Printed headline: A Matter of Time
Time is money. For lessors, that means quick aircraft transitions, while for MROs it requires tight capacity planning. Unfortunately, this mismatch has left the owners of nearly half the global fleet struggling to find MRO slots.
Even GECAS—the largest lessor in the world, with a fleet of over 1,900 aircraft—is feeling the MRO-capacity pinch, as consolidation and the skills shortage begin to bite.
“We’re seeing it getting worse. As lessors, we’re struggling more and more to find slots when we need them,” says Anton Tams, senior vice president and manager of fleet support at GECAS. “We’re part of the problem as well. Airlines are well-planned. They generally know what they want fairly far in advance, whereas we—as lessors—are much more speculative.”
Tams holds responsibility for MRO contracts across GECAS’ huge fleet. He jokes that in an ideal world, lessors would never need MRO work—as every redelivery would be seamless—but the reality is not quite that simple.
While lessors take a largely hands-off approach to MRO, they sometimes have to repossess aircraft, and they face intense surges of activity during aircraft transitions. Redelivering lessees may be willing to do small amounts of customization work, but there is a limit. “When you start tearing out the interior of the airplane, or moving monuments around, they say enough is enough, so in those cases we do need to go out to the market and get an MRO slot,” says Tams.
GECAS has general terms agreements (GTA) with 71 MRO facilities around the world. Tams says his company’s reputation means most MROs will respond, even if their answer is “we can’t help you.”
“If you’re an MRO and you’re pretty much at 100% capacity over the winter, you just start declining lessor work,” Tams says. “Our only saving grace—and the one that does get us in the door—is we pay well. I think lessors generally are known to pay their bills and generally pay pretty promptly. I suspect we pay a little bit more for the work as well, because of the short-flow nature of our requests. In reality, if we need the slot and we can get a slot, we’re just going to have to pay what we’re going to have to pay. We’ll obviously negotiate hard, but at the end of the day, if we can get the slot, we’ll take it.”
However, from September through to April or May, the capacity is simply not there. “There are some well-documented articles where people have reported that lessors needing significant heavy maintenance work have been left waiting 9-12 months to find a slot. Luckily, we have never ended up in that situation, but we are certainly having to juggle work around,” Tams says. “We’ve had to get creative.”
If a leasing giant like GECAS is having to “get creative,” smaller players face an even greater challenge. Regional-aircraft lessor Elix Aviation Capital was formed in 2013 and currently has a portfolio of 83 ATR and Bombardier Q-Series turboprops.
“Since we’re not a big player, we don’t have huge volumes,” says John Moore, chief commercial officer at Elix Aviation Capital and former head of global sales at ATR. “Often, it’s just the availability of supply that’s a constraint for us. MROs, particularly in the turboprop arena, are smaller players. Obviously, they have limited slots. When you have an aircraft to be delivered to a customer, that can be a real challenge sometimes.”
Interestingly, despite lessors owning nearly half the worldwide fleet, both executives said there is a shortage of targeted MRO products for them.
“Generally, we don’t see that they’re coming to us with customized solutions that are really adapted to lessor requirements,” Moore says. “They have got their standard range of services, and they’re perhaps even less proactive with us, as a lessor, than they are with an airline, where they see a long stream of continuous business. We need things when we need them, and then we don’t need anything for a while; so it’s harder to build that kind of relationship. I don’t have the sense we’re being inundated with customized offers for lessors.”
Moore acknowledges that this could also be a question of size, but the experience at GECAS is similar.
Tams believes the “dreaded” task of lease returns is a lower priority for MROs, behind base maintenance and modification programs. “Part of the problem is I don’t think MROs are thinking about lessors properly yet,” he said. “You need to take a different approach with a leased aircraft.”
He uses a story to bring his point to life. “It’s a bit like a hospital. You either need an accident and emergency [A&E] slot, or you need a bed. [The MRO] view is that all the patients coming in are going into a bed—base maintenance. They will be in the bed for eight days, and then they will get out again. I think what is required is an A&E, where you do some triage work, get yourself sorted and—when you’re ready—you put in for base maintenance,” Tams explains.
