special report:MaiNteNaNce2012

NoveMber 2012

Consolidation, bankruptcies, facility closures and new generation aircraft with different support requirements are some of the key issues airlines must consider when deciding where to service their aircraft or how to grow in-house maintenance divisions

sPecial RePoRt Maintenance

fl ightglobal.com/airlines November 2012 | Airline Business | 27

28 In a state of fl ux MRO providers struggle with rising costs, OEM competition and restricted access to intellectual property for new aircraft, plus this year’s maintenance survey

36 Shifting positions With specialist units closing and slow demand, North American airlines are reassessing their MRO set-ups

38 More to maintain How airline MRO divisions can develop their businesses as the maintenance market grows

contents

All our special reports are available online at fl ightglobal.com/airlines

Air B

erlin

Maintenance consoliDation

in a state oF FluX

“The goal is to develop partnerships with some MROs or airlines with

MRO operations”FRANCK TERNER

President– AFI KLM E&M

fl ightglobal.com/ab28 | Airline Business | November 2012

As MRO providers struggle with rising costs, OEM competition and restricted access to intellectual property for new aircraft, operators’ purchasing choices will determine the supplier landscape

REPORTMICHAEL GUBISCH LONDON

November 2012 | Airline Business | 29fl ightglobal.com/ab

Airlines are facing a changing maintenance, repair and over-haul market. The sector has been consolidating for some time and continues to evolve.

Various drivers are at work, such as the growing presence of OEMs in the aftermarket and the introduction of new-generation air-craft with different technical and support requirements. But the economic environment and consolidation in the airline business are the main driving forces behind the MRO sec-tor’s development. Carriers are a catalyst for change in the aftermarket, as well as being affected by it.

As operators battle with low profi t margins and the economic outlook remains uncertain – especially in the mature markets of Europe and North America – there seems to be little prospect for the airline industry to return to a more healthy balance of revenues and costs.

Power-by-the-hour style agreements with all-inclusive service on fl ight hour-based rates have become popular with airlines not because such arrangements necessarily pro-vide the most cost-effective support, but because they offer fi nancial planning security. With contract periods becoming longer, carri-ers are trying to hedge their bets and keep costs under control over the long term. But the result is that contract volumes have grown, providing airlines with more negotiating power versus their suppliers.

For the OEMs, this has been an opportunity to build their MRO footprint by sweetening equipment sales with aftermarket support deals. Third-party MRO providers, on the other hand, have responded to the trend by offering similar full-service contracts. But this type of agreement requires suffi cient scale in the maintenance provider’s business to absorb the risks associated with offering technical services at fl at rates over long periods.

NON-TECHNICAL SERVICEA further trend is that airlines want to pool spare parts rather than buy their own equip-ment and liquidate existing inventory to improve their fi nances. This was a central fac-tor in Finnair’s decision earlier this year to abandon its in-house engine and component repair activities, and outsource all respective work to Mubadala Aerospace MRO Network member SR Technics in Zurich. The deal included the sale and lease-back of material, including spare engines, to Mubadala fi nanc-ing arm, Sanad.

Such arrangements depend, however, on the fi nancial strength of the maintenance pro-vider. Franck Terner, president of Air France Industries KLM Engineering & Maintenance, says that buying the component stock of cus-tomer airlines requires signifi cant investment, even for large MRO groups. He says it can be a challenge to refl ect the investment costs in the

price for the maintenance services later on. The company has just started cooperating

with Lufthansa Technik for components on Embraer 170/190 series aircraft. The two large European MRO groups have also extended their Spairliners joint venture, formed to pro-vide spare pooling and repair services for the Airbus A380, to regional jets.

While the original purpose was to save resources in light of a small global A380 fl eet as it entered service, the Embraer move focuses on a much larger volume of aircraft that has been in service for years, with inven-tory existing at both MRO groups. By bringing together all their existing Embraer 170/190 component support contracts, Terner says, AFI KLM E&M and LHT can achieve so-called “big scale effects” in the face of growing OEM support programmes.

Airlines are also simplifying their supply chains. Instead of having to manage multiple external partners, such as specialist repair shops, they want to appoint a limited number of MRO providers that can offer a full range of services. “For quite a few years the integrators have been playing a growing role in offering a one-stop shop,” says David Marcontell, presi-dent and chief operating offi cer of the Team-SAI consultancy in New York. “While this is not to say that there is no space for specialists, that space is getting smaller.”

All these factors conspire to favour large MRO groups that can achieve the necessary economies of scale to provide the services. Airlines that used to maintain their aircraft in house, such as Finnair, are outsourcing the work because they cannot reach the required volume to make their own technical opera-tions as cost-effi cient as larger, dedicated maintenance providers and the OEMs.

Economies of scale are not only central to

BRENDAN SOBIE IN LONDON

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CROSS HEAD

Air F

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Maintenance consoliDation

in a state oF FluX

“The goal is to develop partnerships with some MROs or airlines with

MRO operations”FRANCK TERNER

President– AFI KLM E&M

fl ightglobal.com/ab28 | Airline Business | November 2012

As MRO providers struggle with rising costs, OEM competition and restricted access to intellectual property for new aircraft, operators’ purchasing choices will determine the supplier landscape

REPORTMICHAEL GUBISCH LONDON

November 2012 | Airline Business | 29fl ightglobal.com/ab

Airlines are facing a changing maintenance, repair and over-haul market. The sector has been consolidating for some time and continues to evolve.

Various drivers are at work, such as the growing presence of OEMs in the aftermarket and the introduction of new-generation air-craft with different technical and support requirements. But the economic environment and consolidation in the airline business are the main driving forces behind the MRO sec-tor’s development. Carriers are a catalyst for change in the aftermarket, as well as being affected by it.

As operators battle with low profi t margins and the economic outlook remains uncertain – especially in the mature markets of Europe and North America – there seems to be little prospect for the airline industry to return to a more healthy balance of revenues and costs.

Power-by-the-hour style agreements with all-inclusive service on fl ight hour-based rates have become popular with airlines not because such arrangements necessarily pro-vide the most cost-effective support, but because they offer fi nancial planning security. With contract periods becoming longer, carri-ers are trying to hedge their bets and keep costs under control over the long term. But the result is that contract volumes have grown, providing airlines with more negotiating power versus their suppliers.

For the OEMs, this has been an opportunity to build their MRO footprint by sweetening equipment sales with aftermarket support deals. Third-party MRO providers, on the other hand, have responded to the trend by offering similar full-service contracts. But this type of agreement requires suffi cient scale in the maintenance provider’s business to absorb the risks associated with offering technical services at fl at rates over long periods.

NON-TECHNICAL SERVICEA further trend is that airlines want to pool spare parts rather than buy their own equip-ment and liquidate existing inventory to improve their fi nances. This was a central fac-tor in Finnair’s decision earlier this year to abandon its in-house engine and component repair activities, and outsource all respective work to Mubadala Aerospace MRO Network member SR Technics in Zurich. The deal included the sale and lease-back of material, including spare engines, to Mubadala fi nanc-ing arm, Sanad.

Such arrangements depend, however, on the fi nancial strength of the maintenance pro-vider. Franck Terner, president of Air France Industries KLM Engineering & Maintenance, says that buying the component stock of cus-tomer airlines requires signifi cant investment, even for large MRO groups. He says it can be a challenge to refl ect the investment costs in the

price for the maintenance services later on. The company has just started cooperating

with Lufthansa Technik for components on Embraer 170/190 series aircraft. The two large European MRO groups have also extended their Spairliners joint venture, formed to pro-vide spare pooling and repair services for the Airbus A380, to regional jets.

