Rolls-Royce Aviation and the Development of Total Care - Case Study Example

 Rolls-Royce Aviation and the Development of Total Care Introduction Rolls – Royce, one of the leading aircraft engine and parts manufacturer along with two other renowned organizations in this industry namely GE and Pratt & Whitney, operate in a industry which is mature but at the same time volatile in nature. As a consequence they were bound to lower the price of the engines in order to get the market share. But cost of the engine was almost remaining at the same level. To overcome the situation manufacturers decided to focus on the business of after sales services of spare parts. This eventually led to the concept of ‘Total Care’. It was a totally new concept and actually created a new market of long term service agreement between the airline company and the manufacturer. Rolls–Royce is the first engine manufacturing company which actually took the challenge to implement it practically and was quite successful in doing so. Rolls – Royce was actually able to make ‘Total Care’ a successful brand. As a result when the entire airline industry was facing big challenges after 9/11 Rolls – Royce still managed to make profits thanks to their innovative strategies. Rolls – Royce Rolls Royce, world’s leading engine manufacturer of aviation and energy industry, was founded by C.S Rolls and Henry Royce in 1906. According to company website “Rolls Royce is a global business providing integrated power systems for use on land, at sea and in the air.” (Rolls-Royce Group profile, n.d.). Currently Rolls – Royce is operating in four major markets namely civil aerospace, marine, defence aerospace and energy market in almost 120 countries. As per the information given in company’s website, the group has wide customer base which includes near about 600 airlines and 160 armed forces. Apart from this there are almost 4000 corporate and utility aircraft and helicopter operator and 2000 marine and energy customers. Almost 39000 people working worldwide in Rolls – Royce which is having its headquarters in US, UK, Germany, Singapore, Canada, Scandinavia and China (Company overview, n.d.). Parent company of the group is the Rolls – Royce group plc. There are different indirectly held companies in four different sectors. Civil aerospace includes Optimized Systems and Solutions Limited, Rolls – Royce Aircraft Management Limited, Rolls – Royce Leasing Limited and Rolls – Royce Total Care Services Limited. Each of these companies is involved in different services like Optimized Systems and Solutions Limited deals with control and data management, Rolls – Royce Aircraft Management is providing financial support and Rolls – Royce Leasing Limited is dealing with leasing services of engines. Rolls – Royce Total Care Limited is providing all the after market support services. In marine sector there are two indirectly held companies namely Rolls – Royce Marine Electrical Systems which deals with various electrical systems of the marine and Rolls – Royce Power Electrical Systems which deals with nuclear submarine propulsion systems. Rolls – Royce Fuel Cell Systems Limited and Rolls – Royce Power Development Systems are the two companies in the energy sector. Finally, in corporate sector, there are Rolls–Royce International Limited and Rolls–Royce Power Engineering plc (Companies, n.d.) Rolls - Royce Total Care According to the Company, Total Care is a flexible approach to achieving an engine support service. It includes all the required services for the engine for a life time period which starts from the time of the delivery of the engine to the time when the engine goes out of service. As Total Care is a partnership approach, business goals of the partners (that is the airline and the manufacturer) are aligned. As a result of this, financial and operational risks are lowered the risk being transferred from the airline to the engine manufacturer. Due to Total Care service the residual value of the engine gets improved and as the responsibility is transferred from the airline company, it can focus on its core business that is safe and on schedule in taking off and landing of flights (TotalCare is a flexible approach to achieving an engine support service, n.d.) As per the information provided by the company a suite of engine support services are offered by Total Care which includes proactive in-service engine management, overhaul shop maintenance and collecting and managing of engine data (TotalCare® suite of services, n.d.) Major benefits of Total Care are discussed briefly: Improved financial planning A clear idea about the cost of engine maintenance can be obtained from Total Care services. This cost management is helpful for budgeting as well as financial forecasting. Risk transfer Generally airline companies carry the risk which is involved in engine fleet management. This risk could be in terms of both technical and financial. The benefit of Total Care approach is that this risk is transferred from the airlines to Rolls – Royce. Working together in partnerships Total Care program results to a win – win partnership which leads to maximized operational efficiency. The main objective of this partnership is to minimize the disruption in aircraft flying. Improved residual value Residual value of an engine, which is managed under the Total Care program, is improved as the asset liquidity is improved. Focus on core business The total administrative process gets simplified as a result of the Total Care program as the responsibility of managing the engines are shared among the airlines and the manufacturer (Industry benefits, n.d.) Analysis of case Arrival of Total Care The basic concept of Total Care program is lying in the after market support of the delivered engines. But previously it was only for initial provision period duration of which was first 12-24 months after the time of delivery. But in 1997 American Airlines had to invest a significant amount in a fleet of 54 Boeing 777s. As a result of this airline by issuing tender asked for total engine management for lifelong period of the engine to the three main engine manufacturers. The company actually did not want to keep any kind of responsibility regarding engine management on itself. Rolls – Royce managed to get the contract because other two players were not ready to take the challenge as everything “under the pylon” need to be covered in the service package. GE took its steps back considering the huge risk factor associated with the service package. Main point of this proposal was that American