Support programs that guarantee repairs or complete asset management for a fixed fee per hour or some other usage metric are becoming increasingly pervasive because operators like the predictable costs. What started as power-by-hour for engines now extends across most types of aircraft components.
A parallel trend is the steady increase in leased aircraft and engines. Staggered operating leases give airlines critically needed flexibility in sizing their fleets for current conditions. It also helps them relieve pressure on their balance sheets.
Both trends, toward flight-hour MRO and leasing, make sense. But there is a potential tension between the two. Flight-hour contracts traditionally have been written by OEMs and MROs with airlines. But leasing companies are now the true owners of nearly half of the world’s fleets.
Lessors have the most intense interest in maximizing value and minimizing cost over the life of their assets. It would seem to make sense for the aftermarket to at least offer these lessors a flight-hour deal that could follow assets as they transition to new operators and easily adjust terms according to which airline-lessee operated the aircraft during any period. If flight-hour coverage is truly cost-effective, airlines would be obtaining good asset-plus-maintenance leases from lessors.
In principle, portable flight-hour deals make sense. But in practice, they have been much harder to design or implement. And it is only now occurring to many aftermarket providers that translating principles into practice could be worth the trouble. Start with the engine-makers, which have pioneered the concept of flight-hour MRO and are eager to expand it to new powerplants.
Eva Azoulay, vice president of Pratt & Whitney Engine Services, notes that leased engines account for more than half of Pratt’s V2500 fleet, a percentage that continues to grow. The majority of Pratt’s flight-hour programs for leased engines have been agreed directly with airlines, with information provided to lessors. The MRO program must assure lessors that lease-return conditions will be met by shop workscopes and reserves are being paid. Azoulay says these OEM-airline deals make sense because airlines may fly several types of aircraft from different lessors.
But there is now a trend among major lessors, those leasing a number of aircraft to single operators, to seek fleet–management agreements with Pratt directly. For these major lessors, Pratt offers a matrix for calculating flight-hour costs as engines move among operators. The matrix takes into account key cost variables such as stage length, derating, the cycle-to-hour ratio, where aircraft are flown, ambient temperatures and other environmental conditions. If Pratt handles logistics, transportation distances may also be accounted for, but that is not usually a significant cost factor.
Azoulay says these flight-hour agreements are not simple. They vary widely in coverage, terms and contingencies. Combining the complexity of many different levels of coverage with the complexity of all the different cost factors as engines move among different airlines makes these agreements difficult to understand and to sell.
So Pratt is developing a new offer for major lessors, which is expected to be available in 2016. It will provide three levels of coverage and be much simpler, making it easier for lessors to understand their costs and the risks they bear. Pratt can also tailor programs to protect engines during the transition between operators.
A simpler program for lessors in 2016 should be timely. Pratt will soon be rolling the geared turbofan into service, and 85% of these new engines are under fleet-management programs, compared with 65% of V2500s. The OEM will still tailor coverage to airline or lessor needs, but some clarity could ease transition burdens.
CFM developed a similar program, Portable Maintenance for Lessors (PML), in 2012. A related company, GE Capital Aviation Services, agreed to participate in 2013, but PML has so far been used by only one of Gecas’s airline customers.
Rolls-Royce essentially invented flight-hour support, and 90% of its Trent engines are covered by TotalCare agreements. Rolls now sees leasing playing an increasing role even in its widebody market. Operating lessors accounted for 16% of Rolls-powered aircraft a decade ago and comprise 30% now. They will represent half in the future, estimates Simon Goodson, senior vice president for lessors.
This leased fleet alone paid $1 billion in service revenue to Rolls in 2014. An increasing share of Rolls-powered widebodies is now entering the period—10-12 years in age—when the aircraft will transition between original and secondary lessee airlines. Goodson says airlines have been happy with TotalCare, and he wants to ensure leasing companies are as well.
One solution is the Operating Lessor Engine Restoration Agreement, or Opera. Provided the airline takes a TotalCare Life agreement, Rolls can sign an Opera agreement with the lessor. Opera enables the leasing company to receive payments for the one-half of a shop visit that the lessee airline has generally consumed at lease-end. Rolls is also seeking to expand the third-party MRO options for airlines and lessors.
Goodson says Rolls does not enter TotalCare agreements directly with leasing companies now. Serving mainly a widebody market, Rolls simply does not have the huge counts or dependence on massive leasing that CFM and Pratt do. But if a major leasing company sought such an agreement, Goodson says his company would pay attention.
Component makers came later to flight-hour support, but they are very eager to expand such agreements. In one sense, portable maintenance leases should be easier for some component OEMs: Maintenance may not vary with different airlines’ usage as much as it does for engine maintenance. But this is still a young market.
For example, Rockwell Collins offers flight-hour programs for leased aircraft to the airlines that lease them but not to lessors, explains John Fischer, senior director of Commercial Service Solutions. This support is either Dispatch, under which Rockwell owns spares and airlines pay per hour for maintenance and assets or a Contract Maintenance Agreement (CMA), under which airlines purchase spares and pay per hour for maintenance. Dispatch and CMA comprise 10% of service to airlines and are growing fast.
Dispatch or CMA must cover a large number of components for each airline. Charges are based on industry-wide reliability for all covered components. They do not vary by fleet size, location, cycles or local environment.
When leased aircraft move to a new airline, Dispatch or CMA ends. Rockwell encourages the new operator to obtain a flight-hour agreement, but the old one does not follow the aircraft. For business jets, Rockwell’s Corporate Aircraft Service Program does follow the aircraft.
Under Dispatch and CMA, Rockwell helps the airline return aircraft at lease-end with components of a similar age. The airline first moves assets within its fleet to achieve this, then Rockwell fills in from its asset pools. “They are treated exactly like purchased aircraft, except for helping return aircraft from lease to a like condition,” Fischer explains.
MROs and asset managers are increasingly active in flight-hour support. They also face the same challenges in dealing with leased aircraft.
AFI-KLM E&M offers engine and component services to both airlines and lessors. Senior Vice President- Commercial Fabrice Defrance says long-term flight-hour support may follow engines to different lessees, but this involves four stakeholders: the lessor, current lessee, follow-on lessee and MRO. Defrance says huge savings are available if all stakeholders focus on asset life-spans rather than minimum return conditions.
The current operator-lessee bears responsibility for maintenance and is key to the transfer. When engines are transferred, flight-hour programs must be adjusted for utilization, operating conditions and shop locations. And the new lessee always is able to choose whether to stay with flight-hour support or switch to time and materials.
Sales and Marketing Vice President Wolfgang Weynell says Lufthansa Technik (LHT) generally writes flight-hour support contracts directly with airlines. LHT has had some discussions about flight-hour support for leasing companies, but these are still in early stages. The company is open to making such deals with lessors, but Weynell says it is still unclear whether airlines will seek to lease aircraft that include maintenance support in the contracts.
The AJW Group has about 1,000 aircraft under flight-hour programs and offers these to both lessors and airline lessees. Treasurer Ian Malin says component and engine flight-hour agreements could transfer to a different airline, but he is doubtful that would be done, chiefly due to the complex negotiations required. “One airline is unlikely to accept the flight-hour program another has agreed to; there will be differences of opinion about rates and many legal constraints to consider.”
Portable flight-hour support seems to be more desirable in theory than in practice. Renegotiating support during lease transitions may be messy and expensive, but it is at least workable. It may just take more experience with these transfers under many different circumstances before simple and more automatic transfers become possible. As in the past, engine makers are likely to lead progress.