While the original purpose was to save resources in light of a small global A380 fl eet as it entered service, the Embraer move focuses on a much larger volume of aircraft that has been in service for years, with inven-tory existing at both MRO groups. By bringing together all their existing Embraer 170/190 component support contracts, Terner says, AFI KLM E&M and LHT can achieve so-called “big scale effects” in the face of growing OEM support programmes.

Airlines are also simplifying their supply chains. Instead of having to manage multiple external partners, such as specialist repair shops, they want to appoint a limited number of MRO providers that can offer a full range of services. “For quite a few years the integrators have been playing a growing role in offering a one-stop shop,” says David Marcontell, presi-dent and chief operating offi cer of the Team-SAI consultancy in New York. “While this is not to say that there is no space for specialists, that space is getting smaller.”

All these factors conspire to favour large MRO groups that can achieve the necessary economies of scale to provide the services. Airlines that used to maintain their aircraft in house, such as Finnair, are outsourcing the work because they cannot reach the required volume to make their own technical opera-tions as cost-effi cient as larger, dedicated maintenance providers and the OEMs.

Economies of scale are not only central to

BRENDAN SOBIE IN LONDON

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Text here please or bold up text to break up orBox text indent

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Maintenance consoliDation

fl ightglobal.com/ab32 | Airline Business | November 2012

Air Berlin insists that the strategy is not yet clear and that a continued need for a wide service portfolio may favour a home location. But the airline will outsource base mainte-nance for the 787, which is to be delivered from late 2015, because of the small fl eet size of 15 ordered aircraft and the extended heavy check intervals. After evaluating Boeing’s GoldCare aftermarket programme, Air Berlin now wants to cooperate with its largest share-holder, Etihad Airways, to support the type.

The 787 is also set to change Virgin Atlan-tic’s MRO strategy. While it has already focused base maintenance for its existing fl eet on a “low number” of MRO providers, Martyn Haines, general manager continuing airwor-thiness, says: “Our approach for the 787 will probably be more rationalised towards the legacy MRO providers or an OEM.”

MONOPOLISATION THREATHaines thinks that the consolidation in the maintenance sector is both an opportunity and threat. He values the operational reliabil-ity guarantees, which the OEMs provide as part of their aftermarket support programmes, but points out: “Customer service guarantees are nevertheless less mature in the current [manufacturer] offerings.”

He adds: “As the OEMs gain strength in the MRO marketplace, we see a worrying trend of monopolisation, as the infl uence of parts pric-ing and maintenance data protection restricts legacy MRO providers’ ability to compete.”

Access to repair manuals and engineering data for new-generation equipment will be a central differentiating factor for MRO provid-ers of new-generation aircraft as the manufac-turers are guarding their intellectual property for their products ever more closely to restrict third-party competition. Maintenance compa-nies have to partner either with the OEMs or airlines that can negotiate IP access through their aircraft orders – or a combination of both. But there is much concern that new air-craft, such as the 787 and A350, will reduce diversity and choice in the MRO market.

James Stewart, group chief executive of the Mubadala Aerospace MRO Network, expects a split to go through the MRO industry, where new aircraft platforms will be supported by a small number of global maintenance provid-ers. These MRO fi rms will also cater for mid-generation equipment, such as the 777 and A330, but be separate from a second tier of smaller maintenance companies supporting older types approaching their sunset period.

The separation will be partly a result of the fi nancial investment needed to establish tech-nical capabilities and provision spare parts, but also the fact that new equipment should offer greater reliability over its predecessors, meaning less maintenance. “MRO providers will not be able to make the economics work on the new platforms… unless they have a

maintenance schedules with external MRO providers on short notice can incur penalty payments, which may invalidate an original cost advance. Nevertheless, he admits, that productivity needs to improve “signifi cantly” in future.

The airline wants to decide by the end of 2012 whether to merge its two base mainte-nance sites. “The more [production] lines are located in one facility, the more fl exibility we gain,” says Hundhausen. “But the challenge is how to overcome the [current] know-how separation, with the 737s being serviced in Munich and the Airbus types in Dusseldorf.”

By mid-2013, Air Berlin also wishes to decide how to source base maintenance in future. If the technical division were to pro-vide only line maintenance and standard C-checks, the latter could be moved to a low-cost location. Hundhausen appears to favour setting up a facility in, for example, eastern Europe, rather than outsourcing the work. “With around 150 aircraft, we could occupy about three production lines. Given this fl eet size, I am not sure whether outsourcing will really be more economic.”

bringing down prices for airframe, component and engine maintenance, but they also gener-ate secondary benefi ts, such as building up engineering expertise, using data manage-ment and administration resources effi ciently, and establishing new technical capabilities.

MIXED MODEAir Berlin employs both in-house mainte-nance capacity and external partners to sup-port its fl eet. Airframe base maintenance for its Boeing 737, A320 and A330 aircraft are provided by Air Berlin Technik’s facilities in Dusseldorf and Munich, while engines and most components are serviced through other MRO companies.

Despite Germany’s high labour costs, Tobias Hundhausen, senior vice-president produc-tion and accountable manager at Air Berlin Technik, says that the location offers advan-tages in terms of fl exibility because of the service breadth close to the parent’s opera-tional base, covering not just scheduled checks but also modifi cations such as cabin upgrades and in-fl ight entertainment installa-tions. He adds that changing agreed fl eet

LEADING SELECTED AIRLINE GROUPS BY MAINTENANCE EXPENDITURE

Airline group Expenditure ($m) Change (%) Cost share (%) Cost share change

United Continental Holdings 3,186 8.1 9.0 -0.1 Lufthansa Group 2,849 11.9 7.3 -0.3

AMR Corporation 2,823 0.0 11.3 -1.6

Delta Air Lines 2,420 8.3 7.3 -0.3 FedEx Express 1,980 0.1 7.8 -0.6 International Airlines Group 1,536 8.3 6.9 -0.5 All Nippon Airways 1,335 10.2 9.0 0.1 Southwest Airlines 1,237 7.3 8.3 -2.1 China Southern Airlines 1,168 41.3 8.9 0.9 US Airways 1,107 3.1 8.6 -0.8 Cathay Pacifi c Group 1,088 19.6 9.1 0.1 UPS Airlines 938 14.0 16.8 -0.8 Air Canada 691 9.3 6.0 -0.2 China Eastern Airlines 683 0.1 5.6 -1.2 Singapore Airlines 443 16.4 4.7 0.0 Air China 405 6.3 2.8 -0.8 China Airlines 404 21.2 8.9 0.4 Thai Airways International 383 25.3 – –TAM Linhas Aereas 370 6.7 5.2 -0.7 SAS Group 362 2.4 – –Air Berlin 327 21.5 5.5 0.1 EasyJet 288 4.5 5.6 -0.7 Turkish Airlines 228 -31.6 3.3 -3.0 Korean Air 228 – 2.2 –Philippine Airlines 207 5.1 11.2 -1.0 Aeromexico 189 23.0 7.3 -0.4 Ethiopian Airlines 134 -11.2 9.0 -3.7 Royal Jordanian Airlines 123 8.2 11.0 -1.1 Kuwait Airways 112 -12.9 9.9 -2.2 Air Transat 110 34.0 – –Skymark Airlines 109 57.7 13.3 0.6 NOTES: Figures cover total cost of maintenance including labour, materials etc rather than materials-only fi gures. Sourced from airline annual returns, US DoT form 41 and ICAO data compiled by Flightglobal data research team

Maintenance consoliDation

fl ightglobal.com/ab34 | Airline Business | November 2012

equipment. The MRO provider is talking to different potential joint-venture partners but has declined to provide more details.

