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AIRCRAFT MAINTENANCE RUSSIA:THE EMERGING MARKET20-21 March, 2007, Moscow

Achieving High Performance with Global

Supply Chain Service and Support

Solutions

Presented by:Ethan Alpert

Chief Executive OfficerAirlogic Holding S.A.

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AGENDA

Current Challenges

Lessons Learned

Key Airline Objectives

Current Demand Side Dynamics

Current Supply Side Dynamics

Solutions

The Way forward

What does Airlogic do?

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HOW CAN RUSSIAN AIRLINES RELIABLY AND ECONOMICALLY SUPPORT THE DAILY TECHNICAL REQUIREMENTS OF THEIR BOEING AND AIRBUS FLEETS?

CURRENT CHALLENGES

No significant spare parts inventories for western-built aircraft currently in Russia

Few technical personnel having experience to purchase and manage repair logistics for western material

Several Russian operators of western aircraft are at the ‘mercy’ of powerful, high-cost, ‘FULL SUPPORT’ maintenance providers; often paying well in excess of market value for components and receiving limited customer support

Operators must wait for material to be delivered from distant locations and then deal with the time constraints and expense of the Russian customs regime

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CURRENT CHALLENGES

Ad Hoc Purchasing – Reliance on numerous vendors with individual credit tolerances; too many gaps in reliability

Main Base Leases – Up front costs (e.g., customs duties) of importing high value inventory makes leasing expensive; scale of turnover (potential lease revenue) is still too low; owners of inventory are reluctant to dedicate ‘new generation’ inventory

Pooling – Same issues as for leasing; insufficient scale in terms of number of aircraft and revenue stream

Spares Financing – Western style ‘asset-based’ lending not available and too expensive; airlines shouldn’t be owning inventory

‘Full Support’ – Far too expensive as a long term solution; especially beyond aircraft warranty phase

THE CURRENT SOLUTIONS ARE NOT SUFFICIENTLY PRACTICAL OR ECONOMICAL

THE STATUS QUO ISN’T GOOD ENOUGH

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CURRENT CHALLENGES

ONE ISSUE IS VERY CLEAR . . .

SUPPLIERS NEED TO INTRODUCE BOTH INVENTORY AND RELIABLE, EFFICIENT LOGISTICS SUPPORT MECHANISMS HERE, IN RUSSIA

WE ALL KNOW THE OBSTACLES –

LOCAL CUSTOMS REGULATIONS

IMPORT DUTIES

PROTECTION OF INVENTORY OWNER INTERESTS

MATTERS OF SCALE

ETC.

CHANGE IS INEVITABLE IF RUSSIAN AIRLINES ARE TO BE GLOBALLY

COMPETITIVE

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LESSONS LEARNED BY U.S. ‘LEGACY’ CARRIERS:

THREE PRINCIPAL FUNCTIONS OF AIRLINE OPERATION

FLYINGAIRPLANES

MAINTAININGAIRPLANES

COORDINATINGALL

LESSONS LEARNED

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LESSONS LEARNED

SUPPLIER MANAGEMENT Contract NegotiationInvoicingWarranty Administration Follow-upMeeting SuppliersPurchasing

MAINTENANCE PLANNINGTestRepairOverhaulNFFADS/SBsSoftware Upgrades

STOCK / INVENTORY Financing Obsolescence Depreciation Residual Values

AOG MANAGEMENT Loan Components, AOG Fees,AOG Shipping, Forwarding, Tracking

OWN SHOPS InfrastructureToolsStaffProceduresManualsUpgradesQualityLogisticsPurchasingInventory Management

We know there is redundant overhead associated with the performance of maintenance-related functions – the difficult part is deciding which of these functions the airline does best and which it should outsource

LOGISTICSInfrastructureStaffWarehousePlanningAdministrationShippingBookingPackagingTrackingCustomsTaxesDocumentationFollow-up