The problem is that not many MROs offer A&E—a service where 5-10 mechanics “carry tools to the airplane,” do a half-day of on-the-spot work and come up with a plan for the hospital stay. “I think that’s where the MRO world needs to go in terms of a more innovative approach,” Tams says.
Lessor work will never be neatly packaged and predictable, but that is a constant, so it becomes a question of dealing with planned unpredictability.
“You have to start thinking about it like that before you can get to the answer,” Tams says, citing Lufthansa Technik in Shannon as being on the right track. “Some MROs handle the uncertainty better than others. They expect the unpredictability, they expect the uncertainty, and they manage it better via communication.”
Patrick Metz is a senior sales executive in Lufthansa Technik’s Lessors & Banks department. When quizzed on the main tensions between lessors and MROs, his reply was familiar: MROs want to plan their capacity around mid- to long-term contracts, whereas lessors want flexibility. “MROs don’t always have sufficient capacity available, for example, for aircraft transitions or engine overhauls,” he says.
Having recognized the problem, Lufthansa Technik has created services specifically aimed at aircraft owners—particularly lessors and banks—covering airworthiness management, aircraft transitions, material support and asset assessments.
“Lufthansa Technik is cooperating with lessors to develop services, aiming to support their fleets on a mid- to long-term basis,” Metz says. “Lufthansa Technik has set up lessor-specific teams that are driving these projects.”
GECAS prefers dealing with MROs that accurately assess the work needed. If unexpected items crop up, Tams is looking for regular updates, proactive solutions and flexible manpower to run work packages in parallel.
“If we had our way, we would just define the output date and be very flexible on the input date,” Tams says. “We need predictability, but we also need flexibility, which sounds like a contradiction.”
Often the timelines and extent of lessor work are unclear, creating a planning nightmare for MROs. For example, when a 5,000-hr. work package runs to 6,000 hr., Tams says the MROs hate it—despite the extra revenue.
“There is something wrong with the relationship dynamics when we end up doing more [MRO] work than expected and nobody is happy. Bring a plumber round to your house. If he ends up there twice as long, he’s quite happy. That does not happen in the MRO world. For [GECAS] project managers, when they’re just trying to get work done and get aircraft out, it’s a huge problem. If we got to the ultimate—if we were offering MROs extra work and they were pleased—that would be the change I’d love to see in the relationship.”
While lessors are the paying customer, this is a two-way relationship—or three-way, if you include the airline. “The person who sits in the middle and suffers is the MRO,” says David Stewart, partner at consultancy Oliver Wyman.
Stewart says MROs need better transparency from lessors, in terms of requirements and records as well as improved materials availability during transitions. Too many of the time-critical factors are outside the MRO’s control.
“Often lessors give limited warning, or inconsistent guidance, on timing of required slots for checks. This does not help with hangar and labor planning, and it hurts efficiency,” Stewart explains. “Lessors too often change their requirements for aircraft acceptance late in a check. When this happens, it results in delays in releasing aircraft from the hangar, again compromising hangar and labor planning.”
If MROs and lessors tamed the unpredictability factor by using the A&E approach, it would help everyone better plan their workload.
“A lessor will value time—getting the work done in a month versus two months—much more than they value cost,” says Daniel Bunyan, a partner at Oliver Wyman. “The cost is very often done on the airline’s dollar, but the time is very much coming out of their pocket.”
But Bunyan, himself a former leasing executive, says the greatest concern for lessors is anything that affects the liquidity of their asset. Lessors are seeking standardization, while airlines want customization. “There’s natural tension there,” he observes.
Leasing contracts often require airlines to follow standard original equipment manufacturer (OEM) programs, with very limited parts manufacturer-approval (PMA) parts, to keep the asset portable between different operators and regulatory jurisdictions.
