9/10/2015 Aircraft Maintenance Module1 Aircraft Maintenance Management Module Aircraft Maintenance- In- house Vs. Outsourcing

04/21/23 Aircraft Maintenance Module 1

Aircraft Maintenance Management Module

Aircraft Maintenance- In-house Vs. Outsourcing

Outsourcing Vs In-House Maintenance The current economic downturn forces accompanied by a

slow in demand had pushed severely on airlines budgets to the limit where many started to evaluate their business model. Outsourcing was the main reorganisation tool used by some airlines and the trend is increasing.

Outsourcing allow airline Managers to leverage resources and capabilities by concentrating on core business competencies that create value for customers and outsource those non value added labour based activities.


Levels of Outsourcing

The question asked by airlines, Should we outsource? If yes then, which extent and what level?

This decision making process for outsourcing is described by a four step model starting by internal benchmarking, leading to external benchmarking, contract negotiation and outsourcing management.

The four main level of outsourcing are:

1. Level I- Essential, few processes have an effect on the airline performance and any misconduct of these processes leads to more costs or threat to service level.


2. Level II-Demand justification: the level of demand for MRO by a customer does not justify venture in capabilities’ development.

3. Level III-Airline potential, there may be financial constraints, skilled labour scarcity or availability of facilities, this case MRO activities have to be outsourced.

4. Level IV-MRO capacity, the final element in deciding on MRO activity is capacity where MRO can be under or over its capacity.


Cost factors consideration during Outsourcing evaluation A number of factors would be analysed prior to reaching

outsourcing decision. The primary issue in this context “Is it feasible and

cheaper to outsource or keep In house? And most significantly which activity or type of maintenance we should consider outsourcing?”

There is also another school of thought where they disagree to outsource maintenance activities and stress on the overall maintenance management concept. This concept involves planning and strategies by keeping close control over maintenance to avoid degradation of quality.


In order to address all these concerns, cost factors, theory and practice that are affecting outsourcing during evaluation process are outlined:

1. In house Maintenance Cost: This is the primary factor, as the airline must exactly identify their In house costs elements to be able to evaluate outsourcing options and proposals. For example, the DMC cost element of In house labour rate must be calculated accurately accounting for variable and fixed costs including but not limited to facility equipment, overhead cost as erroneously few experts discount such costs from their rates analysis. All other relevant costs to also be considered such as training, staff pay and support maintenance costs.


2. Outsourcing maintenance costs: This aspect

includes subcontracting costs including third party

direct charges, Airline representatives,

administration of documentation and audit teams,

etc. Additional costs with regard to mobilising

aircraft or components to MRO Base which means

loss of revenue to the airline during this activity.04/21/23 Aircraft Maintenance Module 7

3. Risks of incomplete, deferred tasks and poor

quality. All these factors come in place more

frequently and would be difficult to penalise the

MRO for such faults as they will most likely

manifest themselves post Maintenance check

completion and even post the one year warranty

normally granted for such activity.04/21/23 Aircraft Maintenance Module 8

Advantages of Outsourcing

1. New Airline Start up: If a new Airline starting up with limited financial resources it would impractical to invest high capital of Maintenance facility establishment. Alternatively such airline is better off subcontracting this smaller fleet size to an MRO and negotiates competitive maintenance costs. For example, FlyDubai as a new airline starting up in Dubai have subcontracted all of its maintenance activities for a period of five years to Emirates. This is considered a sensible decision given the high establishment investment at a time when they try to secure a sound Low cost model.


Advantages cont’d

2. Airline existing capacity: Due to the airline

exponential fleet growth and per the aircraft

maintenance program, they could run out of hangar

slots, this way they need to outsource. Emirates

airline is a good example of this scenario, as hangars

slots are fading away with more aircraft due for

maintenance.04/21/23 Aircraft Maintenance Module 10

Advantages cont’d

3. Human resources: In view of company policy

regarding staff costs, when more resources are

required for the extra maintenance tasks, hence such

activities can be outsourced to alleviate the burden

from the airline and release aircraft back to service

swiftly.


Advantages cont’d

4. MRO Competitive charges: The MRO market is growing

rapidly and trying hard to secure airline maintenance business

for longer terms, hence they offer competitive rates which

might be well below airline costs it self had they established

maintenance facilities.

