Late one summer evening, a nearly full widebody headed for London is ready to pull away from its JFK gate when the final check catches a glitch in the cockpit. Mechanics run diagnostics, spot the problem and tell operations it should take no more than an hour to fix.
Ten minutes later, bad news: JFK does not have the necessary part. This plane is not leaving tonight.
Passengers must be put up, crews moved and future business is probably lost. There are also cascade effects on tomorrow’s flight back. Accountants tally nearly $200,000 in aircraft-on-ground (AOG) costs. The only way to avoid situations like this is to stock so many parts everywhere that they never run out. The exorbitant cost of that strategy is a CFO’s nightmare. So decently run airlines go through three basic steps: They estimate the costs of AOGs; model the part stocks needed to minimize them; and then buy, lease or arrange access for desired levels of stocks.
There are reasons for better execution of this process. Markets are fiercely competitive, so finding the right economic balance between AOG and stocking costs is more important than ever. Airline finances are healthy, so carriers can afford to invest in the right choice, be it part stocks or better software to make better decisions. Asset managers offer availability guarantees that may do a better job than airline stocks. To negotiate with these managers, carriers must know what they want and its exact value.
Start with AOG costs. Some carriers shortcut this step by setting a goal for technical dispatch reliability (TDR). Carriers assume AOGs are so costly, they must minimize them despite the cost.
That is a rigid rule, and ignores wide variation in AOG costs. AOGs can cancel flights or delay them for a couple of hours. Early morning AOGs throw off schedules for the rest of the day—late domestic AOGs do not. Aircraft size, load factor and passenger mix affect AOG costs. And AOGs can happen at any airport.
Experts recommend operations staff sit down with financial staff and marketers to estimate the costs of some typical AOGs. There are some general rules for estimating costs. For passenger airlines, fare revenue is not lost since passengers are rebooked on other flights. But cargo carriers may lose all revenue if cargo is not delivered on time. That is one reason cargo carriers tend to keep spare aircraft more frequently than passenger airlines. In the EU, there are penalties for delays, and these costs count.
Costs for overnight delays include meals, transport and accommodations for passengers. Extra crew costs are determined by labor agreements. Mechanics require overtime to deal with AOGs, and expedited-shipping costs are incurred. Marketers use intent-to-repurchase models to estimate future business lost due to the AOG experience of passengers.
Fuel, landing and other variable costs are excluded, because these costs are avoided in cancellations and incurred at normal levels in delays.
Finally, cascade effects—including all the above costs on the rest of the schedule—should be included. The results are a series of “what if” costs for AOGs of varying severity and conditions. Most major carriers compute solid AOG estimates, but small or start-up airlines may not.
Airlines must then estimate the probability of occurrence for each kind of AOG. This starts with the reliability of no-go parts, Category 1 on the minimum-equipment list, whose malfunction grounds aircraft immediately.
For parts an airline flies extensively, internal reliability engineers should have robust data. For newer parts, original equipment manufacturer (OEM) estimates may be useful, and OEMs often guarantee reliability for new components. Conversation with peer airlines may help, as can the Reliability Exchange of Airline Data International (READI) web-suite. The aim is to obtain the largest sample of relevant reliability data on each part.
The next step is to translate AOG costs and probabilities into a profile of part needs and required levels of part stocks. Traditionally, this has been done with Required Spare Provisioning List (RSPL) models.
RSPL practice varies widely in completeness and sophistication. Not all airlines use RSPL, notes David Marcontell, president of TeamSAI. Some airlines use RSPL only for initial stocks. Other airlines lack time to compile a thorough RSPL for new aircraft, or do not know where these will operate.
The RSPL model determines likely part demands by airport and recognizes transport time, since AOGs will occur and stocks will be kept at particular airports. RSPL combines reliability metrics for no-go parts and flight frequency to estimate part needs at each line station. Marcontell says passenger airlines typically want parts available 95% of the time they are needed. That works out to 99.5% TDR across the system. Cargo carriers seek TDR closer to 100% because of exorbitant AOG costs.
Major carriers have enhanced traditional RSPL with other systems to make estimates more accurate, detailed and useful. There are also a new generation of inventory-planning systems that go well beyond traditional-RSPL capabilities.
Armac Systems’ Rotable Inventory Optimization Systems (RIOsys) plans both rotable and consumable inventories for airlines and MROs. “About 60% of part numbers may be used less than three times a year, but not having it can ground an aircraft,” summarizes CEO Micheal Armstrong. “We focus on optimizing how many to hold, how many to repair and what service level to seek and then how to execute this optimized plan day to day.”
