Aviation Enters Agreements with Brazilian Aircraft Maintenance Companies - Term Paper Example

 Executive Summary Outsourcing is a quite common strategy for controlling costs related to business operations. In British Airways the above strategy has been considered as necessary for reducing costs and increasing the level of business productivity. Aircraft maintenance has been the sector of the organization that has been found to be most valuable for the organizational performance. Aligned with the existing theories on outsourcing, the firm’s managers have decided to promote the outsourcing of the firm’s aircraft maintenance services. Three countries have been selected as the most appropriate targets for such initiative: Mexico, Brazil and Ukraine. Each of these countries can offer different benefits in regard to the firm’s particular plan. Mexico seems to meet all criteria as a target country for outsourcing activities. Brazil and Ukraine can also respond to the firm’s specific needs under the terms that appropriate arrangements of cooperation are made. The various aspects of such plan are presented below emphasizing on both the theoretical and practical implications of the specific project. Table of contents Executive Summary 2 1. Introduction 4 2. British Airways – Outsourcing of Aircraft maintenance services 4 2.1 Company overview 4 2.2 Aircraft maintenance services – industry characteristics 5 2.3 Outsourcing of Aircraft maintenance services 5 2.3.1 Brazil 5 2.3.2 Mexico 6 2.3.3 Ukraine 7 2.4 Outsourcing as a business strategy – theoretical perspectives 8 2.5 Conclusion 9 References 10 Appendix 13 1. Introduction The effects of firms’ strategic decisions can be quite important influencing the organizational performance either in the short or the long term. For this reason, when managers have to develop a critical strategic decision need to review all parameters of the relevant plan, taking into consideration potential failures or unexpected problems. In the Aviation industry a similar approach has to be used when such decisions need to be developed. This paper focuses on the potential effects of the decision of British Airways (BA) to outsource part of each supply chain activities, its aircraft maintenance services. There are three countries that have been reviewed, as of potential targets of this strategy: Brazil, Mexico and Ukraine. Each of these countries has been involved in such activities, but not at the same level. For example, Mexico has been found to be a country that can effectively support all aspects of outsourcing in regard to an air carrier’s aircraft maintenance services. The other two countries, Brazil and Ukraine seem to be less developed in this sector; still, Brazil and Ukraine also can offer a series of benefits to firms that would decide to outsource their aircraft maintenance services to these countries. The theoretical aspects of outsourcing, as a common business strategy are also presented in this paper, aiming to highlight the implications that BA would have to face in case it would decide to proceed to the specific plan, i.e. to outsource its aircraft maintenance services to Brazil, Mexico or Ukraine. 2. British Airways – Outsourcing of Aircraft maintenance services 2.1 Company overview British Airways is a major competitor in the global aviation industry. The firm was first established in 1919 under the name ‘Aircraft Transport and Travel Limited (AT&T)’ (British Airways History 2012). In the decades that followed the growth of the firm was significant (British Airways History 2012). At the end of 2011 the fleet of the company was estimated to ‘245 aircrafts’ (IAG About Us). In 2011, January, BA was merged with the Spanish Air Carrier, Iberia (IAG About Us); the firm resulted has been IAG, International Airlines Group, a firm based in Spain (IAG About Us). The financial performance of BA, as a member of IAG can be characterized as quite important, as indicating in the financial report of IAG, the parent company, for 2011 (Figure 4, Appendix). In a more analytical presentation of the Group’s financial performance, the financial results related to each member of the Group are presented (Figure 5). It is clear that the performance of BA is significantly higher compared to Iberia, the other member of IAG (Figure 5). Still, it would be quite important for the firm to locate strategies that would help towards the increase of its competitiveness; outsourcing its aircraft maintenance services would help BA to decrease its costs, develop valuable strategic alliances and become familiar to important international markets, such as the markets of Brazil, Mexico and Ukraine. 