Airlines wanted this service on cost per flying hour basis rather than the condition of the engine. More over huge amount of risk was involved as unpredictable amount of cost was associated with operating heavy engineering workshops to repair jet engines. In aircraft engine management one can not limit the maintenance work within the allocated cost. For example, if there is an indicative cost of $3mn it does not mean that the required maintenance work would be complete within $3mn, It might well exceed the amount. This is because in aircraft engine management if any thing required is to be done, it has to be done. The industry is itself a regulated industry and the managers of workshops are bound to follow all the manuals as there is no scope of any kind of compromise in quality and cost reduction. Moreover each and every part has to be tagged. Apart from this there are other important factors which could add a significant amount to the total cost. For example, when birds or gravels are sucked into the engine in the runway it might lead to some expensive repairs and costly boroscope investigation. In Total Care program cost is unpredictable because there is no specific lifespan of an engine. Normally, an engine can serve for a time period of 25 - 30 years. Adding to this, new directive of airworthiness could arrive at any time and this might result to significant increase in cost of monitoring and replacement of various parts. Again, there are huge inventory cost of spare parts and alternative engines. Despite huge amounts of unpredictable cost and associated risks, Rolls – Royce was not only able to manage the entire operation of ‘Total Care’ successfully but also they were able to make the program a successful brand of the company. Rolls – Royce realized that the program was a unique concept and they were the ‘first mover’ in a completely new market. Problems in industry acceptance of Total Care There were different barriers for Total Care program to get the acceptance in the industry. These are: Responsibility Vs Accountability There is big difference between responsibility and accountability. Although, through Total Care program American Airlines wanted to transfer the responsibility to the engine manufacturer but they were still accountable for engine performance, safety, third party liability and airworthiness. This is because, if there were any accidents, or any kind of violation in safety regulations, or any problems in airlines services, the organization that would be questioned would be the airlines itself. So, although through Total Care, responsibility could be passed to the engine manufacturer but the accountability would be retained with the airlines. Selling Total Care Selling a concept is totally different from selling a product as concepts are intangible. Total Care is a complete service package for aircraft engine maintenance, not a physical product. It is difficult to sale an abstract thing which has no physical presence. So, in case of Total Care, selling process would include the promotion of ‘power by the hour’ concept, manufacturer’s reliability and the brand attractiveness of Total Care. Business Continuation Continuation of the smooth airlines business operation is another hurdle for Total Care in the sense that every airline’s main services include taking off and landing the flights safely and on time, but any kind of delay in the services due to some technical problem would be harmful for the image of the airlines. That is why every airline wants to keep a safety stock of spare parts and have its own workshop, because companies believe that there is no alternative for own workshop to meet deadlines. So, actually this traditional belief is one of the major obstacles in the implementation of Total Care concept. Complexity of the workshop’s operation Aircraft engine management requires workshops which are complex in nature. These workshops contain huge stock of spare parts, all the details of technical information, fuel pumps, valves, connectors and other accessories which are nothing but the infrastructure of supply relationships with all the manufacturers and facilities that are required for monitoring the condition. Because of this extent of complexity of the workshops the Total Care program might face some challenges in getting accepted in the industry: more the complexity, more the cost and risk involved. Psychological and Physical Risk Generally, when airlines operate their own workshop, people who are working in it are emotionally attached to it. There are years of extensive training, expertise and specific type of lifestyle associated with it. People working in those workshops share a unique kind of psychological and physical bonding. So, when this entire activity is passed to a totally different organization a huge amount of risk would be associated with it. The above mentioned factors are the major barriers for Total Care approach implementation. However, these obstacles in the delivery of Total Care could be removed but this requires few changes. Changes needed for delivery As Rolls – Royce is the manufacturer of the aircraft, engine so moving to Total Care that means maintaining the engine for its lifetime was actually falling into the core business area of the Rolls – Royce. But in Total Care program, airline is actually the partner of the business rather than the customer. So to adapt with this fundamental change there has to be a shift in thinking especially for an engineer of the manufacturer. As it is total shift of responsibility to the manufacturer, now Rolls – Royce has to find strategies to reduce cost, they have to follow the leads of other industries. Rolls – Royce realized that to provide excellent engine management services they need to analyze all the data and for this they went into a joint venture with the US software company SAIC to form a separate data management company named Data Systems and Solutions. Main job of this Data Systems and Solutions was to provide a software solution which would be providing a clear understanding about the performance characteristics of an engine under different circumstances. Rolls – Royce also realized that now as a result of constant monitoring there is an opportunity to warn about the service requirement few weeks before. It was quite clear to Rolls – Royce that it needed to modify its business thinking and procedure in the process of moving to Total Care. Traditional thinking in the company was that the engine project group would be focusing on a specific group of a product and main objective was to