Reasons Why Outsourcing Has Gained Popularity in Airline Sector - Coursework Example

Outsourcing is increasingly being viewed as a strategic decision rather than merely a cost reduction technique. No organization can rely solely on its own technology and people. To remain ahead of competition and technology, companies have to take the support of others. This has led to specialized services in every area which also renders obtaining these services more economical than having in-house facilities. Airlines are increasingly been choosing to outsource their line and base maintenance services rather than using in-house engineering. This paper will discuss the reasons why outsourcing has gained popularity in this sector. Engineering and Maintenance (E&M) of aircrafts is essential to provide the maximum availability of aircraft capable of undertaking flight operations. It also ensures that aircrafts are maintained and operated to acceptable levels of safety. The airworthiness of aircrafts can be continuously monitored if maintenance is regularly attended to. While maintenance helps to keep the aircraft serviceable, engineering maintains the safety. Both these areas have to follow certain guidelines and operate to certain standards defined by the authorities. The regulations permit sub-contracting of any or all maintenance activities but the responsibility remains with the operator. The firms offering such services need to have a minimum number of qualified and experienced staff. The number of employees depends on the number of aircraft with the airline which suggests that the E&M department grows in size and complexity in proportion to the growth of the airline. In the early 1980s, E&M was an integral part of the airline. The routes were controlled by the government and competition was non-existent. As small airlines emerged they demanded an equitable share of routes but they were not keen to set up large maintenance organizations as they were not capital intensive. Deregulation in the United States led to increased competition and the traditional carriers suffered in the process. As an aftermath of the Gulf War, the fares plunged and the airlines were forced to consider outsourcing of E&M as it is capital intensive. This gave rise to the maintenance, repair and overhaul (MRO) market which became an organized sector. Airlines are increasingly outsourcing their MRO which allows them to concentrate on their core business according to the Vice-President of Lufthansa Technik (Dore, 2006). Outsourcing does not only lead to cost efficiency but using MRO also helps them to increase their own maintenance capacity. The need for MRO service is high if the airline is just a start up with nothing expect the aircraft. It is also feasible to use MRO when the airline has a huge fleet exceeding ten aircrafts. For smaller airlines it is not economically viable to have their own set up for maintenance. Thus, irrespective whether it is new airline, airline with a huge fleet or a small fleet, MRO benefits each in its own way. Established airlines with large maintenance facilities are also choosing to outsource. Since there has been an increase in international air transport, the demand for MRO services increased in 2005. This is because low cost carriers have come in which prefer to use MRO services and besides aircrafts that have been purchased few years ago now demand maintenance. Many airlines had also delayed maintenance as a part of crisis management strategy especially in the wake of 9/11. Maintenance contracts guarantee certain reliability which is another strong reason that airlines opt for outsourcing. The main role of an airline’s MRO, according to Al-kaabi, Potter and Naim (2006), is to provide a fully serviceable aircraft at minimum cost and optimum quality when it is required by the operators. MRO typically consists of 10-15% of an airline’s operating cost. Economic pressures and fluctuating passenger demands forced the airlines to reconsider their business model. The trend toward outsourcing is expected to reach as high as 65% of the MRO budget by 2010. Initially only non-core intensive labor activities were outsourced although now stand alone units function efficiently. Another reason which could be responsible for outsourcing of MRO activities is because specialized agencies have come up offering these services. They provide comprehensive services which include product evolution, on site assistance, vendors monitoring, maintenance cost analysis, technical assistance, engineering services and a global maintenance agreement (ATR, n.d.). Another very important reason why airlines prefer to outsource is because concerns have been raised about the experience and background of workers who perform the upkeep of the aircrafts (Goo, 2005). It has been observed that the E&M departments of most Flag-Ship carriers are grossly inefficient. Fifty-three percent of all major maintenance on US airlines is done by contractors rather than airline employees. In 1993 only a third of the airlines company opted for outsourcing, this figure was 47% in 2003. JetBlue Airways and America West Airlines have their planes serviced in El Salvador while Northwest and Continental Airlines use repair stations in Hong Kong and Singapore. At the same time concerns abound about the skills and capability