Airlines face a tough dilemma when it comes to maintenance strategy: keep it in-house or farm it out to a dedicated provider? We test the mood in the current climate, writes Sandra Arnoult in Washington
Airline executives are always mulling over their MRO strategy; should they outsource more or should they make investments to bring MRO back under their control? Should they update the fleet to cut MRO costs? Or, should MRO be a cost centre or marketed in an effort to become a profit centre? If you ask different people, you can get different answers and it becomes clear there is no "one size fits all" approach. In general, however, low-cost and start-up carriers are more likely to depend heavily on third-party MRO providers, while legacy carriers may look to their own in-house capabilities.
"Low-cost carriers have intentionally designed their business models to not include maintenance as a core activity," says Jonathan Berger of SH&E Consultants. "Larger carriers do what they can do in-house cheaper than the market can perform. They are outsourcing what they can't provide in-house."
As the airline industry languished over the past two years, capacity was cut and aircraft were parked. Now, as things begin to pick up again, a number of carriers are taking another look at the opportunities available as MROs compete vigorously for their business.
Airlines that outsource are able to focus on their core businesses and can reduce their fixed costs related to facilities, training and manpower, says ST Aerospace president Chang Cheow Teck. "Aircraft operators will require a certain minimum maintenance volume to cover the cost before in-house maintenance is a viable option," says Chang. "We expect outsourcing to grow corresponding to the cost pressures felt by airlines as a result of intensifying competition."
JetBlue performs line maintenance up to and including A-checks, but outsources most other work. Aircraft components are sent back to the OEM for repairs. "The cost for us to do anything other than the work we perform today would be enormous," says JetBlue vice-president technical operations Dave Ramage. "Engine maintenance is an enormous cost and quite frankly we couldn't make the business case and we don't have the critical mass."
For A320 airframe maintenance, JetBlue relies on Aeroman, based in El Salvador, and Pemco in Tampa, Florida. "Maybe at some point we could say we should look into that, but right now we don't have a big enough fleet that would make this a value proposition." Embraer 190s are serviced at the Embraer Aircraft Maintenance Service centre in Nashville, Tennessee. JetBlue is still looking for a service provider for the GE Aviation CF34 powerplants on its Embraer 190s. "It's a relatively new engine. We're trying out a number of different facilities with the intent next year to identify our long-term business partner. We have about five to choose from."
Turnaround time and quality of service are key decision drivers when selecting an MRO partner, Ramage says. "The first thing we look at is the culture of the company. And obviously when I talk about quality, it is what is the safety culture and can they do the job well. Quality, safety and experience is important."
JetBlue also wants providers that have a good relationship with the US FAA, are financially sound and are not likely to "disappear somewhere down the line", explains Ramage. "Our biggest challenge right now is making sure we have the lowest maintenance cost possible. One of the biggest areas of cost is growing - and it's not coming down. You pay more for an aging fleet."
The growth of JetBlue's fleet has slowed over the past three years. But the question of whether to renew a fleet or pay higher MRO costs is a constant as the fleet ages. "It's been something that we've been discussing lately at executive level - how long should we keep an aircraft. We'd love to be in Singapore Airlines mode: flip them over when they get old."
Berger from SH&E says: "It's a discussion airlines have at corporate level all the time - fleet renewal. Delta has made a strategic decision not to buy new aircraft. They've elected to invest over a billion in revitalising their cabins, to put in new seats and IFE. They've done the numbers and it's cheaper to maintain." He adds that other airlines may decide to retire their fleets when their aircraft and engines are eligible for major maintenance visits.
Low-cost carrier easyJet says it is satisfied with its current programme, where it outsources its heavy maintenance, components and engine work. Engine overhaul is handled by GE Wales, SR Technics performs component work and other tasks are picked up by Lufthansa and Virgin. EasyJet selects its MRO partners based on quality of service and workmanship, price and the company's overall "financial health". It also seeks providers "able to cope with the growth of easyJet", but wants its work to be "relatively small compared to the [MRO's] total customer base". Other than adding a second E-Check bay at its Luton base, easyJet has no plans to extend its engineering capabilities. The carrier will be one of the first customers at SR Technic's new Malta facility.
Meanwhile, British Airways is boosting its engineering staff and in-house MRO to attract third-party business. Twenty years ago, BA's engineering department employed 18,000 people. Over the years numbers dwindled as some services were curtailed or contracted out. Today the department has 4,700 staff worldwide, but that is about to change dramatically.
