Maintenance special report: Cautious approach

Airlines have a lot to gain by signing up for long-term fleet hour agreements but need to be careful when selecting their maintenance solutions

Start-up and low-cost carriers upon acquiring aircraft now opt for maintenance packages almost always for engines, frequently for components and occasionally for airframes. Some legacy carriers also have begun acquiring these types of packages, especially for engines. While legacy carriers typically have the technical expertise to thoroughly evaluate and number crunch power-by-the-hour solutions, smaller carriers and start-ups should bring in outside expertise.

"It's very complicated," says David Stewart, co-founder of management consulting firm AeroStrategy. "The first thing is they have to run a competition. [Then] they have to recruit or engage people who have done it before."

Torbjorn Karlsson, principal of executive recruitment firm Heidrick & Struggles and a former Honeywell manager, says airlines and maintenance providers sometimes assign inexperienced teams to negotiate fleet-hour agreements. "The obstacle to continued high growth in outsourcing in the maintenance sector lies in the ability of both parties to propose, develop and understand the complexity of these types of deals," he says. "Quite often both the seller and the buyer come from a 'traditional' background which has been transactional rather than long-term-focused."

Airlines especially have to tread carefully when they are offered new maintenance products. For example, the Select after-market package launched last year by V2500 manufacturer International Aero Engines (IAE) for the first time includes a technology insertion, slated to improve fuel burn by 1%.

"With Select we have absolutely no information on the performance," says Kingfisher Airlines executive vice-­president Hitesh Patel, who is now evaluating a quote from IAE. "They guarantee it, but how do you go after a warranty claim for fuel savings? It's nice to have but hard to prove."

Airlines warn some contracts inked since engine manufacturers began selling power-by-the-hour packages in the early 1990s turned out to be cost inefficient. "Ten to 20 years ago they didn't work well. Both sides couldn't get a good deal from either side. They couldn't get a good idea of the costs. Everyone put in a bit of pad in there," says Cathay Pacific engineering director Derek Cridland.

According to Monarch Aircraft Engineering commercial director Derek Gibson: "If you go back two years, power-by-the-hour wasn't the best deal if you can take a $2 million to $3 million hit on a one-off basis" to cover the overhaul cost. Cridland, Gibson and Stewart say airlines wanting to shop around are sometimes better off waiting to select an engine maintenance provider until just before the first overhaul.

For example, Stewart says Australian low-cost carrier Virgin Blue has not yet signed for a fleet-hour agreement for any of its CFM International CFM56s, although it now has about 100 of the engines in service. This strategy lets an airline avoid incurring maintenance costs for several years, which can be beneficial to start-ups.

"The engines are so reliable you don't need something in place from day one," Stewart says. "Engine manufacturers try their best to sell fleet-hour agreements but you don't need them."

Cridland points out airlines can save by selecting non-manufacturers to maintain their engines because they can use parts that are not produced by the manufacturers and their suppliers. Manufacturers "give the impression these parts are substandard. They are not," Cridland says.

Irresistible deals

While initially Cathay, Monarch and even Kingfisher when ordering their first batch of V2500s rejected fleet-hour agreements, they have recently been offered deals too good to reject. Kingfisher has signed up for fleet-hour agreements with Pratt & Whitney and Rolls-Royce covering engines on its future Airbus A330 and A340 fleets Cathay for engines powering its A330s and future Boeing 777-300ERs and Monarch for its A330 engines. Gibson says Monarch also will commit to a fleet-hour agreement when it chooses GE or Rolls-Royce for engines to power its new 787 fleet.

Gibson says airlines need to sign up for fleet-hour agreements with manufacturers at the point of sale because that is when "their pencils are a lot sharper". Patel agrees: "In negotiating a price for engines when you tie in maintenance services you tie in better prices."

To further maximise leverage, airlines are also encouraged to include maintenance providers that do not double as manufacturers. "Airlines are not all signing up for the first best provider which comes," says Lufthansa Technik chairman August Henningsen. "It's not only a question of overhauling the engine after five or six years, it's a question of who is taking care of engines on a day-to-day basis." ■

Source: Airline Business