5. Fixed costs agreements-clear prediction: Fixed

maintenance agreements future costs are predicted easily for

budgets based on estimated flight hours. 04/21/23 Aircraft Maintenance Module 12

Advantages cont’d

6. More attention on airline business: If the airline

alleviate the maintenance burden and put that on

MROs, then it can further invest on the airline main

business and give more priority to passenger

satisfaction and relevant services.


Disadvantages of Outsourcing

1. Quality and production control: As mentioned earlier in

this chapter, quality is not fully guaranteed by MROs to

match the airline standard even if it contractually reflected.

The production activity needs to be monitored by the

airline representatives, which brings higher costs to the

airline by accommodating its teams in foreign places. Also

the MRO charges dearly for even allowing those

representatives enter their premises or use of facilities.


Disadvantages cont’d

2. Contractual penalties: Normally MRO contracts dictate heavy Penalties on airlines if they miss a booked hangar slots. This is prone to happen quite frequently due to potential reasons where aircraft are delayed for days or even weeks from the pre allocated maintenance slots.

3. Risk of Warranty loss: Warranties are normally granted for the airline and not for third party MROs; hence OEMs might reject warranties if units are tampered with by others. A Long warranty claim process is required by suppliers if Repairs authorisation provided to MRO staff.


Disadvantages cont’d

4. Incomplete MRO capability: It is not uncommon to find MROs subcontract many of the airline maintenance activities to other third party in the maintenance loop. This introduces more risks of Maintenance check delays with no control over the full supply chain.

5. Logistics: As the aircraft or Engines are mobilised/transferred to different location, this impose additional costs of transportation and parts logistical support between the base and the MRO facility.


In house Repair facilities and increasing maintenance costs

Traditionally, the MRO services were an integral part of the airline structure mainly due to the smaller size of such airlines and lower demand of air travel. However in late 1980’s airlines started thinking of having more focus on core transport activity and outsource remaining maintenance functions. Besides, with the increased fleet size and design sophistications of aircraft systems and components, airlines are no longer capable of including all required maintenance services under one roof.


Secondly, the development costs of such In house facility

including building, equipment, engineers training, and other

specialised testing jigs and benches, made it extremely

uneconomical for airlines to invest for such additional

establishments; therefore, the need arise to seek MRO for highly

specialised maintenance services. For example, Emirates airline

grew rapidly in the last decade in fleet size from small to a mega

carrier that had a direct impact on aircraft maintenance facilities

to also grow in similar magnitude. 04/21/23 Aircraft Maintenance Module 18

For example, Emirates had invested more than $600M in the new Engineering centre which was inaugurated in Nov 2007; this is already identified as not sufficient to cater for Emirates new fleet. It is clearly evident that Emirates must envisage outsourcing certain maintenance activities which would alleviate burden from its In house maint costs.

The development costs of In house repair shops greatly depend on the level of outsourcing which the airline select. In other words, if an airline elects to handle all levels of maintenance including the non core activity, then large investment capital must be secured towards establishment of such facilities.


Outsourcing Options- Heavy and Line Maintenance The Airframe minor transit and “A” checks neither require

extensive labour nor material as the MPD task calls for

minimum inspections and routine maintenance. Airlines

have traditionally carried out these checks by their own

employees with less outsourcing. However low cost or

smaller type carriers tend to outsource not only heavy

checks but also Line maintenance and transit checks which

would allow them to fully focus on their core business of

transporting passengers or cargo.04/21/23 Aircraft Maintenance Module 20

Large carrier such as Emirates had invested in heavy maintenance checks In-house and established a highly advanced Technical maintenance facilities including fully equipped hangars, specialised support overhaul shops and expensive aircraft docking systems. In a contrast to the past, Emirates heavy checks have been outsourced due to lack of facilities and resources; all of the heavy “C” and “D” checks are conducted in house when only a small portion of outstation Line maintenance is outsourced.

It is quite sensible to invite third party work and generate revenues for those minor repairs within the maintenance facilities if capacity and resources permits.


On the other hand, the MRO business started early 1990 and swiftly developed in the last decade. Airlines realised that with the steep fleet growth and the technological development and diversification of aircraft equipment, it became extremely difficult for the airlines to have their maintenance facilities undergo repeated developments or investing in new repair schemes apparatus. That is why many of the best – in – class airlines such as Lufthansa and British Airways, have their own Maintenance organisation turn into a fully fledged separate MRO companies that focus on maintenance business development and act as a profit centre while the airline focused on the core transport operation activity.


