Carriers such as easyJet are gunning for a more creative and smarter approach from maintenance providers in a sector that has been slow to react to the low-cost world
Of all the major airline cost centres, maintenance and repair has arguably been among the least affected by the low-cost carrier revolution - or at least so far. However, it is a picture that is going to change rapidly if airlines get their way. Increasingly, low-cost carriers are demanding more from their service providers, not simply in paying less for their maintenance, which they expect to happen anyway, but in offering new service concepts that better fit their business philosophy.
It is not just the low-cost sector that is seeking a new direction in maintenance, many full-service carriers are joining the likes of Cathay Pacific Airways, Continental Airlines and Lufthansa in transforming their maintenance operations by establishing service subsidiaries or doing a lot more outsourcing. Overall, as this year's ranking of airline maintenance spend shows, carriers have generally been making further savings in their annual service bills, whether through out-sourcing or other cost-cutting measures.
"As airlines adopt low-cost practices, that ethos will be transmitted into the maintenance space," says Gareth Evans, principal with aerospace consultancy AT Kearney. "It is already happening but it is less advanced than areas like ticketing and internet selling."
This is not altogether surprising: airline engineering is a deeply traditional and cautious business and in many ways has changed little in decades. "A lot of airlines are still willing to subsidise their maintenance operations, which is holding back this market transformation," believes Per Boll, managing director of SAS Component, a unit of SAS Technical Services. This business is itself in the midst of change, moving from an internal department of the Scandinavian carrier to its new status as a standalone subsidiary from October.
Until now, SAS Technical Services has received all SAS work but this guarantee expires mid-2005 when the carrier will be free to buy maintenance from wherever it chooses. The end of the grace period is the best incentive there is to ensure the business becomes competitive, adds Boll. "Knowing you will have no subsidy from your parent creates a hell of a lot of enthusiasm to focus on change," he says, noting that maintenance providers must be ready to follow the service demands of the "trend-setting" low-cost carriers.
Low-cost demands
Such demands are made loud and clear by Allen Marking, chief engineer at easyJet. "I am struggling with the maintenance world," he complains. Maintenance providers would do well to listen, given that he is in the process of placing millions of dollars of airframe and component repair contracts in the market over the next few months. That includes maintenance work for all the Airbus A319s that easyJet takes in its mammoth 120 aircraft order.
He would like to find fresh thinking from the maintenance community about how to deliver the kind of service that a low-cost carrier would value. "I don't really see it, which is a concern for me. It means that from an operational point of view we have to educate these guys in something that is actually their business and where I would expect to buy into their expertise," says Marking. "I'm not looking for the minimum maintenance performance, I'm looking for the best value where maintenance is an investment in the reliability and longevity of the aeroplane."
In short, he is in search of a smarter approach to running the contract for the benefit of the airline. "This could be related to how suppliers collect data, what data they collect and how they use it so that I derive a benefit from it," he says. "I want a supplier that takes ownership of the service without me having to constantly chase him. Suppliers need to move from being reactive to being predictive and proactive."
For example, there are large suppliers that have data on carrying out hundreds of Boeing 737 C checks, the intermediate check that takes place about every 18 months, he says. This enables them to know the most frequent material repair and replace events and "provision" accordingly. "To be honest, a C check is a collection of simplistic mechanical tasks that have all been done before at some stage," says Marking. He argues that suppliers know what to expect as they carry out tasks like C checks and that the relationship with easyJet should reflect that experience.
But Marking's frustration with a lack of creative thinking on the part of suppliers may come down to their different focus. A large chunk of maintenance work that suppliers bill is in man-hours. "I want air time and they want ground time," says Marking. For example, he asks, is it in the interest of a maintenance firm to help a carrier extend the periods between checks? "There is a conflict of interest there," he notes. This gives suppliers less incentive to "improve themselves".
"The maintenance business needs to rethink what it is they are offering," says Marking. "Older aircraft have a lot of structural repair work but the modern fleet does not require that type of workforce," he says, with the emphasis on systems and avionics. "Suppliers just won't see these aircraft in the hangar for so long." He believes suppliers will have to choose which business they are in, with those trying to handle both heavy maintenance and the new style of systems servicing as likely to struggle.
