For the maintenance, repair and overhaul (MRO) industry, the continuing struggles of the US airlines present opportunities and challenges. The opportunities arise from outsourcing by the airlines of everything from airframe heavy maintenance to supply chain management. The challenges are in the airlines’ demand for lower costs, faster turnaround times and greater flexibility.
Recovering from its own struggles, the MRO industry stands to grow if it can respond to rapid changes in the market that are driven mainly by airlines restructuring under Chapter 11 bankruptcy protection. “In the last year we have seen a lot of airlines, especially those in Chapter 11, open much more heavy maintenance to suppliers like us,” says Eric Schulz, president of Goodrich Aviation Technical Services.
Outsourcing is also extending to management of the entire spare-parts supply chain, led by the low-cost carriers and regional airlines that already look to outside providers for their airframe and engine maintenance.
According to the US Department of Transportation, US major carriers increased their outsourcing from 44% in 2000 to 54% in 2004, while reducing their maintenance expenses by $1 billion. The trend is expected to continue as legacy carriers, using the threat of low-cost competition – or the protection of Chapter 11 – get rid of in-house maintenance capacity.
Already, Alaska Airlines has closed its Oakland, California maintenance base and outsourced all heavy airframe checks to AAR Aircraft Services in Oklahoma City and Goodrich in Everett, Washington. Under Chapter 11, United Airlines has walked away from its Indianapolis, Indiana maintenance centre and outsourced all Boeing 737 work to AAR, which has leased part of the vacated facility.
Delta Air Lines, also operating under Chapter 11, has closed its Dallas, Texas maintenance centre and is cutting back at its Atlanta, Georgia and Tampa, Florida bases after outsourcing all Boeing 757-200, 767-300 and 767-300ER heavy checks to Air Canada Technical Services (ACTS) in Vancouver, British Columbia; and all Boeing MD-88 and MD-90 overhaul work to Miami-based Avborne, which already maintains low-cost carrier AirTran Airways’ Boeing 717s.
With airlines closing their own maintenance centres, “we are looking at a switch to 50-60% outsourced, and the airlines are looking for big capacities”, says Schulz. “Very high value work is becoming available, and the market is growing significantly for independent MRO providers.”
But other factors are at work. The older, higher-maintenance aircraft around which the MRO industry was built are being retired, and replaced with aircraft that require less maintenance. Airlines are sending more work outside, but they are also changing the way they want their aircraft maintained, to reduce downtime.
“Airlines are trying to modify their maintenance programmes to more on-condition, versus overhauls,” says Schulz. New aircraft such as the Next Generation 737 and Airbus A320 families are maintained under MSG-3 programmes that involve quicker, but more frequent, “mini-checks” that are more easily fitted into airline schedules. Now carriers with mixed fleets are putting their older aircraft, like 737 Classics, on to the same programmes to gain similar benefits.
“MSG-3 reduces the need for manhours on checks, but increases the number of checks. We get less hours per aircraft, but more aircraft per years,” says Schulz. This is requiring an industry structured around performing lengthy heavy checks to become more flexible. “The volume available has grown, but at the same time we have to go to a different business model. The move to on-condition drives us to be much more flexible, and the combination of much more volume and much more flexibility is difficult to manage,” he says.
With aircraft coming and going more frequently, and staying for shorter periods, manpower has to follow the changing requirements. “If you are not flexible, you have too many people. You can’t put people on the shelf, to use when needed,” Schulz says. To cope with peaks in demand, mechanics have to have dual or triple certifications, he says, and have to be able to work on both the 737 and 757 lines, for example.
Outsourcing is eating up the excess capacity that has dogged the US MRO industry in recent years, and could lead to a shortage. “Two to three years ago there was a big overcapacity, but all the new requirements with the big airlines are taking all the available capacity,” says Schulz. “If some of the big airlines still doing work in house – such as American and Continental – release hours quickly, there will probably be a shortage, but that is not the case yet.”
A majority of US MRO capacity is taken up with domestic narrowbody work. Much of the widebody work for US airlines has moved to lower-cost centres in Asia, Schulz says, which has freed up more capacity for narrowbody maintenance at a time when low-cost carriers like JetBlue Airways are expanding rapidly. Exceptions include Timco Aviation Services, which maintains Airbus A300s and A310s in Greensboro, North Carolina, mainly for cargo carriers like FedEx Express.
There is still capacity to be filled. AAR has leased only part of the 12-hangar Indianapolis maintenance centre vacated by United in May 2003, and is operating initially from two hangar bays, with plans to expand to 10 bays during the 10-year lease period. AAR Aircraft Services – Indianapolis was certificated for A320 and 737 family maintenance in November 2004, adding the 757 later. The five-year 737 deal signed with United in March last year involves up to four maintenance lines, and AAR is looking for more customers.
