KAREN WALKER WASHINGTON DC AirLiance Materials, a joint maintenance and spare parts company founded by three Star Alliance airlines, is shaking up the industry. Can other airlines afford not to follow?

Dave Sissons cannot help but wonder sometimes whether the airline industry's cautious attitude towards spare parts has not gone a little too far. When he was appointed president and chief executive officer of the fledgling AirLiance Materials, a surplus parts and maintenance joint venture company formed by three major Star Alliance partners, he noted that he had acquired 200 years' worth of brakes for Fokker 50s.

The industry's belts-and-braces (plus another 12 pairs of braces, please) view of spares is born of a logic that says the true value of a $10 widget is $10,000 if a Boeing 747 is delayed by seven hours in Abu Dhabi because the local maintenance depot manager could not immediately lay his hands on the widget in question. But such a zealous approach to spare parts comes at a price - around $10 billion, the estimated value of today's spart parts surplus mountain. Not for the first time, the airline industry is in danger of making the United Nations look like an efficient organisation.

But AirLiance threatens to shake up this particular sector of the industry. And for three good reasons. First, it has some powerful brand names to wield. United Airlines, Lufthansa Technik and Air Canada are the masterminds behind this operation. Second, is the person they selected to head this most unusual of companies. Sissons is one of the most straight talking and charismatic people you will ever be fortunate enough to find in an executive's boardroom. As such, he is out to change the way the spare parts industry operates and already he is rattling cages. Third, and most important, the chief goal of AirLiance is to lower the maintenance cost of its partner members. If it succeeds, then it would be an arrogant airline that chooses to ignore the message. "We can pull the maintenance industry kicking and screaming towards logistics systems," says Sissons. "Everyone in the parts business has been waiting for some airlines to create a business and three of them did. We've talked to a number of other airlines who say they're going to do the same thing."

AirLiance is the result of three airlines - already joined at the hip by their alliance agreement - talking about the possibility of saving money and taking a common sense attitude towards spare parts. United, holding 40%, Lufthansa Technik, 40%, and Air Canada, holding 20%, signed an agreement in May 1998 to officially form AirLiance - a Chicago based, limited liability, for-profit company which was granted all surplus parts and relevant documentation by each of the three airlines in exchange for a promise that it would handle these parts more efficiently and at lower cost without sacrificing the on-time performance of any member carrier.

It was a big promise that required masses of trust and co-operation from each of the carriers. And AirLiance has yet to really turn the tide. Sissons admits there is still "a lot of winning of hearts and minds" to be done among maintenance departments of the partner airlines, although this is one step forward of the "hand-to-hand combat" he had to confront in the early days. Nor is AirLiance making money - yet. But Sissons insists that profitability is a "when" not an "if" and adds that a fourth potential partner airline is in active negotiations. The airline is not a Star Alliance member. "We are not a closed club," says Sissons. "There are a lot of negotiations going on with potential partners because they see that we can reduce their inventories and lower their maintenance costs. The economics are compelling."

Taking the high road

AirLiance partner airlines have each agreed to consign all their surplus materials exclusively to the company. They have also agreed that AirLiance will be their exclusive supplier of surplus parts. Consequently, AirLiance has a guaranteed supply of material and a guaranteed customer. The company's current inventory is valued at $150 million and is expected to increase to $200 million by the end of the year. At the end of September, the company moved into a new 17,000m2 (185,000ft2) facility at Chicago O'Hare and has the potential to expand by another 14,000m2 .

The company became ISO9000 registered within six months - something unheard of in the industry - and wrote its quality control manual by selecting the best practices of each of the partner airlines. Sissons likes to say that where an airline might normally expect a part to arrive in five days, AirLiance will deliver within an hour. Fifty airline customers are now in AirLiance's database and Sissons says 20 of these are active, regular customers. "We represent something different in the industry and that is a major achievement," says Sissons. "I have spoken to major US carriers who do not have a policy of buying from surplus, but they are willing to talk to us and deal with us because they are comfortable with us."

Sissons believes that AirLiance has been successful this year in its bid to "take the high road" and establish itself at the top end of the marketplace. He recognises that there is scepticism in the market, as well as fear about what AirLiance's presence will ultimately mean, but he remains confident. "We are a bit like motherhood. You can't argue against it," he says. He adds, however, that repair and overhaul specialists need not worry about AirLiance encroaching on their territories. "We are not interested in overhaul or repair or in any other diversification of services. We are an information and parts management company and we intend to stay that way."

But Sissons sees plenty of room for improvement in the parts sector alone. Best estimates are that the world airline industry has more than $50 billion tied up in inventory at any one time. Assuming an annual carrying cost of around 20%, to store and pay for the massive amount of associated documentation papers, that would represent some $10 billion a year - more than the net profits that the industry made last year. Around 5-10% of this inventory is "float", surplus spares that are there due to poor cycle times and general inertia. Eliminating this could therefore produce annual savings of $3-5 billion without having any major impact on part availability. That alone would reduce the annual carrying cost by up to $1 billion.

Sissons, a former manager at Pratt & Whitney, points out that the manufacturing industry proved that such savings are possible when it brushed up its supply-chain logistics over the 1980s, improving part lead times and generally sharpening inventory management.

Airline maintenance, however, has been different for some obvious reasons. First, it is not a manufacturing business simply putting things together and shipping them to customers. It has to disassemble, check, repair or replace andreassamble existing machines. Second, the regulatory/safety framework is such that each part must carry an individual history, complete with appropriate checks.

Spares cataloguing

In this environment, each airline has built up its own spares cataloguing systems. Even where parts are for the same aircraft type in similar operations, they will be held in different ways according to local practise at different airlines. This lack of commonality and interchangeability has effectively barred easy transfer of parts between airlines even if they are clearly surplus. Even within an individual airline, few maintenance operations have a firm grip on just how many parts they have and where precisely they are at each of their bases around the world.

But the tools are now there to create much better logistics management and to start bringing down the surplus holdings. During the last recession, many airlines began to eat into their inventories and have not been keen to restock during the recent boom. Moreover, the drive to become better at logistics has come at the same time as alliance groupings are creating giant co-operative groupings searching for economies of scale.

The Holy Grail is for a transferable parts catalogue which allows transfer of spares between airlines with guarantees about their provenence. Allied to this is the attraction of offloading parts holdings to a company with the scale and logistics to ensure smart delivery, but with the scale to keep stock turns high. AirLiance's early work has largely been centred on creating such a single system to handle and catalogue all these parts so that they are available and traceable on demand.

It is this sort of technology that AirLiance intends to exploit and which leads Sissons to believe that he could easily "throw one-third of today's surplus parts into the ocean" without jeopardising a single flight schedule.

Source: Airline Business