The move is a return to China after AFI KLM E&M became the largest shareholder in the country’s avionics repair specialist, Hangxin Aviation Engineering, in 2002. It then pulled out in 2009. “If any mistakes were made - I am not saying we did- they will not be made today,” says Terner.

For airframe support, AFI KLM E&M wants to form closer ties with maintenance provid-ers in Asia, where heavy checks for the parent carriers’ long-haul aircraft have already been outsourced. “The goal is to develop partner-ships with some MROs or airlines with MRO [operations], not just to subcontract D-checks,” says Terner. The objective is to set up facilities such as Aerotechnic Industries, its 50:50 joint-venture A320 base maintenance centre with Royal Air Maroc in Casablanca.

Diversifi cation has been the strategy for Sabena Technics. As traditional airframe maintenance became less viable in western Europe, the French MRO provider, which itself is a consolidation product – having emerged from TAT Industries, AOM Indus-tries, the technical arm of former Belgian car-rier Sabena and EADS Sogerma – has focussed on servicing military transport aircraft, com-ponent support and VIP completions.

In recent years, military aircraft support became the biggest growth driver, now cover-ing roughly 40% of the company’s turnover of around €530 million ($687m), says Jean-Luc Fournel, chief operating offi cer customers.

He is confi dent the MRO provider will be able to extend its capabilities for the 737 and A320 to the re-engined variants. “[But] the long-term question is, will it be possible for us to access new-generation platforms?”

Establishing the required capabilities will need to be done either in partnership with an OEM or airline. “We already cooperate with Airbus and can imagine that this could be expanded to that category of new aircraft [A350],” says Fournel. But he adds that the MRO company is equally open to a potential cooperation with Boeing.

Fournel dismisses concerns that airlines might be less interested in such partnerships if the required capabilities need yet to be developed, leading to a catch 22 situation where the MRO provider cannot establish the services without OEM support.

He says that it would be possible to build up new capabilities with customer, and adds that Sabena Technics is in talks with A350 and 787 customer airlines about a possible cooperation. But he declines to reveal further details at this stage. ■

for opportunities where win-win situations can be reached for both – or multiple – sides,” he says. This could be a mixture of different cooperation models with airlines and manu-facturers, as “there is no single solution that fi ts everything”. But he says that it is impor-tant for third-party MRO providers, to “repre-sent a certain independence. There are so many monopolistic tendencies in the market, which are not supported by the industry and especially the operators. I believe that the air-lines must have a choice.”

Henningsen thinks there is growing con-cern among airlines worldwide, which could lead to greater interest in choice between alternative service providers in future. Yet in the current economic climate where airlines battle with low profi t margins, he expects that many will make mainly price-led, opportun-istic decisions.

Investment remains central for the German maintenance provider’s future growth. Although LHT has expanded its network glo-bally over the past two decades, this does not need necessarily mean large greenfi eld facili-ties, says Henningsen. But it does include development of new processes, quality assur-ance, logistics, engineering and in-house repairs. He says the MRO industry is driven by two main factors – airline growth and mak-ing maintenance processes more effi cient.

INTERNATIONAL EXPANSIONExpanding its international facility network is a central objective of AFI KLM E&M’s strategy. The MRO group wants to open two compo-nent repair shops in China next year – one for avionics and the other for large mechanical

signifi cant fl eet to look after,” says Stewart. “So in order to make their investment pay off, they really need to capture a global fl eet.”

Air Berlin views the MRO industry consoli-dation as a positive development, because large international maintenance groups could offer a counterbalance to the OEMs’ infl uence. For independent MRO providers, which don’t have an own airline or large customer fl eets behind them, the situation is set to become more diffi cult.

“Despite the consolidation in the market for smaller MRO providers, I believe there is still no threat of an oligopoly as in other airline supply areas,” says Hundhausen. “Even if there will be fi ve to 10 large global MRO groups in future – it will probably be a few more – we’ll still have enough competition.”

UNCLEAR FUTUREThe outcome of the MRO industry consolida-tion is not yet clear. While new-generation aircraft will likely change the dynamics as a result of the OEMs’ growing aftermarket involvement, current-generation aircraft will continue to require service over the next two decades. In the case of the re-engined 737 Max and A320neo, maintenance providers believe their existing capabilities for the current mod-els can be extended to the new generation without fundamental change.

August Wilhelm Henningsen, chief execu-tive of Lufthansa Technik, views the current industry situation as a transitioning process, where “everything is in a state of fl ux” with MRO providers and OEMs positioning them-selves in the market. “We need to develop a mind-set for this development and look out

Read how global MRO providers are seeking closer links with Middle Eastern carriers:fl ightglobal.com/MiddleEastMRO

SELECTED CIVIL MAINTENANCE PROVIDERS WITH AIRFRAME/ENGINE CAPABILITIES

Company Country Revenues ($m) Change (%)

GE Engine Services United States 7,200 10.8%Pratt & Whitney United States 6,715 3.8% Lufthansa Technik Germany 5,721 7.9% Rolls-Royce Aerospace United Kingdom 5,376 15.2% Air France Industries-KLM Engineering France 4,350 7.1% Honeywell Aerospace United States 2,828 16.0% AMR Corporation United States 2,823 0.0% Goodrich United States 2,422 11.7% MTU Maintenance Germany 1,561 10.1% ST Aerospace Singapore 1,538 11.4% SR Technics Holding Switzerland 1,249 17.9% US Airways United States 1,107 3.1% Singapore Airlines Singapore 937 12.2% HAECO China, Hong Kong 665 21.1% Embraer Brazil 659 16.9% Delta TechOps United States 650 30.0% Iberia Spain 577 17.6% Turkish Technic Turkey 486 2.0% AAR Corporation United States 422 7.1% TAP Maintenance & Engineering Portugal 216 -7.9% NOTES: 2011 revenues for airline groups include service for in-house carrier and third parties. Estimates have been used where commercial maintenance revenues are not published. SOURCE: Airline Business research, annual reports, US DoT form 41 and ICAO

fl ightglobal.com/ab fl ightglobal.com/ab

technical operations division James Keenan in September, shortly before leaving the company.

Keenan says outsourcing the maintenance will allow for cost savings and enable United to take advantage of OEM contracts for materials. “While United has a long history of overhaul-ing engines in-house, work began as long as 15-20 years ago to begin shifting from that model towards one where more of the work is done on an outsourced basis by the manufac-turer of that engine type,” says Keenan.

Outsourcing maintenance will allow the air-line to move from fi xed costs associated with maintaining its own engine shop to variable costs, which allow for more fl exibility. “In the volatile and often unpredictable world of airline economics, the ability to have more of our cost basis in a variable category is helpful, because it helps us to be more nimble, to react more quick-ly to industry change and things like that,” says Keenan, adding that OEMs are well positioned to optimise and leverage materials costs.

This means United will start looking to out-source power-by-the-hour type contracts with OEMs as it buys new types, Keenan says. As this happens, new aircraft types will have con-tracts and maintenance work will decrease at its San Francisco facility over the longer-term until each engine is contracted out and United outsources most of its engine maintenance.