Outsourcing Options- Power Plant Maintenance The engine normally is the highest stressed module due to

running high temperature during the aircraft

take-off/landing not to mention their susceptibility to bird

strikes, external environment factors and airports altitude

status. Since Engines produce power by burning fuel within the

core chambers, the internal hot section parts such turbine blades must have special material alloys design and specialised manufacturing processes.


This specific hot section design raises the Engine maintenance costs significantly where such parts are replaced at certain cyclic maintenance overhaul intervals, otherwise referred to as engine rebuild.

The Engine also contains many major expensive controlled parts called Life Limited Parts (LLPs) such as Discs, Shafts and rotors. As these LLPs are revolving at a vey high speed, they are prone to damage at any point in their life, hence these are strictly monitored and their records are carefully controlled for proper maintenance (repair or replacement).


Therefore Engine maintenance cost consist highly of materials over 80% of total Engine repair costs as compared to the rest of the aircraft systems where maintenance costs are extensively labour (i.e. more than 50% are labour costs).

Engine accessory LRUs and cowlings rotables and are handled in the same manner as condition based parts to either repair or overhaul to restore their serviceability and fit back for further flights. This process continues until a hard life refurbishment or replacement requirement though manufacturer often waived such need due to embodiment and continuous technical development to these components.


The Engine and accessory repair/overhaul facility usually require a major investment due to specific repair processes and sophisticated repair schemes. The airline is heavily burdened by such facility establishment and therefore majority of airlines (more than 96%) outsource engine maintenance to OEMs or MROs.

These outsourcing options are arranged commonly through negotiated fixed repair agreement or guaranteed power by the hour packages, i.e. fleet management agreements. The other available outsourcing option is to utilise the contractual maintenance costs guarantees and remain on time and materials basis.


However, this option might bring many risks due to future costs uncertainties though initial repair costs would be at minimum due to newness, warranty and guarantees factors.

Similarly, the power by the hour contracts have negative impact on the airline revenues and cash out flow because of fixed payment from the start of operations. Also, for an established airline engineering maintenance facility with high fixed costs, outsourcing option will increase engine repair costs to the airline due to improper utilisation of its own facilities and coverage of such high fixed running costs.


Outsourcing Options- Components Maintenance This is a significant area of maintenance activities because

of population and higher number of removals as compared to Engines and Aircraft systems.

OEMs historically did not focus on maintenance work of the LRUs but due to the erosion of their profits from production units through aircraft manufacturers and/or airlines negotiated contracts, they start to give more focus on maintenance work and in most cases competing with MROs and other service providers.


Therefore, if the OEM long term component repairs or restoration charges are viable, outsourcing of such services thereby recommended that allows the airline to focus on its core business and other value added in house repairs.

Therefore, it is clearly evident that with the steep fleet growth and new technological advancement of aircraft parts, airlines are left with no options but to envisage outsourcing but with due diligences and focus on the process of how this would be conducted.


Additionally, airlines could consider following steps:

1. Airlines must approach single source suppliers in order to secure lower exposure and/or guaranteed thresholds prior to buying aircraft, i.e. during aircraft negotiation acquisition to use the leverage to obtain the required deals and protections.

2. Focus on consumables which are top DMC drivers which are clearly overlooked due to insignificant individual item price but collectively extremely expensive. Shops to develop In house capability focus on high DMC cost items.


3. Airline Engg leadership might need to consider

organisational structure change within the Engg Depts to

align, channel efforts and approach for the optimum goal

of efficient utilisation of people and equipment.

4. Put non exclusive GTA with MROs in order to leverage

Airlines position with OEMs. This will provide the airline

the necessary buffer to conduct proper outsourcing in the

most efficient economical manner.04/21/23 Aircraft Maintenance Module 31

Outsourcing Conclusion

As a general conclusion, all aforementioned

reduction in maintenance costs initiatives and

endeavours will certainly have an impact on the

airline’s profitability, competitive advantage but

would not affect quality and overall corporate

objectives.


Documents

9/10/2015 Aircraft Maintenance Module1 Aircraft Maintenance Management Module Aircraft Maintenance- In- house Vs. Outsourcing