The most dramatic moment for many airline executives is the signing ceremony for new aircraft. It is a celebrated aspect of the business, with months or years of research and network planning behind it and many years of trading and supplier relationships to follow. In even the most experienced eyes, launching a fleet or developing a new network around an existing one is a daunting exercise. Therefore, with over 23,000 deliveries of new narrowbody aircraft—worth in excess of $2.5 trillion—projected in the next two decades, you might be safe in assuming the industry process to support entry into service is a well-practiced science.
Far from it. In fact, the operational support and supply chain setup for new aircraft coming into service represents the most inefficient use of capital in the industry. It is more an art than a science. And in an industry renowned for its foresight and advancing technology, why is there a lack of innovation in supply chain management and component support? There appear to be two factors that continue to lead to massive inefficiencies in the form of surplus components. These bloat airlines’ balance sheets and absorb capital at an alarming rate.
The first is due to the simple cost of the assets being supported, and the criticality of operational key performance indicators for airline management. Aircraft block time (utilization) and on-time performance continue to have a strong correlation to overall financial performance. And woe to the operations manager who has an aircraft delayed because a simple rotable part is not available. Therefore, the solution for most airline managers is to err on the side of caution: larger inventories. The greater the controlled inventory at key hubs or maintenance bases, the safer management feels. And parts usage rates rarely outweigh operational risks when making decisions.
This purchasing decision is accentuated by the fact that commercial aircraft development has led to complex systems where the initial provisioning recommendations from aircraft OEMs (in the form of a recommended spare parts list or RSPL) are embarrassingly large. Considering the investment in aircraft technology and systems, it is interesting that the value of the average RSPL for a new aircraft has reached an astounding $1.2 million (based on a fleet of 30 narrowbodies).
Despite this, the logical answer is actually for airlines to pool resources and cooperate with others, rather than maintain excess inventory, where shareholders’ hard-earned capital is often tied up in under-utilized parts as an expensive operational insurance policy. However, today’s pooling arrangements and rotable support programs stop short of their true potential, despite the advancement in science around inventory management and predictive maintenance.
Is quality a valid concern with pooled parts?
The main cause of this lost potential is the second factor that leads to hidden efficiencies: fear of the unknown about the quality of components to be shared with other operators. Is this is a valid concern? Let us consider the elements that go into managing a pool to support modern aircraft and affect the quality of components.
The first is the rule of lowest common denominator. For a pool to be effective, the standard of all parts must meet the criteria of the most stringent participant. By virtue of the fact that parts must be interchangeable between operators, customer-approved vendors and regulated maintenance providers underwrite this quality.
Another element is aircraft fit lists and modification baselines. Older parts numbers become obsolete, and it is typically easier for an airline to accept a higher modification standard than a lower one. The result: Pool providers are forced to upgrade their parts to ensure efficient utilization.
From a distance, it is then remarkable that capital-intensive businesses like airlines continue to resist the benefits that come with outsourcing to specialists and entering true pooling arrangements. This is particularly surprising with legacy operators, who struggle with entrenched cost bases. The impression seems to be that owning and managing inventory, however far from an airline’s core business, is a preferable position.
Time to relinquish control?
Yet when the factors are finally considered, safety and quality concerns can be addressed effectively through professional management of pools. And, even more critically, when capital deployment and return is the true measure of management’s ability, the question must continue to be asked: Is giving up control of inventories and supply chains a sign of weakness or strength? At the very least, it is an area of clear inefficiency.