Engine manufacturer General Electric says it has noticed several airlines looking to defer maintenance and cost risk to the OEM through exclusive time and materials agreements. “Airlines are defi nitely trying to control costs and workscopes,” says Marty Fritsch, general manager, T&M Solution, GE Aviation Servic-es. “So they’re trying to minimise their invest-ment and still meet their maintenance re-quirements, and they’re trying to maximise utilisation of their fl eets.”

As more effi cient engines come into the market, fewer shop visits will be expected throughout the life of each engine. Therefore, competition for engine contracts continues to heat up among OEMs and MRO units.

More and more airlines are seeing an op-portunity to create a point of leverage to guar-antee maintenance costs throughout a particu-lar ownership cycle by thinking about maintenance contracts when they acquire the aircraft, says Oliver Wyman’s Spafford.

“They’re negotiating long-term maintenance costs on components and powerplants with the OEMs at the time of aircraft acquisition,” he says. However, a recent Oliver Wyman survey co-written by Spafford shows that only about 41% of airlines lock in these long-term mainte-nance contracts when acquiring aircraft – when they have the most leverage. ■

for doing maintenance work may not be as at-tractive as they used to be due to rising labour rates elsewhere in the world. “You’re starting to see people reconsider whether sending air-craft to Asia makes as much sense as it used to, certainly on the narrowbody front,” he says.

SELLER’S MARKETUS Airways senior vice-president for opera-tions David Seymour says MRO is now a sell-er’s rather than a buyer’s market. “Demand for third-party heavy maintenance is going up and supply has come down a little bit.” In many cases, airlines are placing emphasis on their operational and maintenance strengths and letting a third party – be it an OEM or an MRO unit – take care of the rest of the work.

“We want to stick to what we can be really good in, where our core strengths need to be,” says Seymour. For US Airways, that means providing line maintenance to its own fl eet, as well as keeping its shops full for heavy main-tenance, rather than focusing on providing third-party work to other airlines.

The carrier says that 100% of its scheduled line maintenance is done in-house, and an emphasis on improving day-to-day mainte-nance functions is paying off. In the past four years, the carrier has reduced its maintenance cancellations by half, and deferred mainte-nance items are down more than 50% on av-erage, says Seymour.

United Airlines, meanwhile, has a long-term strategy to outsource its engine maintenance to OEMs, said then senior vice-president of the

Maintenance noRtH aMeRica

November 2012 | Airline Business | 3736 | Airline Business | November 2012

Consolidations, bankruptcies and facility closures are changing the North American maintenance, repair and overhaul landscape, affecting capacity and choices for

where airlines can carry out maintenance. Boeing’s market outlook shows the most sig-

nifi cant fl eet growth in North America over the long term will be for single-aisle aircraft, which are expected to increase from 3,730 today to 6,090 by 2031. Twin-aisle orders in this region are set to increase only slightly, while large air-craft and regional deliveries will actually con-tract by the end of the forecast period.

Airframe maintenance in North America is expected to have a slow rate of growth overall compared with Europe and Asia, says aerospace consultants TeamSAI in its 2012-2022 global forecast. Average compound annual fl eet growth in the region from 2012-17 is expected to be minus 0.3%, then (plus) 2.1% until 2022. Based on fl eet needs, MRO spend will only increase by around $300 million in North America to about $16.4 billion at the end of the forecast period.

Despite this relatively slow growth, mainte-nance work will continue to be needed in North

767 and 757 fl ights to help streamline opera-tions. “While most of our maintenance work is – and will continue to be – performed at our own facilities, our competitors have forged a path of having their maintenance completed where it is most cost-effective. In order to compete, we must similarly adapt,” it says. It is unclear which specifi c MRO units will ab-sorb the maintenance work.

In March, Tampa-based maintenance and cargo conversion centre Pemco fi led for bank-ruptcy protection, later closing its facility in Dothan, Alabama. In the same month, Aveos Fleet Performance, a key maintenance supplier to Air Canada, shuttered its doors for good, leav-ing a bankruptcy court to divide up its assets.

Aveos failed to fi nd a buyer to restart its en-gine and airframe businesses, and fi ve MROs ended up buying the business in portions. Court documents show prospective bidders cited that doing airframe maintenance in Cana-da had a “limited role” in a global context. Aveos’s engine facility had a similar fate and was liquidated after failing to secure bidders, with “signifi cant amount of global excess ca-pacity” for engine overhauls around the world

America – especially for narrowbody aircraft. Independent MRO and interiors manufacturer TIMCO says it is expecting to see increased lev-els of narrowbody work. “From a fl eet perspec-tive, the North American 737NGs are beginning to represent a larger part of the market, as more of the type reach heavier scheduled mainte-nance events,” says vice-president for market-ing and business development Leonard Kaz-merski. “TIMCO has been a long-time provider of A320 airframe maintenance, but we have also seen growth in demand for maintenance on that fl eet among North American operators as well.”

CHANGING LANDSCAPEIn the past year, there have been several chang-es to the MRO landscape in North America. After fi ling for bankruptcy protection last No-vember, American Airlines earlier this year an-nounced it would be outsourcing some mainte-nance work and closing its Fort Worth Alliance maintenance facility. The carrier has confi rmed it will be shifting to contract maintenance for its widebody aircraft and Boeing 757s.

The carrier says it will pursue contract maintenance agreements for its Boeing 777,

sHiFting PositionsWith specialist maintenance units closing and relatively slow demand growth predicted for North America, many airlines are starting to reassess their MRO set-ups

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probably maximum length to be interesting”

QUOTE – PERSON NAMEQuote – person details

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Keep up-to-date with the latest MRO news and developments at Flightglobal Pro: fl ightglobal.com/MRO

REPORTKRISTIN MAJCHER WASHINGTON DC

noted as one of the deterrents.Despite the lack of interest in the engine and

airframe businesses, UK component supplier AJ Walter used the Aveos shutdown as an op-portunity to start up a new component mainte-nance capability in Montreal, primarily fo-cused on component logistics and inventory services. AJ Walter was the only company to restart any part of Aveos’s business in a way that resembled what it had been before.

The new facility, called AJW Technique, will be operational by early 2013. AJ Walter president Christopher Whiteside says there is already demand. Work based on demand from existing customers will fi ll up the facility at fi rst. “We’re hoping to sign this year at least 100 A320s in North America, and South America and Central America,” he adds.

Pemco, unlike Aveos, will continue to offer MRO under its own name. The company shut down its Dothan maintenance facility in June, but emerged from Chapter 11 restructuring at the end of August. It signed a new mainte-nance contract for A320-family aircraft with an undisclosed US-based ultra low-cost air-line operating an all-Airbus fl eet in the USA, Latin America, South America and the Carib-bean – matching Spirit Airlines’ profi le.

MRO capacity overall in North America is “relatively tight” says Chris Spafford, partner at Oliver Wyman, with the industry relatively stable and growing slightly. He says that this is caused in part due to MROs improving the way they manage capacity throughout the years.

Spafford also notes that dynamics abroad

Many carriers rely heavily on OEM forecasts Fewer make a comparison with similar fl eets Less compare promised direct maintenance costs with actual costs Only 41% lock in long-term contracts at acquisition

AIRCRAFT PURCHASE: MAINTENANCE SOURCING ACTIVITY

Less than half lock in long-term contracts at acquisitions,

when they have most leverage

But less compare promised direct maintenance costs with

that actually incurred

41%Oliver Wyman survey shows most airlines rely heavily on

OEM-provided forecasts

82%

GE

Avia

tion

55%

fl ightglobal.com/ab fl ightglobal.com/ab

technical operations division James Keenan in September, shortly before leaving the company.

