Maintenance: Turning the screw

The pressure for greater cost efficiencies from maintenance services remains as strong as ever, but recent gains seem to be slowing down. How can carriers and suppliers work in tandem to force more radical change?

When a chief financial officer casts a critical eye down his carrier’s balance sheet there are several serial offenders when it comes to cost control. Excluding the excruciating pain of ever-escalating fuel prices, maintenance can be one of those stubborn areas becoming increasingly resistant to further downward pressure.

Many engineering directors, and labour forces, could argue that they have gone as far as they can in the changes made to the servicing side of the business since costs fell under the microscope in 2001. It is not a field tampered with idly, especially as it affects the reliability, integrity and safety of an operation so profoundly.

So where are the radical changes to the maintenance field coming from? There are two areas: one obvious, and used by many today; the other much more radical and requiring a serious philosophical shift on the part of carriers and suppliers. The first obvious answer is to outsource work that requires hundreds of man-hours, such as heavy airframe maintenance visits, particularly if those man-hours are expensive. The second move, more radical and as yet unproven, is towards a new generation of “intelligent” suppliers that can distribute maintenance on behalf of their customers to the most efficient provider.

EasyJet’s 10-year $1 billion deal with Zurich-based SR Technics for the “total maintenance support” of its entire Airbus A319 fleet, signed in mid-August, may prove to be the genesis of this new approach. It has been billed as one of the largest contracts ever awarded by an airline for the support of a single aircraft type. The deal will initially cover the carrier’s 54-strong A319 ­complement, rising to 120 aircraft by 2008.

The fact that it took over a year for easyJet to reach a deal shows how tough it has been for the carrier to get the supplier community to play ball. “Their first priority is to feed their production factories and therefore they tend to be quite traditional in their approach,” says Peter Ellison, easyJet’s new technical director. “That’s why it has taken so long with SR Technics as we sat down and looked at all the angles. It was about getting them to look at our problems and try to solve them.”

But to suppliers, easyJet’s demands looked daunting: it not only wanted predictability of costs and capacity, it wanted it done 25-30% cheaper than before. “We recognised we were stretching them,” says Ellison. “We want a supplier that seriously reviews its own internal processes so we get an improving cost base and an improvement in the performance of our maintenance provider. At the end of the day there were very few who were willing to sit and review everything they did to meet our needs.”

In parallel with supplier talks, easyJet’s journey led it to evaluate maintenance solutions in eastern Europe. With labour costs still significantly lower in countries like Poland, it was an option the carrier was obliged to explore, says Ellison, who before joining easyJet ran Lufthansa Technik’s service operation in Hungary. However, the carrier did not want a provider to simply take what it currently did and plant it in a lower-cost region, nor did it really want the distraction of developing its own engineering operation so far removed from its core business. However, the initiative was a useful lever in making suppliers realise how determined the airline was to reinvent its support operation.

The focus shifted back to two of the world’s most capable independent maintenance suppliers, with the final running between Singapore’s ST Aero and SR Technics. The former was keen to make inroads into the European market, the latter had essentially bought ailing Irish and UK-based supplier FLS Aerospace to win business from the UK’s booming low-cost carriers. It was a tight competition, but with price such a key factor, SR Technics appears willing to have gone the extra distance.

For easyJet the bottom line is that is has obtained a deal that reduces its A319 maintenance costs, excluding engines, by over 25% over the lifetime of the contract. There is also a saving of £10 million ($18 million) on service costs in the current financial year and better terms for the carrier’s existing support contract for its 32 Boeing 737-700s. Now SR Technics has to deliver. “This is an organisation that has the ability to do it, and we have faith that they actually can do it,” says Ellison. “There are no get-outs. SR Technics has committed to delivering this value. This is the most positive side of what we saw from them.

“The key is openness on their side. We will work with them on developing other solutions, many haven’t even been worked out yet, and it does not necessarily mean they will do the work themselves.” This is an important shift, with the supplier being given the freedom to make choices that deliver the right value at the right price. “We’ve taken a view that while there are certain key agreed performance indicators with the supplier, how they achieve them is kind of up to them,” says Ellison. “If they decide eastern Europe is the base solution then we should allow them to make that choice.”

