The complexion of the maintenance market in North America is changing rapidly as outsourcing takes a firmer hold among major carriers as well as low-fare players
Not many years ago, a listing of the top maintenance, repair and overhaul (MRO) providers in North America would have been dominated by major airlines. Though some carriers continue to strengthen their in-house maintenance capability in limited ways, the clear trend among most is to offer a growing part of their maintenance and overhaul work to outside providers.
"Legacy carriers, which have done the majority of their work in house, are beginning to send their maintenance to others," says Bill Zoeller, president and chief executive of Air Canada Technical Services. "They're looking to cut costs - not through cutting reliability or safety, but looking to areas of excellence that can get the job done. People we've never dreamt we could get work from, we're getting work from." Adding to the pool of new business are new entrant airlines that "never intend to get into MRO", says Zoeller.
United Airlines has been responsible for perhaps the most dramatic cutback in internal maintenance activities. The third largest airline maintenance provider in 2002 after Lufthansa Technik and American Airlines, United has sharply reduced its maintenance assets and in-house capabilities.
In Chapter 11 bankruptcy protection since December 2002, United closed its heavy maintenance bases in Indianapolis and Oakland, and narrowed its San Francisco activities to limited C Check capability. It now outsources heavy checks on its Airbus and Boeing fleets to independents TIMCO and ST Mobile Aerospaceand work on its International Aero Engines V2500 powerplants to Pratt & Whitney (P&W).
At the same time, the United Services unit wants to become more active in the third-party business - but only in a limited number of areas in which it has expertise including overhaul of CFM International CFM56 and P&W PW2000/4000 engines, auxiliary power units, landing gear, high-tech components and avionics. To become a cost-competitive provider, the company focuses on executing "lean" principles - already widely used elsewhere - to improve productivity and build additional capacity for customer work.
Legal challenge
Other carriers have also been shedding assets. US Airways has so far retained two heavy maintenance bases in Pittsburgh and Charlotte for in-house work, but closed a heavy maintenance facility in Tampa, notes Kevin Michaels, principal and co-founder of AeroStrategy Management Consulting, which specialises in maintenance. The airline wanted to outsource some Airbus A320 heavy maintenance but met a legal challenge from its labour union. Eventually, US Airways was given court permission to outsource work on the aircraft, which has been completed, and now awaits the outcome of mediation on further outsourcing.
Alaska Airlines last month decided to close its heavy maintenance base in Oakland where it worked on its Boeing 737 New Generation aircraft. It had already closed a base in Seattle and contracted out 60% of its heavy work to Goodrich Aviation Technical Services and AAR Aircraft Services. Those companies now get the other 40% of the work.
Outsourcing
Even carriers with substantial in-house capability and growing third-party business have been outsourcing work on their aircraft. Witness Delta Air Lines, whose Delta TechOps started bringing in business in 1999. It has grown that business from revenues of $30 million to an expected $260 million this year, according to Udo Rieder, Delta's vice-president, engineering and planning. "We are on a very aggressive path and plan to continue on that growth path," he says.
Responsible for maintaining Delta's 550-aircraft fleet and building third-party business, Delta TechOps seeks work compatible with its core competencies: engines and components that are used extensively in its own fleet and line maintenance, says Rieder.
In general, labour rates at airlines are higher than those at independents, making it difficult for carriers to be competitive and make money selling third-party services, particularly on heavy maintenance. It is easier to overcome these higher rates by overhauling engines and components, says Rieder, which typically have a much lower percentage of their costs associated with labour than do line and hangar work.
Delta has another advantage: it is the only major airline not unionised. Although its labour rates are similar to those at other major airlines and are higher than at some third-party providers, Delta is not saddled by the work rules that make some carriers un-competitive. "The way we overcome the [labour] rates is the productivity we can gain by the flexibility our non-union work force provides," says Rieder. In some cases, Delta TechOps can be more competitive than third-party providers, he adds, "hence the growth". Delta also has a far lower staff turnover than third-party providers, he says, with aviation maintenance technicians averaging 14 years' tenure. "Our business is inherently dependent on institutional knowledge, and we do a better job hanging on to that," says Rieder.
The amount of maintenance work Delta outsources has remained steady at about 23% over the last 10 years, says Rieder. It typically outsources one-off events, such as modifications, as well as products it does not operate in large enough numbers to start up an internal line. Examples include IAE V2500 engines on 16 aircraft and Rolls-Royce Trent engines on its eight Boeing 777s. "They just don't represent the critical mass necessary to warrant the investment," says Rieder.