2.2 Aircraft maintenance services – industry characteristics In order to understand the potential benefits but also the challenges for BA in case the firm would decide to outsource its aircraft maintenance services, it would be necessary to describe the context of these services, as appearing in the market. According to Machado and Urbina (2011) the aircraft maintenance services can be classified into two major categories: ‘the maintenance of aircraft as a single device and the second activity refers to the maintenance of components that serve as inputs to the First’ (Machado and Urbina 2011, p.5). When a firm seeks to outsource its aircraft maintenance services the following decision should be taken: would both these tasks, as part of these services, assigned to the same contractor or a combination of two different contractors would serve best the firm’s interests. BA would also have to decide whether both these tasks, as part of its aircraft maintenance services, would be delegated to firms in a particular country or whether suppliers in different countries would be rather preferred. This issue is discussed in this paper, after presenting the strengths and weaknesses of Brazil, Mexico and Ukraine in regard to the aircraft maintenance industry. Outsourcing is a common practice for many Air Carriers worldwide. In Figure 1 (Appendix section) the outsourcing activities of US Air Carriers are analytically presented. It is clear that all US Air Carriers have outsourced their aircraft maintenance activities internationally, either at a low or high level (Figure 1). The relevant table can be used for understanding the potential value of countries internationally for providing aircraft maintenance services; Mexico, China, Hong Kong and El Salvador are preferred by US Air Carriers for the particular supply chain activities (Figure 1, Appendix). Moreover, the table in Figure 2 (Appendix) shows that the percentage of outsourcing for USA Air carriers has been significantly increased between the years 2001 and 2009 (Figure 2 Appendix). As an example, for 2009 the level of outsourcing for US Airways has reached a percentage of 60%, compared to 29%, of 2001 (Figure 2, Appendix). Also, in United, another popular US Air Carrier, the level of outsourcing for 2009 was estimated to 41%, compared to 18% of 2001 (Figure 2 Appendix). According to Arcieri (2012) outsourcing the aircraft maintenance services has become a popular strategy among Air Carriers internationally. Under these terms, the decision of BA to outsource its aircraft maintenance services seems to be fully justified, especially if taking into consideration the high costs related to the relevant tasks but also the high competition that characterizes the airspace industry. 2.3 Outsourcing of Aircraft maintenance services 2.3.1 Brazil In Brazil, the aircraft maintenance industry can be characterized as well developed. Indeed, there are about 12 firms operating in the country’s aircraft and maintenance industry (Airline Update 2012). Still, a problem seems to exist: each of these firms offer part of aircraft maintenance services; for example, there are just three firms in Brazil that can provide services related to the Airframe Heavy Maintenance (Airline Update 2012). Moreover, only one firm in Brazil can support Aircraft modification (Airline Update 2012); this is the firm TAP Maintenance & Engineering Brazil (Airline Update 2012). Embraer is the largest firm of Brazil’s aviation industry (GL Baltrade 2012). The specific firm controls an extremely high percentage of the local market, about 45% (GL Baltrade 2012). It should be noted that Embraer has developed an extensive supply chain that ‘is mostly located overseas’ (GL Baltrade 2012). This fact also, along with the limitation of the potentials of the firm’s operating in the aircraft maintenance industry in Brazil leads to the following assumption: the decision of a firm to outsourcing its aircraft maintenance services to Brazil would be carefully reviewed, taking into consideration the performance of the country in this sector. On the other hand, the Brazilian economy is quite perspective. Despite the pressure by the global market, the economy of Brazil has managed to keep a standard level of growth (Biller 2012). In this way, the attractiveness of Brazil as an ideal place for investment has been secured (Biller 2012). According to a recent report, the country’s GDP has achieved an increase of ‘0.4 during the last three months’ (Biller 2012). However, the country has to face a series of important challenges for keeping the competitiveness of its economy: high costs related to production need to be controlled, exports have to be increased and interest rates need to be decreased (Biller 2012). Only in this way the country will be able to attract more foreign investors, a term that is critical for the stability of the local economy. Taking into consideration the issues developed above it is clear that the decision of BA to outsource its aircraft maintenance services to Brazil would be quite justified. Despite the fact that the specific industry is not highly developed in Brazil, still the potentials for the industry’s further growth are many. If these potentials are combined with the perspectives of Brazil economy, as described above, the following assumption could be developed: BA should proceed to the particular decision, even if the relevant benefits would be clearer in the long term. Other firms that have adopt similar strategies, such as Lider Aviacao and Boeing can be used as examples of the potential benefits of the particular initiative (Lider Aviacao 2012 and Boeing 2012). 