In a tightly controlled area like maintenance, such thinking has been rare. “What we are finding is a lot of customers simply don’t want a rigid model anymore,” says Philippe Erni, executive vice-president sales and marketing at SR Technics. “They want a flexible solution that meets their needs.”

According to Stefano Sala, a partner in the Aviation Competence Centre of strategy consultants Roland Berger: “There is a space developing, albeit slowly, for somebody who can concentrate the intelligence associated with a maintenance programme.” Over the past few years his team has worked with several major carriers and suppliers on strategic initiatives in the maintenance field. The concept sees a new kind of supplier working on behalf of a carrier using the accumulated experience and wealth of data on aircraft, engine and component support to produce a maintenance programme where the central theme is the constant driving down of maintenance man-hours. This is built in.

The approach is a tough sell to suppliers: “It is in the best interest of the airline, but goes directly against the priorities of a supplier with a workforce to employ. But in a pure marketplace there would be no reason for them to have a workforce at all – avoiding the conflict of interest of having to fill up their own shop. The critical factor is to have access to a range of different service shops and being able to effectively put them in competition with each other. These smaller operations would essentially be just product shops, whose main job would be to keep the labour rate down.”

However, there are several hurdles for companies to offer this style of support: the first being that they do not really exist. “This work is traditionally done by the manufacturers, but they tend to go only to a certain point, also because they get their money from somewhere else. It is possible that the easyJet deal with SR Technics is the first step towards this,” says Sala.

Coupled with a new buying approach is an adaptation of phased maintenance to produce more efficiency. Carriers have been parcelling out their routine work for years, pushing as big a portion as possible of the heavier checks to the lighter daily and weekly checks. Sala believes that the so-called intelligent supplier can take this system a step further. “The new generation maintenance systems allow suppliers to depackage and repackage the contents of the check and distribute it across the network in a way the traditional phased approach has not yet dared to do. It has the potential of cutting more than 30% of the man-hour content.”

Another hurdle is the operational risk. “It is a risky approach because it is something new and cautiously received in an industry that has reliability and operational integrity at its core,” admits Sala. The key risk to master is the risk to the network, where an aircraft might not come out of a night maintenance check as predicted and is not available during the day.

Despite these hurdles, it is in this white-collar area of technical planning and engineering where big efficiencies could be won, he believes, rather than with the actual spanner-turning work on the shop floor. “You could expect something new here, whereas on the performance side there will be very little that is new. There will be steps in factory automation, but not huge.”

Sala argues that the role of the intelligent supplier, which needs a large base of data and experience, cannot be fulfilled by an airline. “By definition it is difficult for carriers to play this role,” he says. For low-cost carriers, which have large, predominantly new single-aircraft fleets, and no desire to enter the maintenance business, this is likely to be true. Even so, in the mission critical area of making sure every aircraft is available for the first flight of the day, several low-cost carriers have established line maintenance operations. EasyJet, Gol, Ryanair and Virgin Blue have all entered this business to ensure the all-important goal of high aircraft utilisation is achieved.

For legacy carriers with aircraft of various types and ages, and with an associated maintenance operation, the decision to leave engineering to someone else is an altogether more fundamental choice. Cathay Pacific Airways moved to what it describes as a “half-way house” engineering model several years ago. “I have 350 staff in Hong Kong where we control all the engineering standards, services, planning, modifications and where we do maintenance,” says engineering director Derek Cridland. But all of the hands-on work is performed by third parties.

However, for Cridland, there is no step-change looming that will reap great cost benefits. “The future is a lot of small changes coming in different areas,” he believes. One area constantly being fine-tuned is its principle of network maintenance. This is designed to drive aircraft utilisation. “You can save a number of airframes if you can get a couple of hours more utilisation a day our of our fleet.” For example, Cridland believes Cathay saves two airframes over one of its competitors on its freighter fleet because of the way it does maintenance. In the system, Cathay often performs the lightest A checks, when an aircraft has a layover of around 8h, away from its Hong Kong base. This can be in London, Bangkok, Taipei and even Tokyo. “We conduct these checks in some expensive places, with high labour rates, but in the big scheme of things it makes sense,” he says.

On airframe heavy maintenance Cathay places its work with subsidiary HAECO in Hong Kong and joint venture partner TAECO in China. Many carriers have been looking to take widebody aircraft to countries like China to take advantage of lower man-hour rates. United Airlines, for instance, recently signed a five-year deal with Ameco Beijing for up to 80 Boeing 777 heavy maintenance visits.