“Oklahoma City is closest to full capacity; Indianapolis clearly has room for growth,” AAR chief executive David Storch told analysts late last month. “We have growth space. The pacing factor is attracting and retaining qualified people. We continue to hire in Indianapolis, and we are able to find the labour we need. The constraint is getting people up to speed, but we should see steady growth,” he said. Timco says manpower shortages affected operations at several of its locations throughout 2005, and cites higher costs associated with hiring and training personnel to support plans for “necessary” rapid growth of its airframe MRO business.
Some narrowbody work is going outside the USA, but Schulz says the capacity offered by shops in Canada, El Salvador and Mexico is not enough to have a major impact on domestic MRO providers. San Salvador-based Aeroman has targeted the US market after parent airline TACA switched to an all-A320 fleet and dramatically reduced its in-house maintenance capacity requirement. After trials in 2004, both America West and JetBlue sent a portion of their A320-family aircraft to Aeroman for checks last year. America West continued to send the bulk of its aircraft to Timco in Macon, Georgia, while JetBlue despatched three-quarters of its aircraft to ACTS under an existing six-year contract.
ACTS, Aeroman and Timco represent the Americas in the 11-member Airbus MRO network unveiled early last year. The goal of the network is to improve maintenance services available to Airbus operators by benchmarking, and to support sales of Airbus aircraft by offering outsourced maintenance. For ACTS, the Airbus network is one of several efforts under way to build the Air Canada sister company into one of the top three MRO providers in the world, with revenues expected to exceed C$1 billion ($860 million) a year by 2006.
In addition to the five-year, $300 million Delta outsourcing contract, the agreement by Air Canada parent Ace Aviation Holdings to take a stake in the merged America West/US Airways promises to boost ACTS. In return for a $75 million investment to help US Airways out of Chapter 11, ACTS secured the rights to provide all available outsourced maintenance for the merged entity – valued at C$1.5 billion over five years – with the possibility of extending the agreement to cover engine maintenance and supply chain management.
Broad component support is seen as the next big trend in outsourcing for US airlines, with the low-cost and regional airlines leading the way. AAR has signed a 10-year, $300 million agreement with Mesa Air Group to provide end-to-end supply chain management for the regional operator’s fleet of Bombardier CRJ200/700/900 and Embraer ERJ-145 regional jets. Under the agreement, AAR has purchased Mesa’s parts inventory and taken over responsibility for everything from spares supply to management of component repairs.
AAR is looking to expand its supply-chain management business. “As we execute on our existing deals, we expect to capture additional business, and not just with regionals, with larger carriers as well,” Storch told analysts. “There are also more things we would like to offer the regional market.” Mesa’s agreement with AAR follows a 10-year deal with Rockwell Collins and LogisTechs to provide repair management for Collins and non-Collins avionics on its CRJ200s.
Low-cost carrier Spirit Airlines has signed a 15-year component management contract with Lufthansa Technik, covering its growing fleet of A320-family aircraft. JetBlue, meanwhile, is launch customer for Goodrich’s component management service, under which the supplier is responsible for all Goodrich content on the carrier’s A320 fleet, including owning the spares, leasing them to the airline and repairing and replacing components.
“JetBlue is on the leading edge of going to flight-hour agreements,” says Tom Mepham, president of Goodrich Customer Services. “We own the assets, we carry the inventory on our books, and we guarantee dispatch, that parts will be available within 24h. We figure out the most effective way of getting parts repaired,” he says. “The deal with JetBlue initially covers components from five Goodrich business units, but such agreements could be expanded to include other vendors’ components.
As outsourcing of supply chain management becomes more prevalent, the benefit to suppliers of signing such agreements is the ability to protect their business by repairing their own products. “We can get close to the customer, lean out the process and reduce the inventory. If we drive the cost down, it drives up the benefit to us,” Mepham says. “It’s the wave of the future for a lot of low-cost carriers, and a lot of legacy carriers are doing a little bit of it.”
Outsourcing does not mean less oversight, and the US Government Accountability Office (GAO) has criticised the Federal Aviation Administration for making slow progress in shifting its oversight from the airlines to where the maintenance is actually being performed. The FAA is developing a system for targeting surveillance of repair stations based on risk assessments, but the GAO has told Congress the work must be speeded up to keep pace with the outsourcing trend.
Outsourcing is a worldwide phenomenon, accounting for 50% of the $36 billion air transport MRO market in 2004, according to consultancy Aerostrategy. But the contracting out of airframe heavy maintenance is at its highest in the USA, the company says, while the outsourcing of component maintenance is accelerating. So far the opportunities seem to be outweighing the challenges.
GRAHAM WARWICK/WASHINGTON DC
Source: Flight International