Delta is also undertaking work exchange: Aeromexico is doing labour-intensive insulation blanket modification work for Delta, which is performing P&W PW2000 engine overhauls in return.
Continental Airlines outsources about 60% of its maintenance, including heavy maintenance on 18 777s and 50 Boeing 757s, and all work on engines and components. But the carrier does all heavy checks on its Boeing 737s, with four nose-to-tail lines going at all times, one in Orlando and three in Houston. The carrier has a fleet of 248 737s, with 52 more on order. "Our goal is to do steady work in-house and outsource the peaks and valleys," says Mark Moran, Continental's executive vice-president of operations.
This philosophy allows the airline to keep its experienced work group of 3,300 and its core competency, he adds. Continental, with considerable flexibility in its union contracts, held on to its maintenance staff after 9/11 even though it parked aircraft and cancelled some outsourcing. "Our technicians are motivated to be as efficient as possible," he says, producing productivity improvements that allow the airline to bring more aircraft in-house. "As a result, we've been under-budget the last few years," he adds.
Retaining capability
A major exception to the outsourcing trend is American Airlines, which has been seeking to retain in-house heavy maintenance capabilities, particularly with financial incentives from local governments, notes AeroStrategy's Michaels. Bucking the trend, American does about 80% of its maintenance work at its own bases, says the carrier.
To keep the work in-house, the carrier has enlisted its employees in a "continuous improvement" process to come up with ways to bring costs down and increase productivity. The process has yielded cost reductions of nearly 30% in the maintenance and engineering operation, says the airline.
Some major carriers - among them the perennially profitable Southwest Airlines and FedEx Express - have never built up in-house heavy maintenance capability, preferring to outsource the work to specialist companies. Goodrich Aviation Technical Services (ATS) has been performing heavy maintenance for Southwest's Boeing 737 aircraft for nearly 30 years.
Based in Everett, Washington, Goodrich ATS has possibly the largest maintenance site in North America, about 95,000 m2 (1 million ft2). Southwest and three other long-time customers, including FedEx Express, represent about 70% of Goodrich's work.
"Most of our airlines embraced the outsourcing philosophy some time ago, and our business increases as their fleet increases," says Steve Bence, vice-president of marketing and programme management for Goodrich ATS. Many smaller customers - including new business - account for the remaining 30% of its work. This includes work on aircraft transitioning from one lease to another.
Bence says the maintenance business has always been highly competitive, with considerable pressure on pricing. "However, what the airlines want more than anything is dependable turn times and aircraft reliability when in service. This is critical."
To provide that, Goodrich made two major "cultural changes" in the way it manages its business, says Bence. One was adopting a the "lean operations" concept, a variation of lean manufacturing philosophy pioneered by Toyota. Although the concept was devised in a manufacturing environment - and adopted by Goodrich Corp a decade ago - Goodrich ATS embraced it about five years ago, finding it applied to its repair and servicing business as a way of correcting problems or working through issues. If a task takes too long or costs too much, a group of people are put together for a week to focus on fixing the problem or improving the process. "We do this hundreds of times a year on a myriad of processes," says Bence.
The other change was to use information technology to dramatically improve turnaround times of aircraft in the hangar and man/hour performance to the benefit of customers. "It used to take 40-45 days to do a D Check," says Bence. "We are doing it consistently today in 30 days, which is a direct saving."
The IT process starts when inspectors use hand-held devices to write up discrepancies during an in-bound inspection flight. Those findings go directly into a computer, short-cutting a process that used to take days when hand-written notes had to be processed.
Goodrich also created a computer "visibility" system for airlines to use at their home offices to monitor an aircraft's progress in the hangar. Airlines do not have to send as many managers to Everett because they can follow the progress of their aircraft electronically, says Bence, and some carriers have cut their on-site staff by about a quarter.
Heavy maintenance
Goodrich's work includes substantial heavy maintenance - delivering 400-500 aircraft a year, modifications and a sizeable business in component repair. The company is one of two that provide heavy maintenance on 113 Boeing 727s in the FedEx fleet. According to Tony Basham, senior manager, airframe vendor maintenance, for FedEx Express, the package carrier has an extensive network of maintainers - nine across Asia, Europe and the USA - to do heavy maintenance on its 338-strong jet fleet. It also operates 307 turboprops.
Each vendor is accepted only after meeting stringent surveillance and review criteria, also passing an extensive "co-ordinating agency for supplier evaluation" audit performed by the airline's quality assurance department. Then on-site management teams are established at each vendor location.