Keenan says outsourcing the maintenance will allow for cost savings and enable United to take advantage of OEM contracts for materials. “While United has a long history of overhaul-ing engines in-house, work began as long as 15-20 years ago to begin shifting from that model towards one where more of the work is done on an outsourced basis by the manufac-turer of that engine type,” says Keenan.

Outsourcing maintenance will allow the air-line to move from fi xed costs associated with maintaining its own engine shop to variable costs, which allow for more fl exibility. “In the volatile and often unpredictable world of airline economics, the ability to have more of our cost basis in a variable category is helpful, because it helps us to be more nimble, to react more quick-ly to industry change and things like that,” says Keenan, adding that OEMs are well positioned to optimise and leverage materials costs.

This means United will start looking to out-source power-by-the-hour type contracts with OEMs as it buys new types, Keenan says. As this happens, new aircraft types will have con-tracts and maintenance work will decrease at its San Francisco facility over the longer-term until each engine is contracted out and United outsources most of its engine maintenance.

Engine manufacturer General Electric says it has noticed several airlines looking to defer maintenance and cost risk to the OEM through exclusive time and materials agreements. “Airlines are defi nitely trying to control costs and workscopes,” says Marty Fritsch, general manager, T&M Solution, GE Aviation Servic-es. “So they’re trying to minimise their invest-ment and still meet their maintenance re-quirements, and they’re trying to maximise utilisation of their fl eets.”

As more effi cient engines come into the market, fewer shop visits will be expected throughout the life of each engine. Therefore, competition for engine contracts continues to heat up among OEMs and MRO units.

More and more airlines are seeing an op-portunity to create a point of leverage to guar-antee maintenance costs throughout a particu-lar ownership cycle by thinking about maintenance contracts when they acquire the aircraft, says Oliver Wyman’s Spafford.

“They’re negotiating long-term maintenance costs on components and powerplants with the OEMs at the time of aircraft acquisition,” he says. However, a recent Oliver Wyman survey co-written by Spafford shows that only about 41% of airlines lock in these long-term mainte-nance contracts when acquiring aircraft – when they have the most leverage. ■

for doing maintenance work may not be as at-tractive as they used to be due to rising labour rates elsewhere in the world. “You’re starting to see people reconsider whether sending air-craft to Asia makes as much sense as it used to, certainly on the narrowbody front,” he says.

SELLER’S MARKETUS Airways senior vice-president for opera-tions David Seymour says MRO is now a sell-er’s rather than a buyer’s market. “Demand for third-party heavy maintenance is going up and supply has come down a little bit.” In many cases, airlines are placing emphasis on their operational and maintenance strengths and letting a third party – be it an OEM or an MRO unit – take care of the rest of the work.

“We want to stick to what we can be really good in, where our core strengths need to be,” says Seymour. For US Airways, that means providing line maintenance to its own fl eet, as well as keeping its shops full for heavy main-tenance, rather than focusing on providing third-party work to other airlines.

The carrier says that 100% of its scheduled line maintenance is done in-house, and an emphasis on improving day-to-day mainte-nance functions is paying off. In the past four years, the carrier has reduced its maintenance cancellations by half, and deferred mainte-nance items are down more than 50% on av-erage, says Seymour.

United Airlines, meanwhile, has a long-term strategy to outsource its engine maintenance to OEMs, said then senior vice-president of the

Maintenance noRtH aMeRica

November 2012 | Airline Business | 3736 | Airline Business | November 2012

Consolidations, bankruptcies and facility closures are changing the North American maintenance, repair and overhaul landscape, affecting capacity and choices for

where airlines can carry out maintenance. Boeing’s market outlook shows the most sig-

nifi cant fl eet growth in North America over the long term will be for single-aisle aircraft, which are expected to increase from 3,730 today to 6,090 by 2031. Twin-aisle orders in this region are set to increase only slightly, while large air-craft and regional deliveries will actually con-tract by the end of the forecast period.

Airframe maintenance in North America is expected to have a slow rate of growth overall compared with Europe and Asia, says aerospace consultants TeamSAI in its 2012-2022 global forecast. Average compound annual fl eet growth in the region from 2012-17 is expected to be minus 0.3%, then (plus) 2.1% until 2022. Based on fl eet needs, MRO spend will only increase by around $300 million in North America to about $16.4 billion at the end of the forecast period.

Despite this relatively slow growth, mainte-nance work will continue to be needed in North

767 and 757 fl ights to help streamline opera-tions. “While most of our maintenance work is – and will continue to be – performed at our own facilities, our competitors have forged a path of having their maintenance completed where it is most cost-effective. In order to compete, we must similarly adapt,” it says. It is unclear which specifi c MRO units will ab-sorb the maintenance work.

In March, Tampa-based maintenance and cargo conversion centre Pemco fi led for bank-ruptcy protection, later closing its facility in Dothan, Alabama. In the same month, Aveos Fleet Performance, a key maintenance supplier to Air Canada, shuttered its doors for good, leav-ing a bankruptcy court to divide up its assets.

Aveos failed to fi nd a buyer to restart its en-gine and airframe businesses, and fi ve MROs ended up buying the business in portions. Court documents show prospective bidders cited that doing airframe maintenance in Cana-da had a “limited role” in a global context. Aveos’s engine facility had a similar fate and was liquidated after failing to secure bidders, with “signifi cant amount of global excess ca-pacity” for engine overhauls around the world

America – especially for narrowbody aircraft. Independent MRO and interiors manufacturer TIMCO says it is expecting to see increased lev-els of narrowbody work. “From a fl eet perspec-tive, the North American 737NGs are beginning to represent a larger part of the market, as more of the type reach heavier scheduled mainte-nance events,” says vice-president for market-ing and business development Leonard Kaz-merski. “TIMCO has been a long-time provider of A320 airframe maintenance, but we have also seen growth in demand for maintenance on that fl eet among North American operators as well.”

CHANGING LANDSCAPEIn the past year, there have been several chang-es to the MRO landscape in North America. After fi ling for bankruptcy protection last No-vember, American Airlines earlier this year an-nounced it would be outsourcing some mainte-nance work and closing its Fort Worth Alliance maintenance facility. The carrier has confi rmed it will be shifting to contract maintenance for its widebody aircraft and Boeing 757s.

The carrier says it will pursue contract maintenance agreements for its Boeing 777,

sHiFting PositionsWith specialist maintenance units closing and relatively slow demand growth predicted for North America, many airlines are starting to reassess their MRO set-ups

“Quote and quote and quote, four lines is

probably maximum length to be interesting”

QUOTE – PERSON NAMEQuote – person details

■

■

Keep up-to-date with the latest MRO news and developments at Flightglobal Pro: fl ightglobal.com/MRO

REPORTKRISTIN MAJCHER WASHINGTON DC

noted as one of the deterrents.Despite the lack of interest in the engine and

airframe businesses, UK component supplier AJ Walter used the Aveos shutdown as an op-portunity to start up a new component mainte-nance capability in Montreal, primarily fo-cused on component logistics and inventory services. AJ Walter was the only company to restart any part of Aveos’s business in a way that resembled what it had been before.

The new facility, called AJW Technique, will be operational by early 2013. AJ Walter president Christopher Whiteside says there is already demand. Work based on demand from existing customers will fi ll up the facility at fi rst. “We’re hoping to sign this year at least 100 A320s in North America, and South America and Central America,” he adds.