2.3.2 Mexico In Mexico, the aerospace industry is highly developed. In fact, the growth of the particular industry in Mexico seems to be impressive. According to a report published in 2011 by the Canadian Trade Commissioner Service, ‘between 2005 and 2010 the aerospace industry in Mexico was increased by a percentage of 400%’ (Canadian Trade Commissioner Service 2011). It is clear that the aerospace industry in Mexico is a key part of the local economy. Moreover, it is implied that the infrastructure and the technology used are at high levels, a fact that should be taken into consideration by any firm that would consider outsourcing its supply chain activities to Mexico. Most important, in the context of the ‘Bilateral Aviation Safety Agreement (BASA) verified in 2007’ (Canadian Trade Commissioner Service 2011), Mexico’s authorities have been given the power ‘to certify parts, components and aeronautical systems’ (Canadian Trade Commissioner Service 2011). This means that all tasks included in the aircraft maintenance services are verified as of the quality of the material used and the rules followed. Delta, a major competitor in the US Aerospace industry, already uses Mexico for outsourcing their aircraft maintenance services (Figure 1 Appendix). On the other hand, the economy of Mexico can be characterized as highly developed. In fact, the country’s economy has been described as ‘the second – largest economy in Latin America’ (BBC News 2012). A recent report, published in October 2012, highlights the perspectives of Mexico’s economy. According to the above report, the economy of Mexico presents signs of continuous growth, ‘despite the expansion of criminality’ (Vardi 2012). The report also refers to a statement of the Chief executive of Citigroup, Pandit, in regard to the prospects of Mexico. Pandit noted that the prospects of Mexican economy for further growth are extremely high (Vardi 2012). Moreover, the effects of the global financial crisis on the economy of Mexico were effectively controlled (Vardi 2012). In addition, the recovery of the country’s economy from the global recession has been extremely rapid; this fact has been another positive indication for the particular economy’s prospects (Vardi 2012). The performance of Mexican economy from 1999 to 2011 is presented in Graph 3 (Appendix). The trend for the specific economy’s growth is clear. In this context, BA should also choose Mexico, since the potentials of the country are high, both in terms of economy and in terms of infrastructure/ technology. 2.3.3 Ukraine Aircraft maintenance has become a key part of the economy of Ukraine (World Aviation Company 2012). In fact, it seems that during the last decade the demand for aircraft maintenance services in Ukraine has been significantly increased, a fact that has led to the increase of firms involved in such activities (World Aviation Company 2012). In 2009 a Conference was held in Kyiv (Ukraine) in regard to the potentials of Ukraine to support the growth of Aerospace and Aviation industries. In the report that was published, in the context of the above Conference, important information has been released in regard to the potentials of Ukraine in regard to these industries. Reference is made in particular to the high level of growth of Ukraine’s Aerospace and Aviation industry, a level of 15-20% annually (Draft Working Program 2009, p.5). In the above report, emphasis is given on the long history of Ukraine’s Aviation industry in manufacturing passenger aircrafts (Draft Working Program 2009, p.3). At the same time, reference is made to the firms that operate in the Aviation and Aerospace industry of Ukraine, especially ‘the State Aircraft Manufacturing Corporate Group ‘Antonov’’ (Draft Working Program 2009, p.3). In other words, in the above report the potentials of Ukraine in regard to Airspace and Aviation industry are made clear. Still, in terms of its economy, Ukraine seems to be a rather risky place for investments. Indeed, the country has been highly affected by the global recession of 2008, as made clear in Figure 6, Appendix. More specifically, from 2008 onwards the economy of Ukraine has faced significant pressures, a fact that led to the limitation of the country’s economic performance up today (Figure 6, Appendix). Soldak (2012) also notes that the future incorporation of Ukraine in the European Union cannot enhance the performance of its economy, unless it is combined with carefully planned strategies for increasing financial freedom. In this context, the decision of BA to outsource its