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Metrics To Consider Before Negotiating A Flight-Hour Component Agreement

Negotiating a favorable flight-hour component deal requires paying close attention to multiple variables and metrics.

Finding the best deal on component maintenance has in one sense become much easier. OEMs, MROs and asset managers now offer support programs, by part number or nose-to-tail, including all or some of the necessary services, for fixed charges, mostly per flight hour. But how does an airline choose between in-house or outsourced support, and how much does it outsource?

Smart component policy requires an ability to evaluate and choose among these deals, weighing them against in-house options and picking just the right parts and tasks to send out. Perversely, the largest airlines that need flight-hour programs least usually judge them very cleverly. But smaller carriers that need this kind of support most intensely are not always wise in choosing a provider or agreeing to specific terms.   

So it is worth going over the basics. The first question is, Which components are the best candidates for flight-hour support? “The ones that come off most frequently, avionics, mechanics, hydraulics, pneumatics,” summarizes Cavok Vice President David Marcontell.

Deepak Sharma, chief technical officer of AJW Group, agrees. Flight-hour support works best for components that are removed at high or moderate frequencies. He recommends this approach for components with a mean time between removal (MTBR) at or less than 100,000 flight hours, or about four years.

Richard Brown, a principal with ICF International, says airlines typically keep high-value components outside flight-hour contracts since these repairs can be negotiated separately to get the best price, often from component OEMs. These high-value components include wheels and brakes, APUs, thrust reversers and some avionics. 

The in-house versus outsourcing choice also depends on size of fleet, existing maintenance infrastructure, labor cost and productivity, availability of viable outsourcers, part complexity and airline financial strength. Maintenance spending can also be important. “Some airlines perform wheel and brake maintenance in-house because of the large spend and frequency of replacement,” Brown observes.

But the trend is clearly toward outsourcing, partly due to difficulties in obtaining test rigs for the latest equipment and repair data and partly due to limited airline finances. And the best candidates are high-frequency parts, for which in-house infrastructure does not exist.

Next, an airline must do its homework thoroughly. Marcontell stresses that an airline should know the costs of keeping work inside even if it expects to receive three or five highly competitive bids, because carriers always have the choice of how much to outsource, whether to manage time-and-material repairs in-house, manage assets or outsource that function. And they can choose which parts are covered in a flight-hour agreement. By estimating the costs of all in-house options in detail, carriers can make smart and specific choices, not just all-or-nothing choices among proposals.

That means estimating by part numbers. Start with mean time between removals, and don’t rely just on suppliers for MTBR. Airline reliability data should be used, and peer-carrier data should also be used if available.

Distance to shops and turnaround time are also important. If an airline manages time and material repairs itself, it needs these figures to calculate the true cost of repairs and the time required, which will affect inventory costs. The airline also needs to estimate repair costs, which Marcontell says can be obtained from the market sources.

“Now you know how often, how long and how much,” Marcontell notes. This gives an estimate of repair costs per flight hour, which can be compared with proposed rates from suppliers.

If outsourcing asset management is being considered, the airline must next estimate the cost of holding spare inventory, again by part number. In-house inventories are figured by required spare provisioning list (RSPL) models using Poisson distributions. Here the carrier must choose the service level(s) it needs and whether it is willing to share inventories with other airlines. Once the RSPL estimates the inventories required, operating costs will include financing and warehousing and usually run about 1.1% of inventory value per month.

Combined with the airline’s operating plan, the steps above should yield the cost per flight hour of repairs and asset management, by part number. These are the basic benchmarks for judging flight-hour proposals.

AJW’s Sharma agrees with Marcontell on the importance of these steps. “Know your demand patterns, cost bases, repair costs, pool costs and the costs of maintaining the pool.”