At ST Mobile Aerospace Engineering, where Airbus A300/310, DC-10 and Boeing 727 work is performed, the team will include up to 13 FedEx employees - maintenance administrators, a production manager, quality assurance representatives, engineers and a material support representative. After maintenance, FedEx tracks the service performance of each aircraft by monitoring "post-check reliability performance".
Following in the footsteps of Southwest and FedEx, new entrants are also outsourcing maintenance. "Essentially, the only maintenance we do on our fleet is line maintenance - everything up to but not including C Checks," says Dave Ramage, vice-president, technical operations at JetBlue Airways. The airline outsources heavy maintenance on its Airbus A320s - engines, APUs and components. Ramage concedes that "could" change as the carrier grows, but it does not seem likely. JetBlue currently has 62 aircraft, a number that grows every few weeks. "For the next several years, subcontracting maintenance will serve us well," says Ramage.
The cost of entry to heavy maintenance is huge, he notes, with a need for hangars, shops, specialised tools and equipment, parts inventory, warehousing and increased headcount. "Unless your fleet is at critical mass, unless you could drive up utilisation, you could have empty hangars. This, quite frankly, is what legacy carriers are discovering.
"That's why JetBlue is not interested in making this investment at this point, and a lot of people are interested in doing this for us. You never say never. In a dozen years or so, we'll have a fleet of more than 400 aircraft, then we may take another look at the philosophy we have. But we're happy now."
Partner not vendor
Although JetBlue awarded Air Canada Technical Services (ACTS) its airframe heavy maintenance work, then moved it to EADS Aeroframe Services and then moved it back, Ramage says the airline does not favour "short-term contracts and bouncing around". It would like to establish long-term relationships with partners. "Ideally, we would like to have a couple of business partners," he says, so the airline does not give anybody "100% of the work". The carrier pointedly uses the term "partner" and not "vendor". In looking for partners, JetBlue seeks capability, training, track record, a reputation for quality and the ability to meet promised turntimes, says Ramage. The carrier also looks at personnel issues when seeking partners, he says, including the relationship between management and staff and the occupational health and safety record.
"What's not on the list for the initial go-around is the price tag," says Ramage. "We're convinced that if you don't get quality, it doesn't matter what you pay." If JetBlue is interested, it goes back for contract talks.
While Air Canada is doing most of its A320 work - there is always a JetBlue A320 in ACTS's Winnipeg hangar - Ramage says JetBlue evaluated several other providers last year to get a secondary supply "in order not to have all our eggs in one basket". It decided on TACA Group's Aeroman maintenance division in El Salvador, which was awarded work on eight aircraft. As TACA is doing a good job, he says, JetBlue will also send some aircraft there next year.
Having dual business partners is a win/win proposition for all parties, says Ramage. "There's nothing like a little competition to keep people on their toes." Although it is just getting started, Ramage says JetBlue would like to be able to sit down with both partners and jointly learn by experience, enabling JetBlue to get high quality and lower costs and the partners to benefit by learning as well.
Would partners share? "I haven't pushed it," he admits, adding: "It will take a little prodding." He suggests that once the partners know it is not a game to dump one of them and that everyone would win, it could be possible.
REPORT BY CAROLE SHIFRIN IN WASHINGTON
Tackling waste and inefficiency
One of the most radical maintenance restructurings has taken place at Air Canada Technical Services (ACTS) since parent company Air Canada filed for bankruptcy-law protection in April 2003.
"I wouldn't wish this on anyone," says ACTS chief executive Bill Zoeller, who started his Air Canada career as an avionics mechanic 30 years ago. "But it gave us an opportunity to take inefficiency and wastage out of agreements with labour, suppliers, even with airport authorities, to position ourselves to do a better job in the marketplace to offer MRO services." Overall, ACTS was able to take about 30-33% out of its costs, he says. "What we've been able to do is take the cost base and move it out of the range of legacy carriers...into the independent MRO price," Zoeller says.
Examples in the labour arena abound. In the powerplant shop, prior agreements listed 918 different specialists with workers only doing that piece. Today, there are 11 of them. ACTS pays workers for 2,080 hours each per year but used to get just 930-950 hours of productive time. In July that was up to 1,610, closing in on the maximum possible after allowing for holidays and training. ACTS and the union also agreed to allow the short-term scheduling of overtime to meet extra demand. The time is placed in a "bank" at time-and-a-half pay, to be used for employee time off at Christmas, for instance, when demand is low.
ACTS also took a hard look at how its activities were structured and made substantial changes. It was maintaining Boeing 737s in three places, for instance; now that work is only carried out in one place. It also consolidated heavy maintenance of other aircraft types from multiple facilities so it can develop centres of excellence.
