Maintenance outsourcing has become a crucial part of the business model for low-cost and smaller carriers. But there is no one size fits all solution
Skybus was three years away from launching when it started to think about maintenance sourcing. The Ohio-based start-up had not acquired a single aircraft or even selected which aircraft type it would operate when it decided that for its pure no-frills business model to succeed, it needed to pursue a pioneering maintenance strategy that locked in low servicing costs for over a decade.
The carrier persuaded Airbus and Boeing to offer an unusual package that combined the purchase of aircraft with maintenance services. After lengthy negotiations, Skybus awarded Airbus a contract in October 2006 for 65 A319s that includes most maintenance services for 12 years. Skybus launched services in May and now operates five leased A319s, which Airbus is also responsible for maintaining.
"The whole contract is on a cost per hour basis. The key thing is we know what our maintenance cost will be," says Skybus vice-president of maintenance and engineering Toney Quillen. "We made it part of our negotiations for the airplanes."
Airbus senior director maintenance, repair and overhaul support management and customer services Wolfgang Kortas recalls: "They made it quite clear to us during the sales campaign that their strategy was based on total outsourcing with competitive prices and very aggressive performance guarantees."
Kortas acknowledges Airbus was initially reluctant to offer Skybus a maintenance package but eventually realised it needed to go in this direction to secure orders from forward-thinking carriers like Skybus. "We've listened to our customers," he says. "They kept on telling us we need to be responsible for maintenance and we've responded."
Quillen says when Skybus began negotiations with both manufacturers, "Boeing was far ahead with this concept. But Airbus did a turn around and pulled out all the stops. It was hands down the better deal."
Airbus now holds up its arrangement with Skybus as a "groundbreaking contract" that demonstrates its new approach to maintenance. It claims this approach does not mean it has strayed into the maintenance market because it will subcontract most of the work for airlines like Skybus that it is responsible for. "We can't do everything and we don't want to," says Kortas
Total support
After winning the Skybus contract, Airbus held a competition to select maintenance providers. Singapore Technologies Aerospace's (ST Aero) US division, Mobile Aerospace (MAE), won a $635 million contract covering a wide array of services, including line and light airframe maintenance and components. Wheels and brakes, which Messier-Bugatti is looking after, were the only item contracted out separately by Airbus.
"We're doing everything from engineering to planning and maintenance," says ST Aero chief executive Tay Kok Khiang. "Skybus outsources everything. They don't have a single [maintenance] crew and they are flying 15 hours per day."
ST Aero sees the work it is doing for Skybus as a glimpse into the future. Tay says the contract represents one more step in a gradual trend towards more outsourcing and larger packages. While legacy carriers over the last several years have gradually outsourced more maintenance, low-cost carriers and start-ups are increasingly looking at packaged solutions. Tay says Skybus, easyJet and Jetstar Asia have already gone down this path and believes "other airlines will follow".
Jetstar Asia awarded ST Aero a five-year $47 million "total aviation support" contract prior to launching in late 2004. In August 2005, SR Technics beat out ST Aero to win a much larger "total maintenance support" contract from easyJet. The 10-year, $1 billion deal in many ways was the defining moment in the trend towards large packages.
"The contract has worked in that it has achieved what it was supposed to," says easyJet technical director Peter Ellison. "It has provided stable support and reduced our cost as much as possible."
SR Technics executive vice-president sales and marketing Declan O'Shea says the contract guarantees 99% aircraft availability for easyJet's fleet of A319s and Boeing 737-700s, which are operated 18 hours per day. "That means we have a 10-minute window of error every day. Today on both platforms we are beating 99%," O'Shea says.
But Ellison reveals easyJet will likely not continue to rely so much on a single provider. SR Technics is now responsible for maintaining and supplying components for all 120 aircraft in easyJet's fleet. Ellison says as easyJet's fleet approaches 200 aircraft, multi-sourcing will become attractive because only a few providers have the capacity to maintain such a large fleet and if the package is divided several more providers will be able to bid. "At a time in the future we'll look into splitting the contract," Ellison says.
Over outsourcing?
He also reveals easyJet plans to expand its in-house engineering team and in-source fleet management. "We've outsourced almost everything we can. We need now to look at in-sourcing some functions," Ellison says.
