soul will always be the Americas”, including South and Central America – a region in which the service provider does not yet have a presence.
“We’re also looking at the significance of the exponential growth of aircraft in the Indian subcontinent, to be a part of that phenomenal growth,” Zoeller says. Participation could be through joint ventures, partnerships or greenfield sites, he adds. “We’re looking for opportunities; we want to be one of the one, two or three full-service providers across the globe.”
ACTS also has no facilities in the USA, Zoeller notes, even though an estimated 53-54% of all outsourced maintenance, or about $18 billion, originates with US carriers. “We need to establish a presence in the USA,” Zoeller says. “It’s one of the strategies we need to be a global service provider.”
His plan to expand operations further afield is a practical one. The company, set up as a separate business unit a year ago when a reorganised Air Canada emerged from bankruptcy protection, has basically run out of space in its homeland.
The two big contracts it bagged this year – to maintain 208 Boeing 757s and 767s of Delta Air Lines, and as many as 361 aircraft in the new combined US Airways-America West fleet – may eventually limit its ability to seek significant new contracts. “For our airframe work, we are absolutely running out [of space],” Zoeller says. “There is nothing to lease; we own the biggest facilities.”
ACTS currently has four major maintenance centres across Canada: in Montreal, Toronto, Winnipeg and Vancouver. The majority of its heavy maintenance work is done in large hangars in Montreal, Winnipeg and Vancouver, with lighter checks also performed in smaller hangar facilities in Calgary. Toronto, Air Canada’s main hub, has the largest line maintenance facility, components shops and a paint facility. ACTS also has large engine and component shops in Montreal.
Consolidation exercise
In a radical restructuring, undertaken after Air Canada filed for bankruptcy protection in 2003, ACTS consolidated heavy maintenance of each aircraft type from multiple sites to a single location to develop centres of excellence. Subsequent events, however, have spread aircraft types to other locations. Work on 737s, 757s and 767s, for instance, was to be concentrated in Vancouver. But with the new Delta contract, worth an estimated $300 million over the next five years, Vancouver is “used to 100%”, Zoeller says.
Delta aircraft will occupy four of Vancouver’s five widebody lines for five years and some other 767s will go to Montreal, which was, under last year’s plan, to work only on Airbus A310s, A330s and A340s. Winnipeg’s seven narrowbody lines were to concentrate on the A319, A320 and A321, but Airbus recently extended heavy maintenance intervals on the aircraft family, opening up Winnipeg to some maintenance on 737s and 757s, Zoeller says.
As for future aircraft capability, he says ACTS does not intend to add Boeing 777 capability, although it performs some 777 component work, but plans to be a player in maintaining the new 787, whether or not Air Canada acquires it.
Work on Air Canada and Air Canada Jazz aircraft, which represented about 70% of the unit’s activities last year, will still represent an estimated 60% of revenues this year. That is expected to drop to less than 50% in the future because of its new contracts. The service agreements for once-captive Air Canada and Jazz are reviewed every year, with pricing of the contracts renegotiated. ACTS has first refusal on the work, but the carriers selectively bid to get a feel for the market to make sure ACTS is competitive.
The structure of the new US Airways-America West agreement is somewhat similar. As part of a C$89 million ($75 million) investment in the merged carrier by ACE Aviation Holdings, ACTS is entitled to provide all available outsourced maintenance for the merged entity’s 737, 757, 767 and A320 family and A330 aircraft. ACTS has first refusal on the work if it matches market rates, including price, turn times, commercial agreements and warranties. ACTS will not have access to all the new entity’s work, however; the carrier is keeping intact some agreements, for instance with GE Engines.
The US Airways contract is valued at as much as C$1.5 billion over the next five years. While viewing the $75 million ACE is putting into US Airways as a standalone investment, ACE head Robert Milton says the capital will be repaid within two years just based on the maintenance insourcing ACTS will procure. Maintenance expenditure will propel ACTS revenues next year to more than C$1 billion. Milton expects ACE at some point in the future will spin off at least a portion of ACTS.
Without significant revenues yet from Delta or US Airways, ACTS had revenues of C$376 million for the first six months of 2005, including C$86 million from third-party work. The unit had operating income of C$46 million, net profits of C$41 million and an operating margin of 12.8%.
ACTS already has started work on components for US Airways and expects to have its first A330 in the hangar in Montreal shortly. “The ramp-up will be quite dramatic over the next two to four months,” Zoeller says. ACTS has a good relationship with management of the new US Airways-America West, he adds. “We’re all operations guys, so we know we don’t want to have a step climb of 50,000-60,000 units a year [the number of components on the aircraft]. We’re bringing them in a very controlled manner.” He admits, however, that the pace will accelerate as more employees are brought in and contracts are given to parts suppliers.
Zoeller is confident ACTS can maintain quality and timeliness. The employees being hired to accommodate the additional work are very skilled, furloughed employees with on average over 8 years experience. “But any time you bring in a major customer, a relationship needs a month or two to stabilise,” he says. “The learning curve with new customers and products is very short though; it affects the first aircraft, engine or component a little bit,” he adds.
Staff recall
During the reorganisation, ACTS reduced staff numbers from about 6,500 to 3,650, but has begun recalling employees. About 300 have returned for the Delta contract, which began in May, and an additional 200 are coming back to work in component shops on the US Airways contract. This will allow ACTS to recall 700 workers, Zoeller says, including 350 over the next eight months to Montreal and Winnipeg and another 150 for future components work.
Zoeller has much praise for ACTS employees, who accepted revolutionary changes in their labour agreements to help ACTS reduce its costs by more than 35%. “We have an employee group that is very focused and capable,” he says. The resulting productivity improvements, common-work regime and flexible scheduling are working well, he says. “We have everything embedded into the culture now,” he adds. Moreover, staff can see that their efforts bring in important customers, he says.
Overall, ACTS has about 100 customers – both large and small – including JetBlue Airways, Canada’s Department of National Defense and ILFC, which signed a five-year agreement late last year to provide airframe, engine and component maintenance for its aircraft in transition from one operator to another. “We have a wide, eclectic profile of customers,” Zoeller says.
To handle its new business, ACTS is able to use its existing physical capacity, investing just in variable costs, manpower and components. The additional work requires capital investment of about C$20 million for equipment. Also, ACTS components shops are running 8h, six days a week, so use of the same equipment can be substantially increased, Zoeller says, probably by two-and-a-half times.
CAROLE SHIFRIN WASHINGTON
Source: Airline Business
