Air Taiwan
Topic Author
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Out-sourcing Maintanence (URGENT)

Mon Sep 02, 2002 5:17 pm

Hi all,

I'm doing this report on Costs of airlines and ways to reduce costs.

The figure I've been given is that 13% of the total airline cost is spent on direct maintanence.

There are some airlines that completely out-source their maintanence to other airlines. Can anyone tell me how much (by percentage) does this save the airline?

Would it eliminate as much as 50%?

Thanks!!

Jimmy
 
Whiskeyflyer
Posts: 223
Joined: Mon May 13, 2002 3:07 pm

RE: Out-sourcing Maintanence (URGENT)

Mon Sep 02, 2002 5:36 pm

Question is a biy vague. To get accurate answer you need to add some more info such as?
What checks are to be outsourced (all checks or just the heavy checks)?
Are all skills being outsourced or just some (do you have a small avionics shop and no NDT, a brake shop but a shortage of sheet meatl workers etc)?
What is the schedule of your flights (heavy utilisation means less time on ground and is your outsourcing agency on the ramp of your airport or elsewhere)?
Are your maintenance check intervals, staggered, split up. block etc.?
What aircraft you have (easier to find a third party maintennace facility for B737s that for B707s)?
What are your local labour costs?
Are you outsourcing for short term gain (such as lay off your maintenance staff due to current losses) or long term gain such as a good long term maintennace contract or cheaper to outsource than build a hanger you need?

Every situation is different and as they say get two economists in a room and you'll get three opinions.
I don't honestly think there is a quick and easy answer to your question. There is a lot of money involved. many a person thought he had a good deal and later got screwed on some contract details

As a side note, we brought out maintenance inhouse
 
Rick767
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RE: Out-sourcing Maintanence (URGENT)

Mon Sep 02, 2002 9:13 pm

Take the airline I work for as an example. We do most of our maintenance in-house, including overhauls.

In the financial year to 31.12.2000, maintenance costs accounted for 8.47% of our total operating expenses.

Take three other airlines which do not do their own in-house maintenance but out-source it instead. All very similar operations (holiday charter) and fleet type and size are closely comparable. Their maintenance costs account for 10.87%, 9.70% and 13.18% of total operating expenses respectively.

This suggests savings of up to 5% doing the maintenance yourself.

Hope this was of interest.
I used to love the smell of Jet-A in the morning...
 
Air Taiwan
Topic Author
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RE: Out-sourcing Maintanence (URGENT)

Mon Sep 02, 2002 9:25 pm

Thanks Whiskeyflyer and Richard!

Well this is for a report at uni, so this is what we have been given

3 aircrafts, 1 747, 1 767 and 1 737

utilisation is 12.2, 11.3 and 9 respectively.
unit costs are 9.1c, 9.8c, and 11c respectively.

we're looking at ways to reduce costs to improve profits. and i've heard that airtran and some other airlines oursource (don't know the degree thou) their maintenance to reduce costs, so I thought it'd be a way to do it. But the thing is I really don't know where to get the figures from.

Richard, you seem to say that outsourcing isn't the only way to reduce maintenance costs, what does your airline do to be able to keep the maintenance costs so low?

Thanks again!

Jimmy
(UNSW, Sydney)
 
saintsman
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RE: Out-sourcing Maintanence (URGENT)

Mon Sep 02, 2002 9:52 pm

The biggest way to reduce maintenance costs is to not have a big a workforce and pay them less. (Do I sound bitter there?)

To reduce costs you need to carry out a check in less manhours and reduce the overhead costs. You reduce the manhours by becoming more efficient. The overhead costs (the cost of things like your facilities, equipment and all the additional staff needed to support the engineers) help to define the rate that you charge or endure to get the work carried out. The cost of the engineer is a small proportion of the overall charge.

It can be cheaper to out source because you don't have to support the cost of a hangar etc. A maintenance facility really needs to be used 24/7 to be totally cost effective. If you have a workforce sitting idle between checks that is also not cost effective. That is why there are engineering facilities that do not have their own aircraft and airlines that do not have engineering facilities. It makes sense for some operators to work this way.

