Despite excess capacity and reduced demand major carriers are returning to the third party maintenance & overhaul business as a key part of their maintenance and engineering strategies. By Steven Casley.In recent years third party maintenance organisations have been through a turbulent period of excess repair capacity, reduced carrier demand and severe price competition. Not surprisingly, this has adversely affected financial performance and forced retrenchment and consolidation within the industry. The many examples include the closure of Page Avjet's maintenance operation in Orlando, Florida; the consolidation of Greenwich Air Services and Pratt & Whitney JT8D maintenance assets; and the sale of Dallas Airmotive by Aviall.

The recent international aviation recession has undermined the business strategies of most of the major third party companies that repair and overhaul airframes, powerplants and components. These strategies, based on two dominant trends of the late 1980s, were reversed in the early 1990s:

1 Strong forecasted domestic and international traffic growth that would have increased existing aircraft utilisation and new aircraft acquisition well into the next century never resulted in the expected aircraft 'order boom'.

2 Major airlines withdrew from third party maintenance activities to create in-house capacity for their own growing fleets (carriers such as American, United and Northwest pursued this path), only to later reverse their positions.

These trends led to a major expansion of overhaul facilities by third party independents, especially in wide-body hangar capacity. In the US alone more than 400,000 square feet of capacity was added in 1991, with another 800,000 to 1,000,000 square feet of capacity planned through 1996.

The untimely expansion of capacity, coinciding with falling traffic, fleet reductions and reduced aircraft orders, dealt a devastating blow that will continue to plague the maintenance and overhaul industry for the next several years.

Strategic rethink

So why would an airline make third party maintenance and overhaul a key component of its future maintenance and engineering strategy?

Today's bottom line oriented airline management needs innovative solutions to offset operational cost increases and the required investment in new technologies, training, and systems. Revenue from third party maintenance and overhaul activities helps fill this need. From an airline perspective, third party maintenance and overhaul makes use of existing core competencies and subsidised resources to generate an incremental revenue stream, increasing value and offsetting cost.

But what level of success can carriers expect in a market suffering from excess capacity and how can they gain a sustainable competitive advantage over the consolidated, cost-competitive independents?

Market growth in terms of the number of aircraft is substantially lower than originally forecasted. The compound average annual growth rate for jet transports is 3.1 per cent, while the rate for regionals and commuters is 5.8 per cent (see table). However, even with new jet transports below forecast levels, surprising growth is occurring in industry maintenance man-hour requirements, due in part to the following unanticipated factors:

1 The effect of ageing aircraft airworthiness directives and noise compliance measures, compounded by the decisions of many airlines to defer orders and increase the life cycle of existing fleets.

2 The proliferation of new, niche airlines whose operating strategies require the return of older aircraft (DC-9, B737-200, B727) and powerplants to service.

3 Growing numbers of freight operators putting older B747s back into service subject to section 41 modifications. For example the number of industry man-hours required to perform heavy C and D airframe checks is projected to increase from 90 million in 1996 to 144 million in 2006. The amount of man-hours required for engine overhaul, however, will decrease from 45 million to 40 million over the same period as a result of more reliable new generation powerplants and the switch from quad- and tri-jets to twins (see table).

Key players

In North America, maintenance and overhaul industry consolidation has created some formidable stand-alone airframe and specialist material suppliers: AAR, Aviation Sales, Dalfort, Dee Howard, Dynair, Memphis Group, Timco, and Tramco, to name just a few. However, major North American carriers are beginning to make third party maintenance and overhaul a key component of their maintenance and engineering strategies. These carriers are well positioned to acquire sizeable market share and enjoy the competitive advantage of being subsidised by captive airline operations. American Airlines and Delta have announced their intention to increase their third party maintenance offerings, while both the Northwest/KLM and USAir/British Airways partnerships are discussing ways to capitalise on the synergies of their alliances.

Greater savings

To date Europe has not seen the type of traumatic ration-alisation which has afflicted North America, though it has witnessed the break-up of more than 20-year-old consortiums Atlas and KSSU. Airline mergers (for example Air France and UTA), and greater variations in equipment, have reduced the financial benefits and need for shared maintenance. The recent recession forced airlines to look beyond consortiums for greater savings in the maintenance area. However expanded alliances are focusing on opportunities to maximise every aspect of their operations.

Aircraft maintenance capabilities in Asia-Pacific have increased substantially in recent years both in terms of quantity and quality. Japan Airlines, Singapore Airlines and Cathay Pacific have strengthened their maintenance bases: Jamco is a major third party maintenance provider and both Ameco and Haeco have established strong reputations. As China expands its aviation infrastructure, more third party maintenance opportunities will develop.

In addition to the competitive advantage of subsidised operations, major carriers worldwide have the ability to offer a fully integrated product to their prospective customers. The concept of a turn-key maintenance programme is attractive to start-ups as well as established national or regional carriers. This kind of programme includes: fleet management services, engineering services, maintenance & overhaul of airframe, powerplants and components, and material services and inventory management.

Start-ups and growing national/regional carriers with older equipment types, such as DC-9s and B737-200s, make up an attractive market. With limited infrastructures, these carriers could be strong candidates for a fully integrated maintenance product.

Growing freight carriers with older B747s - for which demand for maintenance service and man-hours is projected to increase 2.5 times more than for other wide-body aircraft and three times more than for narrow-body aircraft - are attractive targets for carriers which can offer B747 support. Unlike the narrow-body market, demand is not restricted by national or regional boundaries, and a trend is underway for the operators of this equipment type to seek cost-effective service, regardless of location.

There is little doubt among industry experts that third party maintenance capacity will exceed demand for the next few years. Given this fact, economic factors will continue to force weaker and less committed suppliers out of business, further consolidating the industry.

This trend, combined with the impact of ageing aircraft directives, noise compliance measures, and the retention of and reentry into service of older aircraft, will create an opportunity for major airlines offering a fully integrated maintenance product to enter the market quickly and develop a strong market position. The biggest challenge for the maintenance and engineering executives at those airlines will be to harmonise product offerings and the availability of resources with market demand.

Informed decisions

The achievement of this harmony will require an extensive review of existing operations. This review should identify core competencies and determine higher versus low margin work, allowing management to make informed decisions about outsourcing and third party capacity. In most cases, airlines will retain higher value business activities where they gain advantage from competence or scale. Lower value activities will be outsourced, generating cost savings and potential third party maintenance capacity.

Whether in a global or a niche market, it appears that third party maintenance opportunities exist for major airlines worldwide. In either case, third party maintenance and overhaul needs to be a key component of airline maintenance and engineering strategy.

Source: Airline Business