ACTS has done the same analysis and restructuring across the board. The powerplant shop used to service seven engine types - with staff training, tooling and parts inventory for each. It has phased out or is outsourcing all but GE CF34 and CFM International CFM56 engines. The same applies to components. Once servicing 10,000 part numbers, it has reduced that to 6,000 and aims to limit it to 3,500. In both engines and components, the price has dropped, flow rate has gone up and new business has been attracted.
Although the ACTS workforce is now at 6,500, down from 2,850, it has already been able to recall some employees in the last few months as contracts have been signed. Zoeller thinks employees understand that while Air Canada is a "very important" customer, in order for ACTS to survive and thrive, it has to bring in third-party work. The company has ambitious goals. This year, about 70% of its work is for Air Canada and 30% for others. Next year, it hopes for a 60/40 split and later on its objective is a 40% share for Air Canada and 60% for third-party work, providing Air Canada with the most cost-effective maintenance product available, he says, and one that also brings in other customers.
AAR moves into Indianapolis
One beneficiary of United Airline's sharp pull-back in maintenance services is AAR Aircraft Services, which has acquired United's former maintenance base at Indianapolis. Mark McDonald, AAR group vice-president, manufacturing and maintenance, repair & overhaul, says the base is a world-class facility, complete with advanced docking, mezzanines, new-technology equipment, fixtures and tooling. Built in 1994 for United at a cost estimated at more than $800 million, it was funded by the state of Indiana and Indianapolis International Airport so it all belongs to them.
At full capacity at its Oklahoma City base, AAR decided to lease portions of the 1.8-million ft2 Indianapolis facility in order to expand its maintenance, repair and overhaul (MRO) offerings. AAR has leased 800,000ft2 of space, including 10 hangar bays, for 10 years with a 10-year option. The maintenance facility was "built for productivity," McDonald says. "You are able to put more people on the aircraft, in some cases double the norm, so that the aircraft turns out faster. Then, because of our investment level and the reach we have, we're able to offer a relatively low price for that better service," he adds.
AAR has hired some staff, including the majority of its managers, initiated FAA certification and is implementing IT and other start-up activities. McDonald says the facility could be in operation by the end of the year if discussions with potential customers result in contracts. The company expects its Oklahoma City site to continue focusing on older-generation aircraft while Indianapolis focuses on new generation 737s and Airbus aircraft. "One of our strategic goals is to do volume work on fewer types so productivity grows," he says.
Attracting employees is not a problem. A job fair attracted 2,800 resumes and another 800 were submitted on the company's website during the first week, with many ex-United employees among them. They will not make as much money with AAR - the pay scales for technicians at airlines and MROs are very different - but they will have jobs. "When I talk to technicians, I tell them this isn't a United that has all these aircraft that they will bring here," says McDonald. "We have to go out and earn our keep every day - win business and then perform excellently to keep it. If we don't, we don't have a business or a job. This is the message we are half-preaching in Indianapolis."
Preventative medicine
Singapore Airlines has become the first customer for a new Boeing inflight aircraft monitoring system the manufacturer believes will significantly enhance maintenance planning and reduce flight schedule interruptions.
In development since 2002 and in test over the past year with three carriers, the Airplane Health Management (AHM) system monitors the health of an aircraft in flight and relays that information in real time to the ground.
Lou Mancini, senior vice-president of Boeing's Commercial Aviation Services, says the data-monitoring and prognostic system turns maintenance "from somewhat reactive to proactive". Apart from providing airlines with in-flight information that allows them to have a maintenance crew ready at an airport gate to make any needed repairs quickly, it also can help airlines identify recurring faults and trends.
The system, data mining millions of flights, has a feature that can identify and highlight precursors of future events. "Think about the opportunity to get ahead of the game before a fault code," he says.
"It's nice to have access to R&D funding and dream about innovating, about how to make this business better," says Mancini, who joined Boeing after 17 years in maintenance and engineering posts at United and Northwest Airlines. Immediately prior to joining Boeing in 2002, Mancini was vice president - engineering and technical support at United Airlines.
Air France, American Airlines and Japan Airlines have been working with Boeing as partners during development and testing of the AHM system, validating its effectiveness. The tests involved substantial numbers of Boeing 777 and 747 aircraft.
The system is being offered in three releases, with increasing functionality, and will be key in Boeing's plans to offer the 7E7 and future aircraft a higher level of health monitoring.
Source: Airline Business