In September, BA announced it was hiring 90 technicians to take part in an apprenticeship programme that will be part of the foundation for a more ambitious MRO business. Currently, about 10% of its MRO work is done for outside parties, but BA is optimistic it will be able to double that figure. This move appears to be counter-intuitive to current trends of outsourcing, some analysts say. Building the engineering and technology capabilities is an expensive proposition, but BA is committed to it. "We are currently seeing it as a cost centre but, with our ambition to grow this business, I think this is a real opportunity to move it off to a profit centre basis," says BA's director of engineering Garry Copeland.
BA's recent merger with Iberia has fuelled the plan because of the Spanish carrier's "vibrant maintenance engineering division", Copeland says. "We are looking at developing a very strong partnership between the two operations. In the immediate to medium term, the synergies will allow us not to just look after our own in a very competitive way but also bring some pretty compelling products to the MRO marketplace." Iberia also has engine overhaul capabilities. "We will be looking at opportunities there," Copeland says. BA currently sends its Rolls-Royce and GE engines back to the OEM for service.
Delta Air Lines is strong in the in-house field through its Delta TechOps division, which services its own fleet, along with 150 other operators. Delta TechOps president Tony Charaf says his team is performing a market analysis to see what type of work can be offered at Minneapolis following Delta's merger with Northwest Airlines. Delta is seeking Part 145 certification for Minneapolis and plans to do the same for Detroit.
Charaf says TechOps at Delta's Atlanta base is not at full capacity, but areas such as base maintenance are "bursting at the seams". Engine maintenance is another growth area. "I believe right now we can add another 100 production engines to our yearly output and I think we can handle that. Engines are definitely the drive and then behind it we have components and then base maintenance."
Delta wants annual revenues at TechOps to reach $1 billion, but to do this it will need to forge partnerships around the world. Brazil, India and China top the list. Charaf adds: "We believe we will start seeing an uptick in our MRO business somewhere in 2011."
Like Delta, Lufthansa has concentrated its efforts on building its own in-house MRO with Lufthansa Technik. "The biggest advantage we have is a very close relationship with our main customer - Lufthansa," says Lufthansa Technik board chairman August Henningsen. Lufthansa accounts for 45% of its work, while the remainder is made up of outside customers. "We can influence reliability and we have a very sophisticated and up-to-date system to monitor our costs. We have the ability to engineer solutions for them. We are very fast in identifying and solving problems." This expertise can be then be used to help the company's 600 other customers, says Henningsen. Lufthansa Technik employs 13,000 workers in Germany and a total of 30,000 worldwide.
Henningsen highlights the company's unique position and the advantage of growing side by side with the airline. "Because there was no service for aircraft, every airline had to have the ability on [its] own," he says. Engineering, design and maintenance had to be done in-house because there were no outside providers and communication between major firms was limited before the age of the Internet, he says. "We started our dedicated MRO service in 1995 and grew with the market. It gave us the ability to realise economies of scale."
But he warns that Lufthansa is anticipating a decline in MRO this year. "First you see a decline in cargo demand, then later in passenger demand," he says. "There's a delay of six to nine months before a decline in MRO services." When there is a financial crunch, customers will hold off on certain MRO activities that do not compromise safety, until their financial future is more stable, he explains. In anticipation of the downturn, Lufthansa Technik has a flexible staff structure, hiring temporary workers during the upswing and cutting back when work slows down, he says.
While BA is aggressively building its in-house MRO capabilities, that is not likely to be the path for other carriers. "One could debate that airlines are best suited focusing on their core operations - flying from point A to point B," says Chris Spafford, a partner at consultancy firm Oliver Wyman. But while acknowledging that Lufthansa and Lufthansa Technik are "a very powerful equation", he says very few do all the work themselves. "You see people who have small niches with specific capabilities that are really struggling to compete or survive on their own."
Despite Lufthansa Technik's success, their chairman shares some words of caution. "We would not decide to do it again today. We are only able to deliver this service for commercial airplanes due to the fact that we've done it over 50 years," says Henningsen, highlighting the difficulties of establishing a worldwide MRO company. "I don't know if I would really recommend doing this on a green field because margins in MRO are very small. It's a very challenging thing to do," he says.