Pemco, unlike Aveos, will continue to offer MRO under its own name. The company shut down its Dothan maintenance facility in June, but emerged from Chapter 11 restructuring at the end of August. It signed a new mainte-nance contract for A320-family aircraft with an undisclosed US-based ultra low-cost air-line operating an all-Airbus fl eet in the USA, Latin America, South America and the Carib-bean – matching Spirit Airlines’ profi le.

MRO capacity overall in North America is “relatively tight” says Chris Spafford, partner at Oliver Wyman, with the industry relatively stable and growing slightly. He says that this is caused in part due to MROs improving the way they manage capacity throughout the years.

Spafford also notes that dynamics abroad

Many carriers rely heavily on OEM forecasts Fewer make a comparison with similar fl eets Less compare promised direct maintenance costs with actual costs Only 41% lock in long-term contracts at acquisition

AIRCRAFT PURCHASE: MAINTENANCE SOURCING ACTIVITY

Less than half lock in long-term contracts at acquisitions,

when they have most leverage

But less compare promised direct maintenance costs with

that actually incurred

41%Oliver Wyman survey shows most airlines rely heavily on

OEM-provided forecasts

82%

GE

Avia

tion

55%

fl ightglobal.com/ab fl ightglobal.com/ab

■ Turnaround time and costs: airframe, engine shop and component shop productiv-ity, average costs and duration of light and heavy checks■ Supply chain effi ciency: inventory per air-craft, inventory turns, delays due to lack of parts, AOG requests ■ Safety: in-fl ight shut down rate, diversions, engine MTRB, rejected take-off.

The benchmarking process will identify areas of potential opportunity for improve-ment. To fully benefi t this must be followed by a detailed diagnostic assessment of processes and procedures.

This should include a review of engineering, maintenance planning, base and line mainte-nance, production control materials supply, outsourcing and contracts, QA, inspection and safety and security. Utilising predefi ned diag-nostic templates and checklists the assessment can be quickly handled.

The processes are examined for ineffi ciencies by measuring any deviation from recognised best practices in the industry, as well as any compliance infringements. The diagnostic anal-ysis will focus on the variances between ineffi -cient operations and best practices, and will determine what impact the gap is having on the airline MRO’s performance.

The diagnostic analysis can identify miss-ing components in a typical supply chain process (see diagram 1 opposite). For exam-ple, some airline MROs do not have a struc-tured material forecasting process driving the supply chain, and these activities are frag-mented with different reporting lines in the organisation. This means no one has account-ability for delivering the required part to the right place when needed at minimal cost.

An operating plan based on the airlines’ schedule will optimise the top and bottom

line revenues by minimising aircraft ground time and utilisation, subject to operational constraints. Network design and fl ight sched-ule development can drive ineffi ciencies in line maintenance costs, with many aircraft resting overnight in outstations away from maintenance bases. A lack of alignment between network and fl eet planning, schedul-ing, operations control and maintenance can also be key drivers to ineffi ciencies.

Line maintenance benchmarking can quickly indicate ineffi ciencies in the MRO process. For example, (see example 1 above), a top-down

provide a more detailed and granular view of customer expectations. It can also be used to identify new service requirements and areas for improvement in performance. This infor-mation will help the airline MRO to capture a greater share of the market.

Once the segment priorities are established, the MRO should focus on productivity improvements to enable delivery of the serv-ice at market rates. This requires business alignment and productivity improvement efforts. Activities here include benchmarking, diagnostic, process improvement, organisa-tion alignment, performance management and systems.

The benchmarking process is carried out to compare the airline MRO with its peer group, competitors and best-in-class companies. The benchmarking process includes:■ Asset utilisation: fl eet availability, unsched-uled aircraft out of service, on-time perform-ance■ Maintenance costs: maintenance CASK, MCASK per fl ight hour, maintenance yield■ Labour productivity and costs: employee aircraft, overtime costs, material usage■ Planning and engineering effi ciency: main-tenance planning yield

■ Evaluate current and potential customers of an airline MRO to assess what is the expected business potential?■ Which airline customers are likely to use it?■ What amount of business can be generated from third parties?■ What services should be offered?■ What are the target fares?

Carrying out demand and supply side analy-ses helps airline MROs to quickly focus on the right segments. Involvement of MRO leadership and sales and marketing will enable them to contribute their expertise to the process. In addition workshops to discuss priorities will complement the detailed analysis, and help engage executives and management.

However, demand and supply-side analyses only provide a macro level view to an MRO’s operations. These analyses must be comple-mented with a bottom up micro-focused analy-sis of the airline MRO’s customer requirements, and feedback on its performance. The informa-tion can be used during business alignment and productivity improvement efforts.

Customer analysis can be carried out through a series of meetings and workshops with the airline MRO’s current and future cus-tomers. This information can then be used to

Maintenance stRategY

November 2012 | Airline Business | 3938 | Airline Business | November 2012

The growth potential of the indus-try is clear. Boeing’s latest global market forecast estimates the number of aircraft in service will grow by around 20,000 to reach

39,780 aircraft in 2031. It sees delivery of 34,000 aircraft over these 20 years, including more than 23,000 single-aisles.

At the same time, a study by aircraft lessor Avolon shows the proportion of the aircraft fl eet that is 25 years and older has increased from 30% in 1990 to 60% today.

These fi gures all strongly suggest that the maintenance, repair and overhaul market is set to grow signifi cantly. Some airlines will be able to benefi t from this growth by leveraging their MRO capabilities and extending their third-party services. This, however, requires the improvement of their MRO capabilities, and of delivery performance.

MROs without a captive customer which have to compete for third-party business have a general need to be more effi cient, compared with those that retain captive customers. There are many symptoms of ineffi ciencies. Often, leadership is focused on day-to-day

market demand for the target segment and available and planned competitive capacity. A market forecast can be executed at global and regional levels, as well as with a specifi c geographic focus, and can include the follow-ing elements: ■ Aircraft category■ Aircraft generation■ Maintenance activity■ Aircraft/engine type■ Component category

An analysis of supply is just as important as the demand for MRO services. Such an analysis includes the airline MRO’s competi-tors and look at a variety of areas. A typical supply-side analysis should address the fol-lowing questions:■ Who are the main suppliers/supply groups by MRO segment? What are their strengths and weaknesses? What are their capabilities?■ What are the main services/value proposi-tions? Where possible, what is their estimated market share?■ What are the MRO’s pricing strategies?■ Who are their main customers? What are their fares?

execution, leaving insuffi cient time for strat-egy, planning and performance management.

Other symptoms include a lack of collec-tive view and consensus on priorities. A fi re-fi ghting mentality inhibits the delegation of accountabilities and empowerment cascading down to management and supervisory levels. Insuffi cient focus on costs and productivity, fi nance marketing and human resource capa-bilities could limit an airline MRO division’s efforts to improve its competitiveness.

THE RIGHT MARKET SEGMENTImproving competitiveness starts with a focus on the right market segment. This should be one where demand exceeds supply and the air-line MRO has previous experience and expo-sure to the market segment, including aircraft engine and component type. This is then fol-lowed by aligning business and productivity improvements, enabling an airline MRO to deliver the service at market rates with the abil-ity to grow market share profi tably.