find out ways to make money. But the Total Care approach changed the way of thinking and the objective became finding out ways to improve efficiency and reliability by utilizing the outcomes of the analysis of all those data collected from the field. In Total Care the approach was to focus on the reliability and efficiency because it was a long term relationship with the airline, which was built on the faith that the manufacturer of the engine would take care of the same in a better way than the airline itself. In addition to this change in mission, Rolls – Royce also developed an aftermarket department which was supposed to prepare performance manuals of all the engines performing under different circumstances. These actually eased the process of identifying the under performance and monitoring the trend. This is because an engine’s performance can only be measured when it is performing under different circumstances and producing different results. But to analyze all these results critically and to find out whether the engine is performing at its desired level or not the company required a separate department. Another significant change was made by developing real - time monitoring system, where in data regarding engine performance reached to Rolls – Royce in Derby directly from the plane. This data is then analyzed and action is taken within three hours according to the requirement. But this could not work when a plane in an 18 hours route experienced lighting and as a result one of the engines failed to function normally and produced a surge. Since then the three hours time reduced to fifteen minutes to react faster. Future of Total Care In spite of the fact that there were huge amount of risks and unpredictable costs associated with the Total Care service, Rolls – Royce was able to make it a successful brand in a newly created market of long term service agreement. Total Care service type agreement was getting more and more popular and it was found that by the end of 2005 almost two third of all the engines were supplied by Rolls – Royce. According to the information provided by company itself, by 2010 number of engines under Rolls – Royce fleet service will be 15,500 and number of engines under Total Care will grow by 80% (Terrett, 2005) People are trying to implement this type of long term agreement in other sectors also. One of the most important things that have taken place due to this success of Total Care service is that the market has accepted the concept of risk and responsibility transfer. But despite of wide acceptance, some airlines are still running their own workshops especially for some older engines. Moreover, to avoid severe disruption most airlines keep spare engines which involve huge cost, but this is actually an opportunity for value added services for the engine manufacturer if it can sell the stand by engine to the airlines. Larger airline companies like to use stand by engines to reduce the risk factor and hence, the manufacturer can manage to sell stand by engines that will be adding value to their service. From the beginning, when the idea of Total Care was generated, trust is the major issue. The foundation on which the concept of Total Care service is standing is the belief that the engine manufacturer can provide better engine maintenance service than the airlines itself. Because otherwise there is no point in transferring the entire responsibility to the manufacturer as the airlines still remains questionable to the outside market. The future of any long term service agreement like Total Care is likely to comprise a lot of simple and complex possibilities. Firstly, the concept of ‘power by the hour’ can be extended to the sale of the engine. But in such scenario all the responsibility would be transferred to the manufacturer as the airline would not own any asset. As a result of this, complex financial situations would arise; because if Rolls – Royce provide financial support in the lease agreement then it would affect the company’s financial health and if a third party gets involved in it by providing financial solution then there will be problem of ownership. Another problem might arise if big airline companies ask for replacement even before the end of the normal life span. In that case, Rolls – Royce will be having the opportunity of selling the used engine or planes to the underdeveloped countries or some small airlines companies. This is actually a problem of residual value and how it gets solved could be seen in the near future. Apart from this a new system is likely to come for faster engine data analysis which would be used to improve the speed of condition monitoring. Conclusion Total Care is a phenomenal concept in the aviation industry. The fundamental idea behind the generation of the Total Care service is nothing but after market service, which is not new in any industry. But such an extensive long term partnership between the supplier and the operator has never existed before. Although, American Airlines first asked for such a long term service, but it was Rolls – Royce who actually made it real by overcoming all the practical challenges; and after seeing the success of such long term service agreement of the aviation industry other industries are also trying to come up with this type of ideas. References Companies, No Date. Rolls – Royce. [Online], Available at: http://www.rolls-royce.com/about/who_are/companies.jsp [Accessed on 26th August 2009]. Company overview, No Date. Rolls – Royce. [Online], Available at: http://www.rolls-royce.com/investors/company_profile/company_overview/index.jsp [Accessed on 26th August 2009]. Industry benefits, No Date. Rolls – Royce. [Online] Available at: http://www.rolls-royce.com/civil/services/totalcare/industry_benefits.jsp [Accessed on 26th August 2009]. Rolls-Royce Group profile, No Date. What we do, Rolls – Royce. [Online] Available at: http://www.rolls-royce.com/about/what_do/ [Accessed on 26th August 2009]. Terrett, M. 2005, TotalCare® - the dependable way of life, Rolls – Royce. [Online] Available at: http://www1.rolls-royce.com/media/presentations/services3.pdf [Accessed on 26th August 2009]. TotalCare is a flexible approach to achieving an engine support service, No Date. Total Care, Rolls – Royce. [Online] Available at: http://www.rolls-royce.com/civil/services/totalcare/index.jsp [Accessed on 26th August 2009]. TotalCare® suite of services, No Date. Rolls – Royce. [Online] Available at: http://www.rolls-royce.com/civil/services/totalcare/suite_services.jsp [Accessed on 26th August 2009]. Read More