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LESSONS LEARNED

CONSENSUS OPINION AMONG AIRLINE MANAGERS TODAY IS THAT AIRLINES SHOULD CONCENTRATE ON FLYING PASSENGERS

AIRLINE CAPITAL STRUCTURES CAN NO LONGER BEAR COSTS OF PERFORMING NON-CORE FUNCTIONS SUCH AS SPARE PARTS INVENTORY OWNERSHIP AND IN-HOUSE LOGISTICS SUPPORT

OBJECTIONS TO OUTSOURCING PURCHASING AND LOGISTICS HAVE BECOME OUTDATED WITH THE ADVENT OF SENSIBLE, WELL-STRUCTURED, TRANSPARENT AND AUDITABLE PROGRAMS

SUCH PROGRAMS ARE NOT SIMPLE TO IMPLEMENT - OFTEN FACING INTERNAL OPPOSITION - BUT AIRLINE MANAGERS RECOGNIZE THAT THESE ARE VIABLE AND ESSENTIAL OPTIONS WHEN PROPERLY STRUCTURED AND MONITORED

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Reduce costs of procurement, inventory, distribution, transportation and readiness

Reduce number of suppliers; establish single point of contact for day to day operational requirements

Reduce repair turnaround times

Optimize logistics reliability

Minimize capital investment in spares

Increase flexibility during rapid fleet evolution

Enhance accurate and stable cash flow forecasting

Simplify warranty administration

INNOVATIVE SUPPLY CHAIN MANAGEMENT SOLUTIONS

KEY AIRLINE OBJECTIVES

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INCREASING COMPETITION AMONG RUSSIAN CARRIERS

ENORMOUS PRESSURE ON OPERATORS TO DEVELOP EFFICIENT AND ECONOMIC SUPPLY CHAIN SOLUTIONS

SHORTAGE OF QUALIFIED TECHNICAL LOGISTICS AND PURCHASING PERSONNEL

AIRLINE DEMAND FOR COMPREHENSIVE ‘JUST-IN-TIME’ INVENTORY ACCESS, LEASING, POOLING AND ‘FLY-BY-HOUR’ PROGRAMS EXCEEDS SUPPLIER INTEREST; RUSSIAN MARKET IS NOT YET MATURE ENOUGH TO GENERATE REQUIRED THIRD-PARTY INVESTMENT

AIRLINE REQUIREMENTS ARE EVOLVING RAPIDLY; SUPPORT AGENCIES MUST INNOVATE TO MEET RUSSIA’S GROWING AIRLINE SUPPORT REQUIREMENTS

CURRENT DEMAND SIDE DYNAMICS

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EVOLUTION OF MARKETPLACE AWAY FROM INDEPENDENT REPAIR PROVIDERS; OEMs RECAPTURING REPAIR BUSINESS

OEMs AND MROs DEVELOPING ECONOMIES OF SCALE BY CONSOLIDATING LOGISTICS AND SUPPORT PROGRAMS

OEMs RECOGNIZE NEED TO BE ‘CLOSER’ TO OPERATORS BOTH PHYSICALLY AND DIGITALLY

INCREASING COOPERATION AMONG OEMs TO PROVIDE ‘ONE-STOP’ SUPPORT

CURRENT SUPPLY SIDE DYNAMICS

OEMs, MROs AND LOGISTICS PROVIDERS WANT YOUR COMPONENT SUPPORT BUSINESS; AND THEY ARE STARTING TO EMBRACE THE MECHANISMS THAT CAN FULFILL RUSSIA’S SPECIFIC REQUIREMENTS

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CURRENT SUPPLY SIDE DYNAMICS

BURDEN OF HIGH COMPONENT AND ‘HANDLING’ COSTS FROM MAJOR MRO PROVIDERS IS BORNE SOLELY BY AIRLINES – MROs KNOW THIS IS NOT SUSTAINABLE

TREND IN FAVOR OF A NEW GENERATION OF TRANSPARENCY- DRIVEN, PERFORMANCE-BASED CONTRACTS AND RELATIONSHIP MANAGEMENT COMMUNICATIONS APPLICATIONS