Out sourcing to maintenance facilities in the not so developed countries is also an option. The workforce are paid less and maybe conditions are not so good. Health and safety is not given such a high priority for example (and they cost).

You also have to consider value for money. Some operator will pay for a better service.

Lots of things to think about. HTH.
 
Dalmd88
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RE: Out-sourcing Maintanence (URGENT)

Mon Sep 02, 2002 10:02 pm

So, you have a fleet of three vastly different aircraft. That is very practical. All work would have to be outsourced including pilot costs to have any chance to work. An operations size is a big factor in the outsourcing debate. In the problem you have been given there is no argument for inhouse anything. Ok you could do nightly service checks with your own crews. Any thing above that would entail major capital costs for work that would be spaced months or even years apart.

A better question would be given a fleet of say 40-50 same type aircraft what is the answer? My guess would be inhouse everything except D checks and engine overhauls. As the fleet grows do D checks inhouse and look to bring other airlines work into your hangar. This would make maintenance a profit center.

To make inhouse maintenace worth the fixed costs and economy of scale has to achieved. You have to be using that hangar and the mechanics every day. With a small fleet both would be sitting idle to much.
 
Rick767
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RE: Out-sourcing Maintanence (URGENT)

Mon Sep 02, 2002 10:31 pm

I agree with the points about high utilisation of the maintenance facilities. We have a fleet of 30 or so aircraft, nowhere near enough to support a cost-effective maintenance and overhaul facility, but many other airlines outsource their maintenance to us.

So the actual maintanance unit runs as a separate entity to the airline itself, in effect the airline buys the services of the maintenance facility, but at a rock bottom price because the two companies are owned by the same people effectively.

Meanwhile the other airlines are paying industry-standard maintenance prices to use our facilities.

So the maintenance cost to our airline is reduced by having no maintenance out-sourced at all.

Hope this all made sense?!
I used to love the smell of Jet-A in the morning...
 
airplay
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RE: Out-sourcing Maintanence (URGENT)

Mon Sep 02, 2002 11:18 pm

Some large airlines have discovered the advantage of outsourcing maintenance. You don't have to deal with providing infrastructure (hangars, tools etc) or with labour disputes. If the place you go to has a strike or is charging too much you just go somewhere else so you don't need to deal with directly with unions. You are also not on the hook to provide employment perks like flight benifits. You can increase or decrease maintenance costs in proportion to your fleet size without the spectre of breaking any employment contract or laying off.

Be wary of the numbers being thrown around. The numbers can be manipulated several ways. Shop rates at airline maintenance facilities are typically higher than they are at contract maintenance facilities and lengthy labour disputes every couple of years can easily eat up any perceived advantage of in-house maintenance. The huge initial infrastructure debt often does not show up in the numbers.

One exception to this is the airline that does in-house maintenance and contract maintenance at the same facility. The contract maintenance helps make up for the shop rate.

 
LMP737
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RE: Out-sourcing Maintanence (URGENT)

Tue Sep 03, 2002 2:03 am

Outsourcing makes sense for smaller carriers that can't justify having a large maintenance operation for a small fleet. Large carriers do have the money and infrastructure to support an large maintenance operation. By keeping it in house the airline has better control over the maintenance on it's jets. Several years ago America West got rid of it's heavy maintenance operation and laid off around 400 AMT's. Well, they lost control over the work that was being performed on their aircraft. The end result was several million dollar fines and a lot of bad press. The cost of which is hard to calculate.

I've heard the arguments for outsourcing at large airlines. You save money in labor, overhead etc. Delta Tech Ops would be an argument to refute these claims. DTO not only maintains Delta's fleet but also brings in a lot of work from other airlines. All while having some of the highest paid AMT's in the business. That's one of the "secrets" to having a large maintenance operation. To make it more cost effective you have to go out and bring more work in.

