Power-by-the-Hour: cooperation that benefits all parties

With MRO expenses accounting for up to 20% of the operational costs of airlines the optimization of aircraft maintenance remains on the top of their priority list. An independent MRO provider is expected to grant reasonable savings that would outweigh the benefits of maintaining an airline’s own MRO organization. With considerable financial gains stemming from the so called total care programs no wonder that more and more carriers turn to providers offering integrated services and power-by-the-hour support.

MRO is a cash-intensive business, especially when it comes to components, engines or base maintenance services. The entire industry is worth more than $56 billion and is expected to reach almost $80 billion in ten years’ time. Airlines would rather avoid expenses related to the non-profile business support functions and use the cash to finance aircraft acquisitions, improve customer service, or introduce other value-adding services instead. Moreover, in today’s competitive industry, an MRO contract is expected to divide risks between the customer and the provider as well as create conditions for an operator to achieve the greatest performance possible. So the optimal contract is really a combination of three things: fixed payment or fixed price, cost-sharing and performance-based compensation.

As the investments needed in order to build own MRO infrastructure might prove prohibitive to a number of airlines, especially start-ups, there is a growing global trend of Total Support Packages and power-by-the-hour support services, which is especially driven by smaller and low cost airlines. Such a scheme implies that an MRO organization, providing services for the operator is earning money not for the maintenance work conducted, but for the smooth operation of an entire aircraft or its particular part. The provider receives fixed periodical payments according to the precise number of flight hours per certain period of time, and is expected to carry out all the required maintenance using its own resources regardless of the price. The beauty of this scheme is that a large portion of the technical risks is transferred onto the MRO organization, so it is naturally more motivated to carry out the necessary works as efficiently as possible.

But the benefits surpass motivation. For example, the development of the aviation industry has revealed that housing big stocks is not only expensive, but also ineffective. An airline may invest $100-200 million in a spare parts stock, but it still won’t cover every possible malfunction or need. Under the PBH agreement, an MRO provider gets to bear the costs of maintaining facilities and inventories of parts as long as a carrier keeps regularly paying for flight hours. Thus even airlines owning up to 25 Aircraft of the same type are better off signing PBH agreements which enable them to avoid huge investments needed to maintain even the smallest own stock.

While the reasons for individual shifts to PBH support do, of course, vary, at the centre is the peace of mind awarded to carriers in lieu of exorbitant expenditures on unexpected maintenance. Larger carriers may have the financial resources to acquire the necessary spare parts in contingency situations, but this is not the case for airlines with smaller fleets. PBH support means that an MRO organization takes full responsibility for rectifying component related AOG situations, which can cost the operator up to $150.000 per day.

In turn, for the operators this means less outlay of capital and no need to maintain an expensive maintenance infrastructure. And, in addition to the related savings, they can plan their MRO budgets more accurately.

Nevertheless, although PBH support may engender improved financial stability for smaller airlines, its overall advantage is subject to the conditions specified in each contract. Such a scheme clearly requires careful setting of the appropriate hourly rate, which requires accurate life cycle cost estimates that, in turn, heavily rely on accurate life prediction. Otherwise, either a carrier receives an overly expensive service, or a provider experiences loss. PBH is like a long-term marriage. Both parties must feel comfortable when being in that relationship and have a true partnership approach to each other. However, considering the benefits of a successful partnership, it’s definitely worth the effort, as well as the money.