Airlines in Europe are becoming increasingly reliant on third-party component support services.

Maintaining a comprehensive spare-parts inventory for a modern airline is an expensive business, particularly for a small- or medium-sized operator. Many expensive components may be languishing in storage, under-used but held in case an unforeseen failure grounds an aircraft. The cost of acquiring and maintaining storage is enormous, as is the transporting of vital parts to out-stations when they are required. Furthermore, an airline's line-maintenance costs can see-saw from month to month, complicating the task of forecasting annual expenditure.

By selling its spares inventory to a third-party support company, an airline can solve many of these costly logistical problems, and, at the same time, free large amounts of capital to be re-invested in the core activities of the airline.

It is for these reasons that an increasing number of smaller airlines in Europe are now "outsourcing" their component support requirements, following a trend which has been under way in the USA for several years.


European debuts

One of the first airlines to take the outsourcing route in Europe was UK charter carrier Air 2000, which began two years ago by contracting out spares support for its Boeing 757s to British Airways, under a five-year deal. More recently, it has signed an agreement with London-Stansted-based FLS Aerospace covering support for its Airbus A320s, with the maintenance firm purchasing a large inventory of spares which were held by the airline.

"It cleared out our significant stock of rotables," says Neil Greenlees, senior components controller at Air 2000. "We don't have to worry about storage, shelf-life and redundant stocks," he says. Air 2000 is also enjoying major savings in terms of reduced transport costs, says Greenlees, because "-BA has inventories positioned at most of the airports we serve".

There are, however, some drawbacks to the outsourcing policy, some of which Air 2000 had not anticipated. "It does have a downside in that our eggs are really all in one basket now," says Greenlees. "If they [BA and FLS] perform, everything is fine. If they don't, then we suffer for that. There have been occasions where we have had to take delays because BA or FLS have not been able to supply us with a part. If we had our own stock we would sometimes be able to react more quickly."

The terms of the contract mean that, if Air 2000 can find a part it needs that BA does not have in stock, BA still bears the cost. "In the past we have sourced an item from where BA maybe hasn't tried looking, but the cost is still passed on to BA," says Greenlees.

One logistical aspect which Air 2000 had not fully anticipated was the significant increase in the number of parts, with their individual serial numbers, which have to be tracked by their computer system. "We're getting unfamiliar parts coming in, and we have to create them on the system before we can do anything with them," says Greenlees.

Many third-party-maintenance suppliers in Europe are responding with huge investments in rotables, to support the growing number of airlines which are implementing outsourcing policies. FLS, for example, invested over $26 million in rotables and test equipment in 1996. In addition to Air 2000, the company's "flying hour" customers include Air Europa, Maersk Air and Star Europe.

FLS expects to be providing component support services for around 70 aircraft, mainly Boeing 737s and 757s, by the end of this year, compared with 55 at the end of 1996. It has plans to increase this figure to 140 by the turn of the century, while significantly increasing its support capabilities for the Airbus narrowbodies.

Andrew Collins, business-development manager for component services at FLS, says that,while overall cost reduction is an important factor in outsourcing, the principal benefit for airlines is that they can fix their component-support costs on a by-the-hour basis.

"Their costs are exactly in line with their revenue generation," says Collins, "and they have no investment in stock up front. They then benefit from being part of a much larger pool, and they have access to a wider range of components." FLS claims that its airline customers typically achieve a 30% saving in component-support costs, mainly through reduced overheads for administration and equipment.


Moving towards rotables

Elsewhere in Europe, other organisations are studying possible moves into the rotables market. One of these is the SAS/Lufthansa Technik Surplus Sales Alliance, formed after SAS and Lufthansa announced a wide-ranging co-operation agreement. The Surplus Sales Alliance is charged with selling surplus spare parts released by the two parent airlines.

The stock of surplus parts has accumulated because of the increasing efficiency of the airlines' mainline-maintenance operations, meaning that fewer parts need to be held in the inventory because of reduced turntimes. The organisation also sells remaining spares for aircraft which have been phased out of service with the parent airlines.

According to Henning Jorgensen, manager at SAS Technitrade, the joint venture is beginning to study the possibility of entering the rotables market.

"It is growing in importance, but, so far, we have not entered that part of the business," he says. "It is an area we are interested in looking at to see if it develops. In four to six months from now we will sit down and carry out an analysis."

Many smaller airlines are already asking to take spare parts on loan, or in exchange for parts in need of overhaul, says Jorgensen. The problem is that SAS Technitrade and Lufthansa Technik already provide component support services and "-we don't want to go into competition", he adds.

Meanwhile, an important knock-on effect of airlines being able significantly to reduce their line-maintenance costs by outsourcing component support is that they are more likely to be able to afford to buy and operate new aircraft, says Ulrich Leidorf, director marketing and sales support at Lufthansa Technik. The German company already provides so-called total component-system support packages to its third-party customers.

"The airlines are asking for different products than they did five years ago," says Leidorf, "and they require more and more logistics support. Five years ago nobody was in a position to offer something like this [total component system support]."

Lufthansa CityLine, the German flag carrier's regional subsidiary, is also outsourcing much of its component-support requirements, having recently signed a five-year agreement with AAR of the USA covering the management and overhaul of rotable airframe parts for its fleet of 18 AI(R) Avro RJ85s. Lufthansa owns its RJ85 spares inventory, although it is understood to be considering selling the stock to AAR and leasing it back.

" I think we will see over the next two to three years large airlines taking out a bigger chunk of inventory and doing exactly what Lufthansa has done," says Terry McManus, president of AAR's Allen Group International. "Investing in rotables is not what airlines are about," he adds.

While the agreement with Lufthansa CityLine is one of the first involving a major European carrier, McManus says that AAR is "in negotiation with three other carriers" over setting up similar agreements.

Avro also offers component support for the Avro RJ and earlier British Aerospace 146 models, including its tailored "Jet Spares" packages where airlines pay a fixed price per flying hour for the supply of rotable parts. The first Jet Spares customers came on-line around two years ago, and the current list of 12 customers includes Air Malta, Aer Lingus and CityJet.

Avro provides these customers with a small inventory of dispatch-critical parts at their home base, and has "-a major pool backing that up at Weybridge in the UK and Washington DC", says Sally Masom, head of spares for regional aircraft at Avro. Jet Spares is seen by Avro as an important marketing tool to sell aircraft, particularly used 146s on the books of BAe Asset Management Jets.

Masom says that Avro is "-seeing quite a lot of potential interest" in the Jet Spares package from other existing and prospective customers. "Each airline does carefully evaluate every single alternative, but we do see the business continuing, and its definitely expanding," she says.

reluctant majors

So far in Europe it is the small and medium-sized airlines which have decided to outsource component support, while the major carriers appear more reluctant to follow suit. Despite the fact that the major carriers operate much larger fleets of aircraft, and therefore enjoy greater economies of scale in their in-house component support activities, FLS' Collins believes that this situation will gradually change. BA, for example, is known to be considering the sale of sections of its engineering division, as part of its plans to drastically reduce its costs over the next few years.

"There is a huge potential market," says Collins. "The only holdback is a cultural change within the airlines," he says, pointing out the potential social and political repercussions for flag carriers which decide to outsource significant parts of their businesses.

"Airlines wishing to concentrate on their core businesses will seriously look at this type of support, because it frees management time to focus on more crucial factors affecting their operations," Collins adds.

Source: Flight International