aircraft maintenance services to Ukraine can be characterized as rather risky; however, such decision could benefit the company if the agreement related to the costs of the relevant tasks would be favourable for BA. 2.4 Outsourcing as a business strategy – theoretical perspectives Different theories have been developed in regard to the context of outsourcing as a business strategy. According to Oshri, Kotlarsky and Willcocks (2011) the decision of an organization to decide outsourcing need to be developed after completing the following task: all business activities need to be reviewed and identify which one of them ‘contributes more in business operations’ (Oshri, Kotlarsky and Willcocks 2011, p.54), meaning those activities that mostly create value for the particular organization (Oshri, Kotlarsky and Willcocks 2011, p.54). A similar theory is the theory of Core Competencies that sets the following rule: when having to take a strategic decision a firm should focus on its core activities, i.e. those activities that are most important for the organization (Jacques 2006, p.39). Using these theories, the decision of BA to outsource its aircraft maintenance services seems to be fully justified as transportation is the key activity of BA, as of all firms’ operating in the aviation industry. Another popular theory used in the specific theme is the ‘Williamson’s theory of transaction cost economics’ (McIvor 2005, p.40). According to this theory, a firm’s strategic decisions would combine economics and management (McIvor 2005, p.40), meaning that a strategic decision should be taken only after reviewing carefully its financial implications. Through this theory, another basis for justifying the outsourcing decision of BA is provided: BA should decide to outsource its aircraft maintenance services to that country that offers the best agreement in terms of cost involved. From a similar perspective, the arbitrage theory promotes the idea that when having to take a strategic decision a firm ‘should take advantage of the state of imbalance between two or more markets’ (Jacques 2006, p.45). In the case of BA this means that the firm should decide to distribute the various tasks incorporated in the aircraft maintenance services across the three countries, i.e. Mexico, Brazil and Ukraine according to the terms of agreement that these countries can offer in regard to such plan. 2.5 Conclusion The potentials of firms to decrease their costs and enhance their productivity are not standardized. Generally, markets worldwide can offer attractive conditions for interested investors but the expected benefits are not secured, even in countries with high economic performance, such as Mexico. The decision of BA to outsource its aircraft maintenance services should be based on various criteria, including the costs of the project, the challenges and delays expected, the local economy and the technology available. According to the issues discussed above, Mexico would be a primary choice for BA, if proceeding to this plan. Still, the potential use of Brazil and Ukraine for outsourcing BA’s aircraft maintenance services should be also taken into consideration under the following terms: the economy of Brazil has many prospects for rapid growth while the experience of Ukraine industry in handling aircraft maintenance services is significant. References Airline Update (2012) Airframe & Engine MRO in Brazil. Available at http://www.airlineupdate.com/content_subscription/mro/southamerica/brazil.htm [Accessed at 31 October 2012] Arcieri, K. (2012) Growing demand for aircraft maintenance driving TIMCO growth. The Business Journal. June 15, 2012. Available at http://www.bizjournals.com/triad/print-edition/2012/06/15/growing-demand-for-aircraft.html?page=all [Accessed at 31 October 2012] BBC News (2012) Mexico – country profile. September 4, 2012. Available at http://news.bbc.co.uk/2/hi/americas/country_profiles/1205074.stm [Accessed at 31 October 2012] Biller, D. 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Available at http://www.worldaircraftmaintenance.com/ukraine.html [Accessed at 31 October 2012] Appendix Figure 1 – Outsourcing for US Air Carriers (Source: Transport Workers Union of America 2011, p.8) Figure 2 – Level of outsourcing for US Air Carriers (Source: Transport Workers Union of America 2011, p.9) Figure 3 – Economy of Mexico, from 1999 to 2011 (Source: Index Mundi 2012) Figure 4 – Operating profit for IAG, as combined from the performance of the members of the Group from 2007 to 2011 (Source: IAG 2011 Financial Report, p.3) Figure 5 – Operating profit and revenue of BA and Iberia for 2010 and 2011 (Source: IAG 2011 Financial Report, p.73) Figure 6 – Performance of Ukraine’s economy from 2008 to 2012 (Source: The Heritage Foundation 2012) Figure 7 – Factors that need to be taken into consideration when having to take outsourcing decisions (Source: Office of Aviation Research, Washington 2003, p.4-2) Read More