“Lessors expect that aircraft and engines are maintained to OEM standards,” says aviation management consultant Richard Brown. “Should non-OEM parts or repairs be incorporated, there is a view that the asset will be valued lower. Lessors aren’t making a judgment whether PMA is good or bad. Rather, they are recognizing that until the majority of airlines accept PMA in flight-critical areas, it’s prudent to exclude it.”
While understandable, this purist approach toward value preservation can be frustrating for the aftermarket. Nicole Noack is head of the newly created Independent Aircraft Modifier Alliance (IAMA), which brings together retrofit specialists EAD Aerospace, Envoy Aerospace, Etihad Airways Engineering and Lufthansa Technik.
Noack says lessors see commercial risk in supplemental type certification (STC) work, even though independent modifiers are held to the same standards as OEMs, leading to limited supplier choice and longer ground times. “Those limitations are unfortunate for every party,” she says.
She hopes IAMA will offer a forum for centralized discussions and greater STC standardization to reassure lessors. “The first step is to openly talk to each other and to create understanding on both sides.”
Perhaps taking the time to talk is the ultimate answer to the MRO-lessor mismatch. Time may be money, but in the words of American entrepreneur Jim Rohn: “Time properly invested is worth a fortune.”
When a single-aircraft transition can involve going through 70 boxes of paperwork, lessors are understandably keen to go digital. So where is the holdup?
“We’re spending a significant amount of money on managing paper,” says Anton Tams, senior vice president and manager of fleet support at GECAS. “We need to move to digital or electronic records—at least initially transferring records as a PDF file—before going digital from birth.”
GECAS’ bigger airline customers have invested in sophisticated record-keeping systems, and ICAO has developed guidance for standardizing electronic record transfers.
“We are literally right around the edges of trying our first one or two of those,” Tams says. “The piece that keeps coming up is what about the MRO and engine shops? A lot of them don’t have [maintenance and engineering] systems, they don’t produce electronic records and a lot of them can’t receive electronic records. So I think there is a challenge there for the MROs—whose margins are very thin—to invest in the technology they’re going to need.”
David Stewart from Oliver Wyman agrees it will take time for MROs to come onboard. “Replacing an MRO [information technology] system is very expensive,” he says. “It’s just going to take time.”
Likewise, leased aircraft end up placed all over the globe. Stewart observes that there is a “large tail” of hundreds of airlines that will not be early adopters.
Maintenance reserves are a long-accepted tradition of the airline-lessor relationship, but greater competition among lessors, evolving engine-maintenance contracts and stronger airline financials are creating some pushback.
Oliver Wyman partner Daniel Bunyan has seen a decline in maintenance cash reserves over recent years, as new lessors make concessions to win business. At the same time, airlines have become more financially stable, making it more difficult for lessors to demand reserves for financial security.
Power-by-the-hour (PBH) contracts also mean that OEMs have changed the relationship, receiving the money directly from the airlines. “Airlines can’t be asked to pay two parties simultaneously for the same work,” Bunyan says.
This shift in dynamics historically left the lessor exposed. “If airlines paid the engine OEM, but then ceased operation, the lessor was left with an engine that might be due for MRO, but maintenance reserves were held by the OEM and not the lessor. The OEM wouldn’t provide a backstop to the lessor. This situation has changed, with the engine OEMs now offering to support lessors should operators default partway through maintenance contracts,” says aviation consultant Richard Brown.
John Moore, chief commercial officer at Elix Aviation Capital, says there has always been a degree of pushback against maintenance reserves, but he is not seeing the same trend in regional-aircraft leasing.
“In this segment of the market, it’s still pretty much an accepted practice. Most lessors require it, so most lessees recognize that they have to pay it. Obviously, when you get into the Tier 1 market with larger airlines, they just have a policy where they don’t pay reserves, so if you want to do business with them, you have to accept that. It’s all a question of security. If you feel comfortable with the creditworthiness of the operator, you’re going to be less concerned,” Moore says.