A number of factors infl uence the selection of the particular market segments. This includes the airline MRO’s previous expertise,

MoRe to MaintainInterVistas’ Emre Serpen considers the processes airline MROs should be undertaking when looking at how they can develop their business as the market grows

■

■

■

COLOMBIAN CARRIERS XXXXXXXXXX

Carrier Market share Load factorJun-09 Jun-08 Jun-09

Avianca* 55.7% 61.0% 76.7%Aero Republica 17.3% 16.0% 67.6%Aires 14.8% 10.6% 57.7%Satena 8.1% 9.7% 64.0%EasyFly 2.4% 1.5% 61.5%Anitoquia 1.7% 1.3% 67.5%Total/Average 100% 100.1% 69.9%*Avianca fi gures include SAM subsidiary. NOTES: Market share is based on domestic passengers carried in June 2009 and June 2008. SOURCE: Colombian CAA monthly supply and demand data

Air F

ranc

e KL

M

SAMPLE SUPPLY CHAIN PROCESSES

Materialforecast

Inventory management Procurement Stores Transport

EXAMPLE 1: INVENTORY COSTS

Inventory & components Airline 1 Airline 2 Airline 3

Total inventory carried $8.45m $13.5m $10.25mNumber of aircraft 12 22 17Inventory per aircraft $704,000 $614,000 $603,000

“Quote, quote, quote, quote, quote, without

name is best at about fi ve lines is probably max

length to be interesting”

Airlines can benefi t from this growth by leveraging

their MRO capabilities and extending third

party services

fl ightglobal.com/ab fl ightglobal.com/ab

■ Turnaround time and costs: airframe, engine shop and component shop productiv-ity, average costs and duration of light and heavy checks■ Supply chain effi ciency: inventory per air-craft, inventory turns, delays due to lack of parts, AOG requests ■ Safety: in-fl ight shut down rate, diversions, engine MTRB, rejected take-off.

The benchmarking process will identify areas of potential opportunity for improve-ment. To fully benefi t this must be followed by a detailed diagnostic assessment of processes and procedures.

This should include a review of engineering, maintenance planning, base and line mainte-nance, production control materials supply, outsourcing and contracts, QA, inspection and safety and security. Utilising predefi ned diag-nostic templates and checklists the assessment can be quickly handled.

The processes are examined for ineffi ciencies by measuring any deviation from recognised best practices in the industry, as well as any compliance infringements. The diagnostic anal-ysis will focus on the variances between ineffi -cient operations and best practices, and will determine what impact the gap is having on the airline MRO’s performance.

The diagnostic analysis can identify miss-ing components in a typical supply chain process (see diagram 1 opposite). For exam-ple, some airline MROs do not have a struc-tured material forecasting process driving the supply chain, and these activities are frag-mented with different reporting lines in the organisation. This means no one has account-ability for delivering the required part to the right place when needed at minimal cost.

An operating plan based on the airlines’ schedule will optimise the top and bottom

line revenues by minimising aircraft ground time and utilisation, subject to operational constraints. Network design and fl ight sched-ule development can drive ineffi ciencies in line maintenance costs, with many aircraft resting overnight in outstations away from maintenance bases. A lack of alignment between network and fl eet planning, schedul-ing, operations control and maintenance can also be key drivers to ineffi ciencies.

Line maintenance benchmarking can quickly indicate ineffi ciencies in the MRO process. For example, (see example 1 above), a top-down

provide a more detailed and granular view of customer expectations. It can also be used to identify new service requirements and areas for improvement in performance. This infor-mation will help the airline MRO to capture a greater share of the market.

Once the segment priorities are established, the MRO should focus on productivity improvements to enable delivery of the serv-ice at market rates. This requires business alignment and productivity improvement efforts. Activities here include benchmarking, diagnostic, process improvement, organisa-tion alignment, performance management and systems.

The benchmarking process is carried out to compare the airline MRO with its peer group, competitors and best-in-class companies. The benchmarking process includes:■ Asset utilisation: fl eet availability, unsched-uled aircraft out of service, on-time perform-ance■ Maintenance costs: maintenance CASK, MCASK per fl ight hour, maintenance yield■ Labour productivity and costs: employee aircraft, overtime costs, material usage■ Planning and engineering effi ciency: main-tenance planning yield

■ Evaluate current and potential customers of an airline MRO to assess what is the expected business potential?■ Which airline customers are likely to use it?■ What amount of business can be generated from third parties?■ What services should be offered?■ What are the target fares?

Carrying out demand and supply side analy-ses helps airline MROs to quickly focus on the right segments. Involvement of MRO leadership and sales and marketing will enable them to contribute their expertise to the process. In addition workshops to discuss priorities will complement the detailed analysis, and help engage executives and management.

However, demand and supply-side analyses only provide a macro level view to an MRO’s operations. These analyses must be comple-mented with a bottom up micro-focused analy-sis of the airline MRO’s customer requirements, and feedback on its performance. The informa-tion can be used during business alignment and productivity improvement efforts.

Customer analysis can be carried out through a series of meetings and workshops with the airline MRO’s current and future cus-tomers. This information can then be used to

Maintenance stRategY

November 2012 | Airline Business | 3938 | Airline Business | November 2012

The growth potential of the indus-try is clear. Boeing’s latest global market forecast estimates the number of aircraft in service will grow by around 20,000 to reach

39,780 aircraft in 2031. It sees delivery of 34,000 aircraft over these 20 years, including more than 23,000 single-aisles.

At the same time, a study by aircraft lessor Avolon shows the proportion of the aircraft fl eet that is 25 years and older has increased from 30% in 1990 to 60% today.

These fi gures all strongly suggest that the maintenance, repair and overhaul market is set to grow signifi cantly. Some airlines will be able to benefi t from this growth by leveraging their MRO capabilities and extending their third-party services. This, however, requires the improvement of their MRO capabilities, and of delivery performance.

MROs without a captive customer which have to compete for third-party business have a general need to be more effi cient, compared with those that retain captive customers. There are many symptoms of ineffi ciencies. Often, leadership is focused on day-to-day

market demand for the target segment and available and planned competitive capacity. A market forecast can be executed at global and regional levels, as well as with a specifi c geographic focus, and can include the follow-ing elements: ■ Aircraft category■ Aircraft generation■ Maintenance activity■ Aircraft/engine type■ Component category

An analysis of supply is just as important as the demand for MRO services. Such an analysis includes the airline MRO’s competi-tors and look at a variety of areas. A typical supply-side analysis should address the fol-lowing questions:■ Who are the main suppliers/supply groups by MRO segment? What are their strengths and weaknesses? What are their capabilities?■ What are the main services/value proposi-tions? Where possible, what is their estimated market share?■ What are the MRO’s pricing strategies?■ Who are their main customers? What are their fares?

execution, leaving insuffi cient time for strat-egy, planning and performance management.

Other symptoms include a lack of collec-tive view and consensus on priorities. A fi re-fi ghting mentality inhibits the delegation of accountabilities and empowerment cascading down to management and supervisory levels. Insuffi cient focus on costs and productivity, fi nance marketing and human resource capa-bilities could limit an airline MRO division’s efforts to improve its competitiveness.

THE RIGHT MARKET SEGMENTImproving competitiveness starts with a focus on the right market segment. This should be one where demand exceeds supply and the air-line MRO has previous experience and expo-sure to the market segment, including aircraft engine and component type. This is then fol-lowed by aligning business and productivity improvements, enabling an airline MRO to deliver the service at market rates with the abil-ity to grow market share profi tably.