For Cridland, the next logical step, once a relationship with a high-quality supplier in a low-cost area has been established, is to turn that operation into a “centre of excellence” on that aircraft type. “It is not just a cost issue in terms of the man-hour rate, turnaround time is pretty key. If a supplier concentrates on a particular type and can turn that aircraft around a few days quicker, it is worth a lot.”

Cargolux has been through this debate over the past few months as it looked to place 10 heavy D checks between now and 2007 for its Boeing 747-400s. “What is important to us is the downtime – that where’s the biggest money is,” says Jean-Claude Schmitz, senior vice-president maintenance and engineering at Cargolux. The cargo carrier began studying its options as its existing deal with KLM Engineering & Maintenance was coming to an end. It was clear that KLM was significantly more expensive on man-hour rates compared with its Asia-Pacific competitors. Cargolux cast its net to explore the options in Asia, but while the quality is comparable with Europe, the rates turned out not to be as attractive as might have been assumed. “What we saw was that their man-hour rates were too expensive – $40-45 per hour – compared with what they pay their workers.” European suppliers typically charge from $80 an hour.

Cargolux turned back to KLM with a challenge. “What we did was convince KLM to reduce their downtime,” says Schmitz. “We told them that their only chance to survive in this environment is to offer faster turnarounds.” This was not possible for the older 747-200s, but on the more modern 747-400s KLM’s analysis showed that it was a tough ask, but that it was possible. The Dutch company has committed to lowering a 747-400 D check from six to four weeks, including aircraft painting. This is one of the fastest rates in the industry. It is also guaranteed, says Peter Somers, executive vice-president of KLM Engineering & Maintenance.

With one check already completed, the savings target of over 20% on the previous contract has been achieved, says Schmitz, and the aircraft was in the hangar for the promised four weeks. “The idea is to look at the total package for the airline, not just pure maintenance costs. The CFO will tell you to go Asia, it is the lowest cost, but does it help the company? Not necessarily.”

For carriers like Cargolux and Cathay Pacific, going to the best and most appropriate supplier is a way of life. But as the labour dispute at Northwest Airlines over maintenance outsourcing demonstrates, for carriers with large in-house service operations it can be a painful transition. Delta Air Lines is the latest US major, after United and US Airways, to begin a wholesale outsource push. After steadfastly standing by its technical operations, and seeking to boost its third-party work to make it a revenue generator, Delta has called time on some of its heavy maintenance activities. The unit is playing its part in supporting Delta’s transformation plan, says Tony Charaf, senior vice-president of Delta Technical Operations.

Delta’s analysis showed that “in areas where we have a high touch labour content we were not competitive,” he says. “Within six months of taking the decision we are putting our heavy maintenance visits out of the door.” Although Delta did seriously look at suppliers outside North America, because of “regulatory agencies and the quality standards we want to adhere to” it has stuck with US and Canadian firms.

These are huge chunks of work. The checks on its 136 Boeing MD-88s and MD-90s are being farmed out to Miami-based Avborne, with Air Canada Technical Services (see related story on page 55) taking care of Delta’s fleet of 200 Boeing 757 and 767s. Charaf says Delta will save 34% by outsourcing this work compared with its own cost base. The move sees Delta losing around a fifth of its 10,000-strong engineering workforce.

And there could be more to follow. “The guiding principle I have is that we will do whatever it takes to make sure Delta is a viable airline,” says Charaf.

Part of Delta’s strategy is to boost its current level of $250 million in third-party revenue. “We want to become a feared player on the global maintenance market,” he says. But Delta cannot make enough revenue in this field to compensate for the cost-inefficiencies when it has not been competitive. “Technical Operations must stop being a cost centre. We must think and act like a business that is fit financially.”

Notes: The ranking is based upon carriers among the top 15 mainline passenger

groups for which figures are available. Air France-KLM consolidated for the first

time. Maintenance spend=total cost of maintenance including labour, materials etc,

which does not equate to the materials only figures generally given in annual reports.

Source: Airline Business survey returns, Airline Annual Reports, DoT Form 41 and ICAO data.

MARK PILLING LONDON

Source: Airline Business