Sharma says OEMs and suppliers should be only one source of cost and reliability data, for MTBRs can vary by region. For example, in the Middle East and other hot regions ATA Chapter 21 air-conditioning units are removed more frequently. And Sharma notes that internal airline practices will also influence support costs. One obvious example is the service level expected, which will strongly affect inventories required. Another possible variable is testing. One U.S. cargo carrier requires each component be tested in ways that go beyond OEM recommendations, which adds to costs, whether done inside or externally.

With internal flight-hour costs estimated in detail and robustly, the RFPs can go out to responsible providers. Then it’s time to get down to business. Most carriers use a weighted-metric system to grade proposals. The most common metrics are price per flight hour, risk and turnaround time.

Marcontell urges airlines to also seek a reliability commitment from the provider. Even though the supplier is covering all repair and inventory costs in the flight-hour charge, each removal costs the airline money.

What else should the airline ask for in the RFP and look for in proposals? Plenty, according to Marcontell.

First, airline staff need to think about no fault found (NFF) and rogue parts. NFFs can be caused by bad airline troubleshooting or bad repairs by a supplier. In either case, NFFs cost money just for removals and may cause a disruption in service. One way to handle NFFs is to set a threshold, says 10-15%. If NFFs are less than that, the provider bears all costs. The airline would bear NFF costs above the threshold.

Rogue parts are the individual serial numbers that keep showing up as NFF. Both airline and MRO need to get rid of these parts fast, and any flight-hour contract should specify in detail solid methods for shedding these expensive miscreants.

Marcontell also encourages airlines to ensure that they have control over any third-party shops that are used to perform repairs. And asset managers may want to supply upgraded parts in place of older ones. “Make sure you can confirm changes, as they may not suit all your fleet.”

Another criterion for judging proposals is how easy it will be to shift parts to another location when and if the airline changes its operations. Will the contract have to be entirely renegotiated at an expensive premium? Or does it provide reasonable flexibility at reasonable cost?

The quality of a provider’s customer service should also be taken into account, if only by contacting references. Problems do arise, even with the best companies.

Furthermore, Marcontell says, many airlines do not sufficiently consider their exit strategy from a flight-hour agreement. “What if your operations or business model change, or the supplier’s performance deteriorates due to a change in ownership?”

Finally, if the supplier is an OEM and the agreement is for 10 or 15 years, “make sure they will exploit used serviceable parts in the out years,” Marcontell advises. OEMs may prefer selling new parts when used parts could be obtained at 40% of new costs.

Other experts have some more general advice. “Performing MRO is just one part of the offering,” cautions ICF’s Brown. He says reliable suppliers will also need excellent planning software and solid logistics. “Lufthansa Technik has an in-house logistics division, while other suppliers partner with logistics providers such as DHL, UPS or Cat Logistics.” It’s worth examining the entire supply chain and how it is managed.

Brown notes that OEM pricing can be higher for flight-hour agreements. OEM expertise may be worth a higher price, but where does it show up in the contract? In promised reliability improvements? In financial strength to honor all commitments?

If airlines are looking for a single, broad offering, they will often prefer full-service MROs or asset managers. This may be the best deal, but carriers should consider all their alternatives.

Sharma says too many airlines judge proposals just on price and do not consider how a supplier could tailor a solution to provide more value.  Additional benefits that the best asset managers might provide are IT infrastructure, logistics and different service levels for different maintenance bases. “Say they require a part within 12 hours of a call,” he explains. “But we propose that we will average within six hours of a call. They need to be able to evaluate that.”

Some airlines want their parts at list prices, because they only understand list prices. Sharma says carriers could save money by using market value, which is simple for asset managers to calculate with three to five phone calls for quotes. “They end up paying more for list prices.”

Exploring these kinds of questions requires face-to-face meetings between the airline and proposing supplier(s). Sharma recommends airlines start out by reviewing up to 20 paper proposals, then down-select to about seven or “as many as will come in for face-to-face.”

So negotiating a least-cost, high-quality flight-hour agreement takes time and attention to detail. But the airline will be living under the agreement for a long time. It’s worth the work to get it right from the start. 

This article was originally published on April 15.

 

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