"Operators want maintenance where it is convenient for them, particularly if there are smaller packages of work. This will mean maintenance spread around the network," says Marking. EasyJet, for example, has worked with Airbus to devise an "equalised" maintenance concept, where packages of work are carried out more or less every day, during night stops, rather than doing the work all at once in a block. "It's been working for almost a year now and has been quite a successful maintenance philosophy," he says. This success is measured on better aircraft availability. Fleet utilisation has improved overall, he says. The A319 that easyJet operates has seen better availability than the Next Generation 737s that the carrier also operates. This type too is maintained on an equalised basis similar to that of the A319.
Long-term deals
EasyJet is two-thirds of the way through deciding how to conduct maintenance for its A319s, the initial batch of which is already being serviced by SR Technics. The first step has been taken: that was to decide that the carrier will indeed continue to outsource maintenance. The next step was to chose the best method of managing the business critical parts of the supply chain. With that now done, easyJet is talking with three organisations about "long-term, intelligent maintenance agreements", says Marking. "I'm looking for something different. I'm looking for the holy grail of aircraft maintenance and engineering - it's very well hidden."
That holy grail includes another element. "If we sign a 10-year partnership deal there will need to be continued contestability on pricing as time goes on," he says. For example, there may have to be an annual review within a decade-long contract.
Marking is aware that these messages, and their likely impact on supplier revenues, may not be palatable for some, but the size of contract easyJet is offering "is sufficient to tempt people to partner with us", he believes. "We've got an opportunity perhaps to change some of the ground rules here."
However, if easyJet does not like what it sees from the market, it does reserve the option to do more than line maintenance in-house. This would not extend as far as heavy maintenance but it will look at conducting component repair if it could not obtain the prices it wants, says Marking. "We are doing some work now on what we believe component repair and overhaul should cost, and that will be our benchmark."
Little incentive
For low-cost carriers, there is little incentive to take on board anything other than line maintenance work. "We recognise what we do really well, and that's putting passengers on seats and flying them from point A to point B," says Rick Oehme, vice-president, engineering and quality at America West Airlines. "We maintain our own aircraft every day they fly," he says, with the carrier's 750-strong in-house line maintenance engineering force, but after that it outsources everything else. "We've drawn a line in the sand," says Oehme, with outside firms taking care of airframes, engines and components. "We rely on about 300 vendors that can do this work more cost-effectively than we can."
After some early setbacks in managing its outsourcing drive, which began in 1995, America West has transformed this side of the operation into a very successful strategy over the past few years, says Oehme. "We value our vendors as genuine partners and engage them at that level," he says. "Our philosophy is to give our partners some tools and resources. When we go into a relationship we spend a lot of time setting out our expectations and in education." But the low-cost mantra is never far behind. "The message is that we are not a 30%- margin customer, we are a low-margin customer. We want our suppliers to help us drive costs out and improve our ability to fly reliability," says Oehme.
The ability to uncover more cost reductions will have to come from smarter maintenance planning, rather than turning to suppliers. "We've been back to our vendors on four or five different occasions to try and take costs out," says Oehme. "They've done a lot, but we know they can only do so much." For example, in many places labour costs have gone as low as they are going to. "The next opportunity is to optimise our maintenance programme, doing the right work at the right time and not over-maintaining."
Sending aircraft to low labour cost countries for heavy maintenance has been popular for some years as a way to reduce the cost of this time-consuming work. Now America West is among those trying it out for some shorter intermediate checks. It has just sent two A320s to Aeroman, the El Salvador-based maintenance unit of Grupo TACA, for C checks.
Labour cost difference
This is the airline's first attempt to take advantage of the large labour cost difference between Latin America and the USA. "This could be a huge opportunity for us but you have to pick your partner wisely," says Oehme. America West is confident in Aeroman because of its long experience in maintaining TACA's fleet of A320s. "From a cost standpoint the first two induction aircraft were under what we had planned, the quality of the work is exceptional and their turntimes are at least equal to ours."
There are several more examples of the emergence of lower-cost maintenance countries. Lufthansa Technik has transferred heavy A330/340 work to its base in the Philippines, while suppliers in eastern Europe and the Middle East believe they have cost advantages too. "As labour costs in Europe continue to escalate so does our ability to attract European carriers," says Saif Al Mughairy, general manager of Gulf Aircraft Maintenance Company (GAMCO). Its turnover has risen rapidly to reach $250 million a year, with a target to double this in three-to-five years, on the back of business from European carriers in addition to work from part owner Gulf Air, Qatar Airways and Etihad, he says.