Over the last few years several large maintenance providers have begun marketing new total service packages that cover airframes, engines, components, fleet management and everything in between. But while the easyJet and Skybus deals are seen by some as the start of a wave of new mega maintenance contracts from low-cost carriers, in reality they do not meet the definition of total services.
Ellison says easyJet considered opting for a true one-stop-shop contract but wanted to avoid putting "all the eggs in one basket". As a result, it awarded separate contracts for engines and landing gears. "We thought it would be too risky to go for just one supplier," he explains. "For small- or medium-sized carriers it makes more sense."
Even Skybus is not considered a customer of ST Aero's Total Aviation Support (TAS) programme. The carrier elected to exclude engines and auxiliary power units from its contract with Airbus and instead awarded contracts for these bits to GE and Honeywell. "We do outsource everything but it's not one package," Quillen says. "It is three basic packages. In total we outsource all the maintenance."
Skybus also decided to wait a few years before selecting heavy airframe and landing gear maintenance providers. "We left heavy maintenance out because with new planes it won't come up for five to six years," Quillen says. "I don't want to pay a cost per hour for something six years down the road. I wanted that money in our pocket."
While ST Aero has been selling TAS for several years, Tay acknowledges it only has one TAS customer, Jetstar Asia, which currently operates less than 10 A320s. SR Technics has about 20 customers for its Integrated Airline Solutions (IAS) product but says most carriers opt to buy various combinations of aircraft, component, engine and fleet technical services rather than combine everything into one contract.
Spanish low-cost carrier Vueling, for example, opted only to include fleet management and components in its IAS contract. The carrier's deputy chief operating officer, Michael Bata, says after evaluating several options the carrier decided it was most cost efficient to forge separate deals for engines, heavy airframe checks and auxiliary power units. Like easyJet's Ellison, Bata would hate to only have a single supplier: "We have four major contracts. Through our strategic sourcing project we found the best product and price for the airline and that's what it came down to."
While many carriers are choosing to combine various elements of maintenance, it is very unusual for them to combine everything into one nose-to-tail contract. Kortas says Airbus has several maintenance support contracts with airlines covering airframes and components but only Skybus has requested such a comprehensive package. Boeing has not yet secured a customer for its turnkey lifecycle programme for the 787, GoldCare, although it has actively been marketing it for over one year. "Psychologically airlines are not prepared to accept it," Tay says.
Comair executive manager technical Avi Bhatt says the South African carrier has saved $50 to $60 per maintenance man hour by awarding three maintenance contacts instead of one. "Absolutely it's cheaper to split the deal and we have the resources to manage this [separate contracts]," he says. "As a small player today every dollar counts."
Cathay Pacific general manager engineering commercial Elvis Ho agrees one-stop shop solutions are more costly and believes they do not even improve cost predictability. "That's the myth. We don't feel it's the case," Ho says. New Cathay regional subsidiary Dragonair is now an SR Technics IAS customer. But Cathay has decided to split up this contract from the end of October with SR Technics only retaining components.
Engine suppliers
Standard Aero chief executive Paul Soubry confirms that while carriers are generally trying to reduce the number of maintenance suppliers they use most are not willing to rely on just one provider. "They are not necessarily looking for one solution but a reduced number of suppliers with more accountability," he says. Standard Aero, which specialises in regional aircraft engines, and other providers say engines in particular are almost always contracted out separately. "The airlines recognise engines are a different element and they want a different deal for engines," says Hong Kong Aircraft Engineering (HAECO) executive director Ashok Sathianathan. He adds most airlines prefer to control engine maintenance separately because it accounts for up to 60% of all maintenance costs.
Comair's Bhatt says by awarding separate maintenance contracts for airframes, engines and components plus auxiliary power units, carriers are able to use small providers. He explains there are many small high-quality shops that have lower overheads and can undercut the large providers which are pushing one-stop-shop solutions.
But Bhatt adds that when it comes to airframe maintenance, awarding one contract makes sense. Comair, which operates a British Airways franchise in Africa and a domestic low-cost carrier known as Kulula, has traditionally used two local providers. But in July it awarded a single five-year, $72 million contract to SAA Technical covering line and light airframe maintenance for its entire fleet. "We intended to split it again but by single sourcing we got a lot of benefits," Bhatt says. "Our benefits are costs and maintenance reliability but more important than that, efficiencies."