Armstrong says traditional RSPL neither optimizes stocks nor helps in locating them or making tactical-stocking decisions. For example, if the optimal-hold quantity is five, RIOsys determines where to hold these five, and where shortages could occur due to demand spikes, then recommends ways to address shortages by exchanges or expediting repairs.
For RIOsys to optimize stocks, airlines first need to specify service levels, for example having critical parts available 95-96% of the time they are needed. Increasing service levels further, to 97-98%, can be very expensive, as the cost of adding inventory increases exponentially. Service levels can be specified as immediate, or within periods such as 24 or 48 hr., to allow for some stocks held centrally. RIOsys supports SR Technics’ pool and repair-cycle customers, and is used by Thomas Cook Airlines.
Armstrong says too many airlines rely on the inventory expertise of a few individuals and pay a heavy price when these experts leave. Another common mistake is managing inventories offline or outside the inventory-planning system. “They have $100 million in inventory, say they want only $80 million and end up with $120 million. There are a lot of individual decisions that are not part of the plan.”
PTC’s Service Parts Management (SPM) suite now includes MCA, Excelis and Servigistics software for comprehensive inventory planning. SPM helps forecast the probability of an AOG by combining mean time between failure with number of flight hours, operational environment, configuration of aircraft and flight frequency at particular airports. The resulting distribution may be Poisson or negative binomial, notes Sanjay Jagdale, vice president for aerospace and defense solutions.
SPM can then be run in several ways. If an airline wants a ceiling on AOGs, SPM is designed to optimize the location of parts to meet that objective. It can predict AOGs based upon a fixed level of stocks, or it can specify the service levels necessary to meet a TDR or availability goal. “You can say you want no more than two AOGs per week with no more than 4-hr. delays,” Jagdale explains.
SPM takes into account repair TAT and many other variables to find the least-cost way of meeting airline objectives, but these objectives vary. Some carriers seek different TDR goals at different airports, because AOG costs vary by airport.
For execution, SPM integrates with maintenance management or enterprise resource-planning systems. The optimized plan itself should not be updated too frequently because updating is expensive, but should be updated when the fleet grows or the schedule changes. “Not weekly or monthly, typically once per quarter,” Jagdale advises. Most airlines do not update RSPL estimates regularly and thoroughly, according to Marcontell.
Done right and regularly, SPM optimization can save “in the single-digit percent of part costs for the same service level,” Jagdale estimates. SPM tools have been used by American, Delta and Alaska airlines, and are now employed by OEMs such as Boeing, Embraer, Rockwell Collins and Pratt & Whitney.
RSPL, RIOsys, SPM or other sophisticated systems calculate stocks that can achieve certain TDR rates and ceilings on AOGs. An airline can purchase and assign stocks according to this plan, executing transactions to replenish stocks as needed and updating the plan as conditions change.
But there are other ways to limit AOGs, and these may be more economic than even the most-optimized plans by a single airline. Multi-airline pools may yield the same or better service level with fewer parts and thus less total investment. Asset managers, OEMs, MROs such as AAR, or independent part dealers like AJW also offer guarantees of part availability based upon their own part pools.
Tim Hoyland, partner at Oliver Wyman, notes some carriers have used pools and flight-hour programs simply because they were too financially fragile to buy optimal stocks. That is weakness, not wisdom in part provisioning.
But Marcontell says asset management makes increasing economic sense for new aircraft such as Boeing 787s or 737 MAXs and Airbus A350s or -A320-neos. Scale economies of managed assets are most beneficial for fleets of less than 50 aircraft of the same type. And pools make the most sense for parts that are used infrequently.
Analyzing an airline’s own stocking choices is not irrelevant, even if a pool or asset manager is chosen. Analysis establishes the in-house cost of preventing AOGs, so to speak. That can be compared to the costs of pooling, which outsources AOG prevention. And there may simply be no pool option for some parts in some locations.
Finding the best in-house inventory plan gives each airline options and a benchmark for judging asset managers’ proposals. Some airlines prefer in-house stocks, even if they cost a little more, because airlines control these stocks. This enables airlines to ensure that parts meet exact-configuration requirements and airworthiness directives for the aircraft that use them. But Marcontell says even major airlines are gaining confidence in aggregators.
Notice that the various models do not solve the whole problem, only: optimizing the tradeoff between AOGs and inventory costs. Nobody knows beforehand what a real AOG will cost. But realistic estimates can be made of the major possibilities, for example 1-hr. at an outstation, 3-hr. at a domestic hub or cancellation of an international flight.
Hoyland says most airlines still buy or secure access to stocks beyond the levels justified by likely AOG costs—whether over concerns of bad publicity from delayed flights to inadequate planning.
Setting the costs of specific AOGs against the incremental costs of preventing them—and updating the comparison regularly—at least gives the airline a reasonable basis for planning its inventory policy.