RECOGNITION OF NEED TO OUTSOURCE LOGISTICS TO LOCAL SERVICE PROVIDERS

GROWTH OF THIRD-PARTY LOGISTICS SUPPLIERS AND ENABLING TECHNOLOGIES (REAL-TIME, TRANSPARENT CRM APPLICATIONS)

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SOLUTIONS

WHAT WILL THE NEW MODELS LOOK LIKE? GREATER PURCHASING CENTRALIZATION (FEWER VENDORS)

INCREASED OUTSOURCING OF PURCHASING FUNCTIONS

INCREASED COOPERATION AMONG COMPETITOR AIRLINES OPERATING SIMILAR EQUIPMENT

LOCAL INDEPENDENT LOGISTICS PROVIDER TO ‘HOST’ LOCAL ‘EXCHANGE POOLS’ OF CRITICAL ITEMS

BACK-UP EXCHANGE STOCK FOR NON-CRITICAL MATERIAL

TRANSPARENCY AND DETAILED PERFORMANCE METRICS

INCREASED MONITORING OF TATs FROM REPAIR PROVIDERS

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SOLUTIONS

HOW ARE NEW MODELS BEING STRUCTURED?OEM POOL SPONSORSHIP – LEVEL 1

THALES PLACES EXCHANGE POOL OF HIGH VALUE AVIONICS IN ISTANBUL AND CONTRACTS WITH FOUR TURKISH OPERATORS FOR PER-FLIGHT-HOUR (PFH) SUPPORT PROGRAM

GUARANTEED ACCESS TO POOL COMPONENTS WITHIN 4 HOURS OF REQUEST FOR EXCHANGE (RFE)

RFE IS TRANSMITTED TO AIRLOGIC (THALES LOCAL SERVICE PROVIDER (LSP) IN TURKEY) – LSP COSTS BUILT INTO PFH FEE

OPERATOR’S RESPONSIBILITY BEGINS AND ENDS WITH SUBMISSION OF RFE

A TRULY WIN-WIN SOLUTION:OEMs GET REPAIR BUSINESS/

AIRLINES HAVE LOCAL ACCESS

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SOLUTIONS

SPECIFIC RESPONSIBILITIES OF LSP INCLUDE:

Management of main base stock at airport

Exchange order management (via Thales CRM system)

Delivery of serviceable units and retrieval of unserviceable units

Local customer service hotline and personnel

Repair logistics management

Customs clearance

Door to door transportation

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OPTIMIZEDMAIN BASE

Customer Support

Aftermarket Inventory Pool

RepairManagement

Logistics

OEM Administration

WarrantyFollow Up

LOCALLOCAL SERVICESERVICE

PROVIDERPROVIDER

SOLUTIONS

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SOLUTIONS

OEM POOL SPONSORSHIP – LEVEL 2

USE COMBINED LEVERAGE OF RUSSIAN OPERATORS TO PERSUADE KEY OEMs TO CONSOLIDATE EXCHANGE POOLS AS AN OEM ‘NETWORK’

OEMs ARE FAR MORE RECEPTIVE WHEN HIGHER VOLUME OF REPAIR AND EXCHANGE POOL REVENUE CAN BE GENERATED IN A GIVEN REGION

RUSSIAN AIRLINES SHOULD CONSIDER COOPERATING WITH EACH OTHER TO ACHIEVE A COMMON

OBJECTIVE -

RELIABLE, ECONOMIC, LOCAL ACCESS TO ESSENTIAL MATERIAL

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‘OEM NETWORK MANAGEMENT’