Comair was an early adopter of a total outsourcing strategy, deciding 10 years ago to scrap its maintenance operation including line maintenance. Today its maintenance department consists only of Bhatt, three engineers and two quality managers. "Comair decided to get out of the maintenance business when we got out of turboprop aircraft [in 1997]. It made no sense," Bhatt says. "We do nothing. We outsource 100%. Outsourcing may be a bit more pricey but it's more efficient and reliable this way and it is easier to budget for it."
Panama's Copa Airlines has a similar strategy, but like most carriers carries out its own daily checks. "Copa only performs line maintenance and minor modifications. All heavy checks and major mods are outsourced," says Copa senior vice-president of operations Larry Ganse. "The investment of tooling, test equipment, facilities and head count cannot be justified by the size of our fleet."
Copa is now using GE for engine maintenance and ST Aero's new Panamanian subsidiary for airframe maintenance. Ganse says the opening of Panama Aerospace Engineering earlier this year allowed Copa to reduce aircraft service times, react faster to unpredicted maintenance requirements and improve its access to components.
For smaller and low-cost carriers, outsourcing to a local provider is an ideal solution. It allows carriers to realise the benefits of having full maintenance capabilities onsite without having to invest in the infrastructure. With this in mind, AirAsia signed a deal in May with a new Malaysian company to provide heavy airframe maintenance for its entire fleet. The Malaysian low-cost carrier says it selected Sepang Aircraft Engineering (SAE) to avoid having to waste fuel sending aircraft to Singapore, where most of its heavy airframe maintenance is now done. SAE will begin the first heavy check for AirAsia, which only does line maintenance and A-checks in-house, later this year at a new facility next to AirAsia's Kuala Lumpur base.
"It is logical in terms of cost efficiency to send our aircraft for maintenance within the country. There is always a risk in start-ups but we can see the potential of homegrown companies taking up the challenge," says AirAsia head of engineering Azhari Dhlan. "AirAsia core business is to provide low fares to passengers and will continue to do so. With this outsourcing strategy, it allows AirAsia to concentrate on day to day operations of an airline."
Middle Eastern budget carrier Air Arabia is already benefiting from a new maintenance hangar that opened in September at its Sharjah base. The hangar is operated by HAECO Sharjah Aircraft Maintenance (HS-AECO), a new joint venture company between Air Arabia and HAECO. While legacy carriers commonly forge joint ventures with maintenance companies, this goes against the traditional strategy of budget carriers. But Air Arabia decided it needed to establish HS-AECO to improve fleet reliability. "We need the flexibility of them being at the doorstop to support our high utilisation," says Air Arabia director of operations and maintenance Mohamed Ahmed.
Vueling earlier this year also took the unusual decision to expand its in-house maintenance capability. The carrier plans to open a new hangar in Barcelona in late 2008. Bata says two bays will be exclusively used by Vueling and the carrier is in talks with SR Technics to establish a joint venture to pursue third-party business using a possible third bay. "The main point is it will have Vueling's name on the side of it," he says. "Vueling will build the hangar. Whether SR Technics will be a joint venture partner is still yet to be determined."
Bata says Vueling only does line-maintenance and A-checks in-house but with the hangar opening "we'll probably look at bringing light C-checks and phased C-checks in-house". He acknowledges most new low-cost carriers are unwilling to invest in maintenance infrastructure but says Vueling concluded in-sourcing C-checks would be more cost efficient after its fleet reaches a certain size.
Bringing maintenance in-house
"At a certain point it makes sense to bring some work in-house, when you reach a certain size," Bata explains. "The bottom line is what's the cost? Can you do it in-house cheaper?"
Ahmed says B- and C-checks, which Air Arabia formerly sourced overseas, will now be done in Sharjah and potentially the hangar will be upgraded to accommodate D-checks. Air Arabia owns 51% of HS-AECO but HAECO will be in charge of operating the new hangar and has taken over all 50 of Air Arabia's maintenance employees.
While Air Arabia has handed HAECO fleet management and airframe maintenance, it outsources components and engines to other providers. Sathianathan says most carriers prefer to keep multiple providers and points out HAECO only has two customers with comprehensive packages Singapore cargo start-up Jett 8 Airlines and long-haul low-cost carrier Oasis Hong Kong. Both these deals exclude engines.
Another new long-haul low-cost carrier, Viva Macau, has a similar package from Guangzhou Aircraft Maintenance Engineering (GAMECO). "This is a smaller scale total care," says GAMECO commercial director Joey Lo. He adds mainland Chinese carriers are not interested in packages at all and even insist on multiple sources for airframe maintenance.