Varig Engineering & Maintenance (VEM), the service unit of the Brazilian flag carrier and now itself a separate business entity, is another hoping to gain work from carriers prepared to send their aircraft longer distances to capture lower prices. While rates are negotiable, airframe man-hour rates in Brazil vary from $33-35 an hour up to $45, whereas they start at $40-45 an hour in North America. "We are very competitive compared to the USA and Europe in price terms," says Evandro Oliveira, VEMpresident. The company is in line to grow with Varig if the carrier's recapitalisation plan is realised, and aims to boost its third-party work - now some 20% of its revenue - to reduce its reliance on its parent, he says. VEM's third-party client list already includes Brazil's fast-growing low-cost player Gol, with deals done on a case-by-case basis, says Oliveira. At present, Gol outsources maintenance, but it is examining whether to establish a service capability for itself.
Market segregation
The transfer of work to lower-cost regions will gather pace, believes Hans Ulrich Beyeler, chief executive of Zurich-based SR Technics. "I see a rapid segregation in the maintenance market. Certain work packages are moving to low-cost areas. Some will move east to Asia and some to eastern Europe. Companies in these areas have proved they can do this work, perhaps not always as fast and as reliably as expected, but the move is on." The question for a global maintenance provider like SR Technics is whether to establish its own base in Asia or work with players already there, he notes.
Despite the demands posed by low-cost carriers, suppliers are naturally keen to grab their share of this business. Part of the reasoning for the SR Technics acquisition of UK and Irish maintenance supplier FLS Aerospace is to position it closer to this market. FLS has worked for several low-cost carriers and has a line maintenance joint venture with easyJet. "The UK has pioneered the growth of new airline models and for SR Technics to establish a bridgehead in that part of Europe is of very high strategic importance for us," says Beyeler.
As providers face the challenge of keeping up with their low-cost customers, they are also facing the challenge of fundamental overcapacity in the maintenance world. Most predict this will lead to further consolidation. In Europe, ATKearney predicts a radical shake-up, with airlines and independent providers set to suffer the most.
"Despite recovery there is still endemic overcapacity and structural faultlines are emerging," says Evans of ATKearney. "Airlines and independent maintenance providers will be the most impacted as the are particularly exposed to market changes." These organisations have less access to low-cost labour because of their current geographic base and will be less able to compete in the risk-sharing packages demanded by customers, he says. Large-scale providers with their global reach, like SR Technics and Lufthansa Technik, have the greatest ability take advantage of the market transformation, says Evans.
Innovative solutions
There is no doubt carriers want maintenance providers to come up with the innovative solutions they desire. The last thing they want is a diminishing range of suppliers, nor for their choice to be restricted solely to the largest global players or the original equipment manufacturers. But the difficult market of the past three years has seen both revenues and prices tumble.
In more buoyant markets, such as South America, the prices providers are able to charge are picking up. But other markets remain on the downward slope. "There are still many players who don't know their costs and are happy to keep their people busy at whatever prices they have to in order to win business," says Beyeler. "Also during the crisis there has been a tremendous fleet renewal and newer aircraft need less maintenance."
ATKearney says that the global maintenance market has shrunk by 20% from $42.2 billion in 2001 to $32.5 billion in 2003. However, it will show a modest 3-5% growth this year, says Matt Abraham of ATKearney, but will not recover to 2001 levels until 2007/8. Beyeler of SR Technics says it is arguable if there is any detectable upswing yet.
Whatever the crystal ball says about a possible resurgence in the maintenance market, it is not hard to predict that some seismic shifts are taking place in the sector. And, as in most other aspects of the business, the low-cost carriers are providing the momentum.
Going even further, the ultimate service concept could follow the lease car model, with carriers only running their aircraft up to the first major maintenance event and then handing it back to the lessor, avoiding the cost and hassle of dealing with a heavy check. Such an example might seem far-fetched today, but it is just the kind of "out of the box" thinking that carriers are asking for.
REPORT BY MARK PILLING IN LONDON
Source: Airline Business