A NETWORK OF OEMS SUPPLYING UP TO 70% OF AIRCRAFT ROTABLE REPAIR AND EXCHANGE REQUIREMENTS

COORDINATED BY A PROVEN THIRD-PARTY SPARES AND LOGISTICS NETWORK MANAGER

REMAINING 30% SUPPORTED BY NETWORK MANAGER

SINGLE CUSTOMER SUPPORT INTERFACE

FLY-BY-HOUR PRICING

SOLUTIONS

ULTIMATE OBJECTIVE

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SOLUTIONS

CENTRALIZED/OUTSOURCED PURCHASING

AIRLOGIC CURRENTLY FUNCTIONS AS ‘OUTSOURCED’ PURCHASING DEPARTMENT FOR TWO TURKISH AIRLINES (38 AIRCRAFT; 85 ENGINES)

PRICING STRUCTURE DEPENDS UPON:

1) TYPE OF MATERIAL (CONSUMMABLE, EXPENDABLE, ENGINE COMPONENTS)

2) INVENTORY VS. NON-INVENTORY

3) LOAN, EXCHANGE OR OUTRIGHT SALE

OVERRIDING PRICING PRINCIPAL IS: COST-PLUS

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SOLUTIONS

WHY IS THIS A GOOD IDEA . . . ?

THE “PLUS” COMPONENT OF ‘COST-PLUS’ IS CALCULATED AS A PERCENTAGE OF PURCHASING

PERCENTAGES DETERMINED USING FORMULAS BASED ON:

1) ANNUAL PURCHASING VOLUME

2) TYPE OF MATERIAL (I.E., ENGINE, AIRFRAME, CONSUMMABLE, ROTABLE, NEW, REPAIRED, ETC.)

3) TYPE OF SERVICE (I.E., SALE, LOAN, EXCHANGE, REPAIR MANAGEMENT, CUSTOMS CLEARANCE, FREIGHT FORWARDING, ETC.)

IF YOU KNOW YOUR ANNUAL PURCHASING BUDGET, WE CAN SHOW YOU WHAT YOUR PURCHASING OVERHEAD WILL BE

IF NOT - WE CAN ASSIST IN PERFORMING THE ANALYSIS

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SINGLE VENDOR SIMPLIFIES EVERY STEP OF THE PURCHASING/LOGISTICS PROCESS

SHIPPING INVOICINGCONTRACT

ADMINISTRATIONVENDOR

SELECTION

TRACKING

TRACKING

SINGLEVENDOR NONE

SINGLE DELIVERY POINT

ONE SYSTEM

ONE ACCOUNTABLE VENDOR

SINGLE SOURCE

ONE SET OF PAYMENT TERMS

SINGLE CONTRACT

ONE SET OF RULES

MULTIPLEVENDORS

ONGOING

MULTIPLE DELIVERY POINTS

MULTIPLE SYSTEMS

MULTIPLE VENDORS

MULTIPLE PAYEES

ALL DIFFERENT PAYMENT TERMS

MANY CONTRACTS

DIFFERENT TERMS AND CONDITIONS

SOLUTIONS

ONE SOURCE = OVERHEAD REDUCTION

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Tracking Material Movement Through Single Web Portal

 Dedicated and Accountable Third-Party Product Support Team

 Dedicated Program Director

On-site Field Representative

 Regular Status Reporting

 Reliability Analysis Reporting

TAT Monitoring

AOG Management

Program Review Meetings

SOLUTIONS

ADDITONAL FEATURES OF CENTRALIZED PURCHASING

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THE WAY FORWARD

SUBCONTRACT LOGISTICS > REDUCE COSTS >INCREASE ACCOUNTABILITY

SINGLE CUSTOMER INTERFACE

LOCAL SERVICE PROVIDERLOCAL SERVICE PROVIDERDIRECTLY ACCOUNTABLE TO AIRLINEDIRECTLY ACCOUNTABLE TO AIRLINE

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Repair Management

Rotable Access

Single Channel Interface

RELIABILITY =

Consumables Support

Logistics Support

THE WAY FORWARD

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ALL OF THE THINGS JUST DISCUSSED . . .

WHAT DOES AIRLOGIC DO?

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Спасибо!