A number of factors infl uence the selection of the particular market segments. This includes the airline MRO’s previous expertise,

MoRe to MaintainInterVistas’ Emre Serpen considers the processes airline MROs should be undertaking when looking at how they can develop their business as the market grows

■

■

■

COLOMBIAN CARRIERS XXXXXXXXXX

Carrier Market share Load factorJun-09 Jun-08 Jun-09

Avianca* 55.7% 61.0% 76.7%Aero Republica 17.3% 16.0% 67.6%Aires 14.8% 10.6% 57.7%Satena 8.1% 9.7% 64.0%EasyFly 2.4% 1.5% 61.5%Anitoquia 1.7% 1.3% 67.5%Total/Average 100% 100.1% 69.9%*Avianca fi gures include SAM subsidiary. NOTES: Market share is based on domestic passengers carried in June 2009 and June 2008. SOURCE: Colombian CAA monthly supply and demand data

Air F

ranc

e KL

M

SAMPLE SUPPLY CHAIN PROCESSES

Materialforecast

Inventory management Procurement Stores Transport

EXAMPLE 1: INVENTORY COSTS

Inventory & components Airline 1 Airline 2 Airline 3

Total inventory carried $8.45m $13.5m $10.25mNumber of aircraft 12 22 17Inventory per aircraft $704,000 $614,000 $603,000

“Quote, quote, quote, quote, quote, without

name is best at about fi ve lines is probably max

length to be interesting”

Airlines can benefi t from this growth by leveraging

their MRO capabilities and extending third

party services

fl ightglobal.com/ab

turns – fast versus slow movers – and sell unused stock?

Performance management is key to improv-ing staff motivation, offering clear accounta-bilities and developing quality, fi nancial, cus-tomer service and results-focused teams across the organisation.

MEASURING PERFORMANCEEffective MRO performance management requires the use of easily measurable and sim-ple performance measures. This increases the level of empowerment and staff motivation.

Use of a balanced scorecard enables a focus on profi tability, technical compliance, cus-tomer service and staff development. Meas-ures are further developed for each level in the organisation. These are part of an integral system enabling alignment of staff and man-agement goals with those of the airline MRO. Key performance measures are assigned to staff accountabilities in job specifi cations.

Developing best practice processes and performance management should be sup-ported with and integrated into effective systems strategy enabling integration of MRO activities. Systems are often not fully aligned with the needs of the processes, and they do not provide suffi cient integration across the business. Without a fully aligned and integrated systems portfolio, effi ciencies will be compromised. Selected portfolio supporting business objectives are included in the chart below.

Industry sources estimate the global air transport MRO market is expected to reach $53.5 billion. With a strong forecast for aircraft deliveries in the next 20 years, the aircraft MRO market is poised to experience strong growth in the coming year. Airlines will improve the effi ciency and effectiveness of their MRO capabilities to take advantage of this lucrative market. ■

evaluation of inventory costs indicates that Air-line 1 has higher inventory costs when com-pared with the other two sample airlines.

Line maintenance improvements can be driven by comparing activities against a pre-defi ned diagnostic checklist:■ Selection of line maintenance: bases should be considered against the schedule to mini-mise costs■ Maintenance programme: Ensure transit and overnight checks are performed in com-pliance with the programme■ Planning: carefully manage maintenance yield of line checks■ Shift optimisation: staff according to aircraft maintenance demand■ Material kitting: prepare line check kits con-sisting of all materials required to perform their jobs effi ciently■ Outstations: proactively negotiate and estab-lish on-call contracts for low traffi c cities

Supply chain improvements can be driven by comparing line management activities against a predefi ned diagnostic checklist:■ Do we have supply chain benchmarks? How do we rate against them?■ Do we balance inventory carrying costs against AOG risk? Do we have KPIs in place, and is someone of authority accountable?■ End to end responsibility for supply chain management material supply, inventory man-agement and procurement. ■ Whether to own parts or have them owned by heavy check contractors?■ Streamline supply chain and take out breaks/barriers?■ Evaluation of long-term demand and vol-ume procurement against best timing (ICC versus AOG risk). Obtain volume discount?■ Different elements of supply chain reporting to different units? ■ Do we have supply chain KPIs imple-mented?■ Provide variable compensation to supply chain manager (performance based on meas-ures of on-time delivery, AOG time and inven-tory carrying costs)■ Do we perform regular stock checks, analyse

Maintenance stRategY

40 | Airline Business | November 2012

Emre Serpen is an executive vice president and head of InterVistas Consulting Group’s Airline Practice. Serpen has led multiple airline MRO strategy and improvement projects worldwide.

EXAMPLE 2: SELECTED OBJECTIVES

Process Objectives & Benefi ts

Maintenance planning Plan and scheduled preventative maintenance, co-ordinate non-routine maintenance, develop plan based on usage

Confi guration management Use fi nished records to analyse legal confi guration and associated costs, modifi cation based on operational plans and regulatory requirements

Production planning Ensure resources are planned to deliver maintenance plan, modify production events to meet changes in operations and schedules, monitor work in progress

Inventory management Provide spare parts need to support maintenance operations, manage and track parts usage, warranty and claim administration

Routing Monitor aircraft hours to ensure aircraft meet maintenance plans, ensure aircraft fl ow is consistent with operational objectives, track main-base visits to better forecast return to service

Airworthiness requirements Track and retain aircraft modifi cation information for each aircraft, airworthiness directives, service bulletins

OPERATIONSFlight exceptions (no./1,000 dep

In-fl ight shut-down rate (no./1,000 dep) Compliance fractions (no.) Ground damage value ($)

Total aircraft out of service (%) Scheduled aircraft out of service (%)

Unscheduled aircraft out of service (%) Revenue man-hours/employee

FINANCIAL

Actual fi nancial performance v budget Maintenance cost/ASK ($/ASK)

Maintenance cost/fl ight hour ($/fhr) Maintenance cost/man-hour ($/hr)

Total revenue ($) Operating profi t ($)

Operating profi t rate (%) Return on assets (%)

CUSTOMER SATISFACTION

Technical delays (no./1,000 dep) Maintenance delays (no./1,000 dep)

Parts delays (no./1,000 dep) GSE delays (no./1,000 dep) Customer satisfaction (%)

Share of revenue of returning customers (%) Customer retention rate (%)

PEOPLE DEVELOPMENT

Technical fl ight accidents/incidents (no./1,000 dep)

On-the-job injury rate (no./mhr) Work-related deaths (no.)

Improvement in employee satisfaction (%) Progress against strategic plan Progress of training against plan Growth of revenue man-hours

■

OPERATIONSFlight exceptions (no./1,000 dep)

In-� ight shut-down rate (no./1,000 dep)

Compliance fractions (no.) Ground damage value ($)

Total aircraft out of service (%) Scheduled aircraft out of service (%)

Unscheduled aircraft out of service (%)

Revenue man-hours/employee

CUSTOMER SATISFACTIONTechnical delays (no./1,000 dep)

Maintenance delays (no./1,000 dep)

Parts delays (no./1,000 dep) GSE delays (no./1,000 dep) Customer satisfaction (%)

Share of revenue of returning customers (%)

Customer retention rate (%)

PEOPLE DEVELOPMENT

Technical fl ight accidents/incidents (no./1,000 dep)

On-the-job injury rate (no./mh) Work-related deaths (no.) Improvement in employee

satisfaction (%) Progress against strategic plan

Progress of training against plan

Growth of revenue man-hours

FINANCIALActual fi nancial

performance v budget Maintenance cost/ASK

($/ASK) Maintenance cost/fl ight hour ($/fh)

Maintenance cost/man-hour ($/h)

Total revenue ($) Operating pro� t ($)

Operating profi t rate (%) Return on assets (%)

PERFORMANCEMEASURES

Regionals subject

flightglobal.com/ab12 | Airline Business | February 2012

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