There was an article in Av Week about third party maintenance awhile back. United had outsourced some of it's 737 maintenance to a company in Arizona. When they got the aircraft back they what money they "saved" they had to spend fixing all the errors made by the third party out fit. Antennas were painted over, wire bundles routed incrorrectly etc. So I guess the lesson here is if an airline does out source they had better be carefully who they pick.
Never take financial advice from co-workers.
 
donder10
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RE: Out-sourcing Maintanence (URGENT)

Tue Sep 03, 2002 7:48 am

FLS do a lot of the low-cost maintenance at STN I believe for FR and GO.
 
FDXmech
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RE: Out-sourcing Maintanence (URGENT)

Tue Sep 03, 2002 9:30 am

The general point of outsourcing maintenance as being cheaper always raised some flags in my logic.

Not only is the airline in question paying for the mechanics salary, but is also paying for the contracter per manhour as well.

Airplay: You don't have to deal with providing infrastructure (hangars, tools etc) or with labour disputes.

You don't provide but you certainly pay. If the contractor has a labor dispute,
the airline is most certainly involved. Changing contractors isn't as simple or fast as changing to a new car mechanic.

Airplay: You are also not on the hook to provide employment perks like flight benifits.

This is true, I've worked for a contractor during the PeoplExpress era without flight benefits. But in the same vein as being off the hook for giving the mechanics these sort of perks, most mechs have little loyalty for the airline and are just looking to move on. And even worse, staying and not caring.

You can increase or decrease maintenance costs in proportion to your fleet size without the spectre of breaking any employment contract or laying off.

I don't quite understand this statement.
You're only as good as your last departure.
 
LMP737
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RE: Out-sourcing Maintenance (URGENT)

Tue Sep 03, 2002 9:36 am

FDXmech:

You made a good point about changing contractors being simple. It's especially not that simple if you have several aircraft in the middle of a D check at a facility with labor problems. It's not like you can hook up a tug and take it to another facility.
Never take financial advice from co-workers.
 
airplay
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RE: Out-sourcing Maintanence (URGENT)

Tue Sep 03, 2002 10:19 am

FDXMech,

I'd like to explain my statement:

You can increase or decrease maintenance costs in proportion to your fleet size without the spectre of breaking any employment contract or laying off.

What I meant was that if your fleet maintenance requirements change, you can change your maintenance contract accordingly. Of course you would need to respect your existing contract. For example, if my company was planning to reduce it's fleet by 10% and hence it's maintenance requirements by 10%, I can adjust the contract on the next cycle accordingly. It's not quite as simple with in-house labor. With contract maintenance I wouldn't have to deal with the typical labor issues like seniority lists or laying off following major changes.

As far as changing maintenance contractors during labor disputes, I have this to offer. There are LOTS of contract maintenance shops out there that would jump at the opportunity to snag a new customer. It wouldn't be a pleasant or easy affair but I think you'd be surprised how quickly it can be done. Furthermore, I imagine that any contract facility that holds up several D checks in the middle of a contract would lose any sense of "loyalty" or credibility that they have built. If anything this just supports the use of "non-union" shops.

I understand that my last post caused some upset. I'm sure the majority of those taking offense with my post are those that would be stand to lose the most from out-sourcing maintenance.

The reality these days is that many large airlines are going (and have gone) bankrupt because of labor issues. Air Canada has a huge in-house maintenance system. They also do outside maintenance for airlines such as America West.

They have a huge amount of infrastructure to support maintenance and they also have the highest paid maintainers in the country. Sound good so far? It's not. They are heavily in debt mainly because of the greatly evolved inflexible union contracts they are bound to. The reality is that they can't afford themselves. Air Canada has recently split off the maintenance department as a wholly owned subsidiary. In my opinion they will eventually have to compete with other contract maintenance facilities for Air Canada maintenance contracts.

Logic? Pay? Yes these are relevant questions. You must take into account that "shop rates" are comprised of wages AND infrastructure no matter if you are talking about in-house or out-source maintenance. Contract maintenance facilities can be cheaper because of several factors. Some are located in warmer locations to save on heating. Many offer lower wages with little or no employment benifits. Obviously some of the work coming from some facilities are inferior but I've seen bad work come out of airlines too.

