Aircraft Maintenance Management Module Aircraft Maintenance- In-house Vs. Outsourcing 4/21/2017 Aircraft Maintenance Module

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. 4/21/2017 Aircraft Maintenance Module

Aircraft Maintenance Module 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. 4/21/2017 Aircraft Maintenance Module

Aircraft Maintenance Module 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. 4/21/2017 Aircraft Maintenance Module

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. 4/21/2017 Aircraft Maintenance Module

Aircraft Maintenance Module In order to address all these concerns, cost factors, theory and practice that are affecting outsourcing during evaluation process are outlined: 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. 4/21/2017 Aircraft Maintenance Module

Aircraft Maintenance Module 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. 4/21/2017 Aircraft Maintenance Module

Aircraft Maintenance Module 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. 4/21/2017 Aircraft Maintenance Module

Advantages of Outsourcing 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. 4/21/2017 Aircraft Maintenance Module

Aircraft Maintenance Module 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. 4/21/2017 Aircraft Maintenance Module

Aircraft Maintenance Module 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. 4/21/2017 Aircraft Maintenance Module

Aircraft Maintenance Module 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. 4/21/2017 Aircraft Maintenance Module

Aircraft Maintenance Module 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. 4/21/2017 Aircraft Maintenance Module

Disadvantages of Outsourcing 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. 4/21/2017 Aircraft Maintenance Module

Aircraft Maintenance Module 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. 4/21/2017 Aircraft Maintenance Module

Aircraft Maintenance Module 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. 4/21/2017 Aircraft Maintenance Module

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. 4/21/2017 Aircraft Maintenance Module

Aircraft Maintenance Module 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. 4/21/2017 Aircraft Maintenance Module

Aircraft Maintenance Module 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. 4/21/2017 Aircraft Maintenance Module

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. 4/21/2017 Aircraft Maintenance Module

Aircraft Maintenance Module 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. 4/21/2017 Aircraft Maintenance Module

Aircraft Maintenance Module 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. 4/21/2017 Aircraft Maintenance Module

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. 4/21/2017 Aircraft Maintenance Module

Aircraft Maintenance Module 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). 4/21/2017 Aircraft Maintenance Module

Aircraft Maintenance Module 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. 4/21/2017 Aircraft Maintenance Module

Aircraft Maintenance Module 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. 4/21/2017 Aircraft Maintenance Module

Aircraft Maintenance Module 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. 4/21/2017 Aircraft Maintenance Module

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. 4/21/2017 Aircraft Maintenance Module

Aircraft Maintenance Module 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. 4/21/2017 Aircraft Maintenance Module

Aircraft Maintenance Module 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. 4/21/2017 Aircraft Maintenance Module

Aircraft Maintenance Module 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. 4/21/2017 Aircraft Maintenance Module

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. 4/21/2017 Aircraft Maintenance Module