Most maintenance providers say while there is a trend towards more outsourcing and larger packages, especially in the low-cost sector, every package is different. "There are no two customers that are alike," Kortas says. "We believe in flexible solutions."
Where is GoldCare?
Boeing captured the attention of the maintenance industry last year when it began actively marketing GoldCare, a turnkey lifecycle programme for the 787. But lacking a launch customer, Boeing has said very little this year about GoldCare and claims it is instead busy restructuring the programme in response to evolving customer requirements.
"We've made the programme more modular," says Boeing Commercial Aviation Services general manager Lou Mancini. He explains Boeing initially only offered two options, a full package of maintenance solutions and integrated materials management (IMM). It has since added two more packages offering operational planning and control and engineering planning services.
Boeing also has deferred plans to select maintenance partners in Asia and North America by the end of 2006. "We've slowed down in signing contracts as we redefined the programme," Mancini explains.
Singapore Technologies chief executive Tay Kok Khiang says it is ready to sign up but is waiting for Boeing. Tay expects it will be several years before GoldCare becomes a popular option and most customers will be small carriers. "The only way to price it is to add a big insurance price," he says. "The package solution for the 787 will definitely come but not for five, six or seven years."
One of the 787's launch customers, Qantas low-cost subsidiary Jetstar, says the initial bid it has received for GoldCare is significantly higher than expected and blames this on high risk premiums levied by the suppliers. Jetstar acting general manager of procurement Seb Mackinnon says maintenance bids it has received covering individual systems have also been high and as a result the carrier's operating cost calculation for the 787 is "quantum higher than what the Qantas Group was expecting and that obviously is pretty alarming". He adds: "We'd like to see less risk premiums."
Boeing IMM director Joe Brummit acknowledges risk premiums are currently being priced high but says they should come down as suppliers get a better understanding of customer requirements. "People are trying to figure out what we're actually pricing."
Boeing is confident GoldCare will be a competitive offering but not squeeze out independent providers. The manufacturer expects about 25% of the 787 fleet will eventually be covered under GoldCare with the package tailored for each operator. "No two airlines are the same. GoldCare won't mean the same thing for every airline either," says SR Technics executive vice-president sales and marketing, Declan O'Shea.
Stricter contracts
As carriers rely on fewer maintenance providers, they are insisting on stricter contracts with steep penalty clauses.
Sabena Technics chief operating officer Pierre Reville says carriers are "really pushing a lot" for higher levels of dispatch reliability and bigger penalties for delays. "What they buy is dispatch capability. We're selling service not repair," he says, adding contracts "tend to be more complex and integrated". KLM Engineering and Maintenance product support director components Hans Glasbergen says carriers are now insisting on "more strict performance indicators" and reliability guarantees on a flight hour basis. "It all boils down to cost. Every airline is looking to cut costs," he says.
Comair executive manager technical Avi Bhatt says it took three months instead of the normal one week to sort out baseline language for its new contract with SAA Technical. The new contract has more stringent guarantees. "If you disrupt my service you will pay our costs," says Bhatt.
Honeywell vice-president customer and product support, Adrian Paull, says shorter turnaround times and "real guarantees" on cost and performance are now an "entrance ticket" to negotiations with airlines. He says "in the past there was looseness in the language" and airlines would not hold suppliers responsible if they did not complete repairs in time, but this changed after 2001. Carriers have since reduced headcount within their engineering departments and are no longer shy to enforce product support terms and ask for contracts with "teeth and real remedies". Paull says when he worked for British Airways several years ago there "was an entirely different structure. These days much more accountability is driven to the supplier, quite appropriately I think."
While stricter contracts seem like a positive trend for airlines, Copa senior vice-president of operations Larry Ganse warns they could also be more costly: "We would agree contracts are becoming more complex. We do build reliability into our contracts but, up to now, have not insisted on guarantees for span times. This is very much a double-edged sword in that MROs tend to overestimate the span times to protect themselves, while we are more focused on getting the airplanes back into service as soon as practical. Similarly we are of the belief that many of these 'iron clad' guarantees are being paid for in other ways, such as the labour rate, non-routine findings and back shop work. It would take a substantial presence on the part of the airline to monitor all of this and make certain nothing was being abused."
Source: Airline Business