 
Whiskeyflyer
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Joined: Mon May 13, 2002 3:07 pm

RE: Out-sourcing Maintanence (URGENT)

Tue Sep 03, 2002 3:55 pm

As your question is for a university, they will want to see a logical argument presented so here arte some points I believe you can expand on. The following are just ideas you toss around in your report. No costs listed as its impossible to quote exactly as they vary due to local conditions.
You need to consider where the aircraft area based and where they are flying to and when there next major checks are due and are the aircraft bought or leased. Things to think about:
(1) Aircraft based in Europe has access to many third party maintenance facilities dealing with up to B747 size within close proximity; so many checks can be outsourced, with facilities stretching from Madrid to Hamburg, to Shannon etc. If aircraft is based in say Africa and its routes are only within Africa (or the middle of the Pacific), it does not make sense to ferry an empty B747 aircraft to say Europe or South Africa for an A check, but if the routing involves flying to Johannesburg, you can plan your checks to be done by a firm based there.
(2) A leased aircraft usually has a clause specifying what check type to be performed prior to return to leasee (regardless if it is due or not)
(3) Is the aircraft being bought by the operator (using its or the banks money) then ask the question is a major mod, inspection due soon? Aircraft can be bought cheap but a mojor mod may be due. If you do the mod inhouse (assuming you have the expertise) doing it may cover the cost of tooling, stand etc that can be used to do other checks in house, as opposed to getting a third party facility to do it.
With the fleet you have quoted, out sourcing makes the most sense. Think of the following.
(1) There are no economies of scale with three different types of aircraft, particularly of the different sizes you quote. Notice how the low costs carriers, such as Ryanair, keep a standard aircraft.
(2) Local regulations may state that all maintenance has to be carried out under cover. Building a hanger of B747 size is prohibitive for three aircraft fleet.
(3) Local staff availability. You may not have local B767 experienced persons, so you have to take into account training and learning curve costs
(4) How does local law effect labour productivity (overtime limitations, paid leave etc)
(5) Tooling and access/stand costs
(6) Spares costs (you will be surprised at the cost of keeping spares and three different aircraft increase you costs for rotable spares. Some consumables are calendar life limited)
(7) Manuals and their revision service and engineering services costs.
If outsourcing maintenance, there are still costs involved,
(1) keep the maintenance planning inhouse so you know what’s coming due and the third party maintenance facility is not dictating the check requirements. It is not in the third party maintenance facility interest to help you phase your checks over a longer period of time (it cuts down the money they earn). Maybe that AD they insist on doing now is not due till next year and you can ask to do it when the galley is coming out for the corrosion inspection due next. You can specify exactly what you need done, therefore keeping your costs down
(2) You still need experienced mechanics on your staff even if the maintenance is outsourced, but they are there to do line maintenance at home base. Ensure they rep the maintenance checks.
(3) You need a good contract with the maintenance provider, so you need the lawyers. Insert clauses for late delivery penalties etc. (but keep money aside in case you do have to lease an aircraft while you aircraft is still stuck in the hanger, you got a small fleet) You will not get the penalty money immediately (everybody will be busy blaming everybody else) but your good rep on the check should be able to tell if the check running late, so you fore warned.

But remember if you pay peanuts you get monkeys. Sometimes the cheap outsourced maintenance can prove more expensive than if you did it inhouse, if the aircraft come back with more snags than they went in with.

There are many variables to consider and I have just scratched the surface. Accountants like the simple answer, on the ground its not so simple (anyway get a good ex-accountant from Anderson or Worldcom and he can write off all the costs for setting up a maintenance facility and the maintenance costs somewhere, ha)
 
Air Taiwan
Topic Author
Posts: 1498
Joined: Fri Dec 03, 1999 3:06 pm

RE: Out-sourcing Maintanence (URGENT)

Wed Sep 04, 2002 11:36 pm

Thank you all so much for helping me on my uni work! Appreciated it heaps!

Whiskeyflyer, Airplay, Rick, LMP737, FDXmech, your points are quite logical and I think I'll be using quite a bit of them in my report, especially with the small airline doesn't need own hanger part!

Thank you all very much again! The Tech/ops forum is just so different to the general forum!  Smile/happy/getting dizzy

cheers!
Jimmy

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