of the contract engineers following mid-air crash of an aircraft. This was partly due to improper work on the aircraft had been performed by an inexperienced mechanic at a third-party maintenance contractor. This ground has been rejected as criminal background of the employees is checked before the contract is awarded. Economic downturn has forced Airbus to offer MRO services. When such reputed firms offer such services the reliability factor is taken care of (Burchell, 2004). Thus, the airlines as well as specialized organizations like Airbus benefit from such deals. Low cost carriers anyway shift their responsibility for reliability on the manufacturer while the established carriers prefer to outsource as they can trim cost. To provide customer service, Airbus formed its own group of maintenance providers. MRO consolidation has made an impact in the market and the trend is towards globally organized services. Since the airlines insist on specialize services, they do no want Airbus and Boeing services from the same provider. In such cases, the Airbus partners for services with those organizations that provide Boeing maintenance. Such companies can offer their airline’s maintenance network, including line services, which benefit the low-cost carriers. Technical queries have also arisen in the past three years from the airlines. Airlines are reducing the in-house engineering support which is causing concern. Smaller airlines use older aircraft from leasing companies or second-hand aircraft which require increased maintenance. MRO providers are fast becoming major drivers’ of customers’ perception of aircraft and services. Outsourcing enables the executives to concentrate on the core sectors of the business like marketing otherwise the executive management spends 90% of their time involved in this while they have nothing to do with the operations. Thus, either firms outsource their MRO or convert their E&M departments into MRO profitable units where they earn third party revenue. Maintenance has traditionally been a cost centre to an airline. Maintenance is now used as a source of income (Gatland, Yang & Buxton, 1997). This could make the department have a different perspective – more commercial in nature which ensures efficient, qualified and experienced mechanics. When small airlines do not want to have their own set up for maintenance, the larger airlines in-source maintenance for mutual benefits. This requires an assessment of the available capacity. Outsourcing helps to reduce operational cost and capital investment. The latest advances in aircraft technology have also been a major driver towards outsourcing MRO. As system complexity increases, greater technical maintenance expertise is needed along with sophisticated equipment. Since the smaller airlines cannot afford such capital intensive units, outsourcing became an alternative to vertical integration. At the same time, airlines do not opt for total outsourcing. They retain the commercially sensitive skills in-house and have a strategic control over heavy maintenance lines. Airlines with large fleet size follow the Fully Integrated Model. Their capacity is beyond their own needs and hence they offer services to other airlines. British Airways, Air France and LHT are amongst the airlines that provide MRO services to other airlines (Al-kaabi, Potter and Naim (2006). Partial outsourcing is done when MRO operations are considered a profit center that helps dampen the seasonal passenger demand effect. By being a partially vertically integrated firm they can reduce their upstream cost by supplying to the down stream competitors for selective MRO activities. The other model is where the airlines outsource most of their needs and only critical activities are performed in-house. Some other airlines consider MRO as a non-core activity and they fully outsource their activities. Low-cost airlines like Ryanair and EasyJet follow this model. They concentrate on passenger services and cost optimization. Thus it is evident that circumstances forced the airlines to consider outsourcing their E&M. Some may have entered this due to intensive capital requirement while others converted the existing setup into profit centers by in-sourcing. E&M is certainly not a non-core activity because the passenger safety depends on this and airlines are bound by certain rules and regulations. Nevertheless, many agencies offering these services have emerged apart from the existing big-setups. This demonstrates that the trend is set to continue and become highly professionalized in their approach as demand increases, technology advances all of which requires greater efficiency in MRO activities. References: Al-kaabi, H., Potter, A., & Naim, M., (2006), Review Of The Configuration Of Airlines’ Aftermarket Logistics, Cardiff Logistics & Operations Management, 15 May 2007 ATR (n.d.), Expand our ability for services to assist aircraft operations and maintenance, 15 May 2007 Burchell, B., (2004), Airbus Moves Into MRO Market, 15 May 2007 Dore, L., (2006), More airlines opting to outsource maintenance, Khaleej Times, 15 May 2007 Gatland, R., Yang, E., & Buxton, K., (1997), SOLVING ENGINE MAINTENANCE CAPACITY PROBLEMS WITH SIMULATION, 15 May 2007 Goo, S. K., (2005), Airlines Outsource Upkeep, washingtonpost.com, 15 May 2007 Read More