Locatory.com: E-enabled Supply Chain Management Strategies to improve airlines’ performance

Due to slow recovery of the global economy, most airlines are still struggling to recuperate satisfactory passenger flows. However, sharp budget cuts and constant pressure to lower operational and other expenses have eventually resulted in positive changes of airlines’ performance. In order to preserve successful optimization goals, carriers are ought to further enhance their performance, for instance, by re-defining one’s supply chain management strategy.

Improving Performance

Recently the International Air Transport Association (IATA) has cheered up the global aviation industry by issuing a revised Industry Outlook for 2012, which states that this year airlines will earn over $4 billion, i.e. $1.1 billion more than previously expected. With due regard to high oil prices, which account for over a third of airlines’ expenses, the updated figures indicate that the aviation industry is successfully adapting to the changing global economy conditions.

Table 1. IATA’s Airline Industry profit forecast for 2012

‘Of course, the industry players had no options, but to reconsider their business models in order to survive the economic turmoil and remain in the market. The last 5 tough years had urged both small and large airlines to view their activities in a different light. Many of them turned to newer, much more cost-effective narrow-body and regional jets. As a result, leading aircraft manufacturers received a backlog until the end of the decade,’ commented the CEO of Locatory.com Zilvinas Sadauskas.

Flourishing Developing Economies

However, the rising demand for new aircraft is driven not only by the need to operate more fuel-efficient jets, but also by the highly promising new opportunities in the emerging markets. According to the Global Finance, the annual GDP growth in the emerging and developing economies will be approx. 6% in the following 5 years while the global average will be only slightly over 4.9%. As the purchasing power of nations in the developing economies is improving, their demand for air travel is also rising. For instance, IATA reports that in August the demand in Latin America was 7.3% higher than at the same time in the previous year. Aviation industry players from the emerging markets players are naturally also seeking to benefit from the situation. As a result, they currently account for half of the Boeing’s and Airbus’s backlogs.

Meanwhile, the demand in North America has increased by 0.5% only. However, slower growth rates do not have to necessarily raise serious concerns. The latest figures indicate that North American carriers have shown the best improvement in their performance as the report forecasts the highest $0,5 billion increase in the annual regional industry profits.

‘In past the majority of airlines were fond of keeping enormous stocks of components, spare parts, rotables, consumables and other materials thus trying to ensure maximum support for the fleet. However, 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. No airline can predict what part and when will be need. There will always be a part or a component which is unavailable or too far to be delivered from the base stock,’ commented Zilvinas Sadauskas.

As one of the consequences of the most recent crisis, some airlines have started to consider the low-cost carriers’ (LCC) business model as a means to reducing costs. For instance, many LCCs are preferring to outsource their supply chains to third parties. This helps to minimize components-related costs, since spare parts and/or MRO providers can significantly reduce airlines’ storage expenses and eliminate situations of unnecessary part acquisitions. However, such a model implies extensively large network of suppliers for airlines which operate in dozens of different countries across a variety of regions. And complicated networks often bring about intricate internal supplier management systems of extremely low-efficiency.

Further development

Today not only LCCs, but many other airlines also prefer to outsource spare parts supply to third-party providers. However, while entering new markets, particularly the emerging ones, some carriers encounter difficulties in maintaining effective and continuous spare parts support, since many Western suppliers haven’t yet embraced their presence in the flourishing developing markets. As a result, airlines are forced to look for local suppliers and/or form component pools with regional carriers.

‘In order to preserve the achieved improvement in their performance, airlines should further develop their supply chains. In order to effectively manage their supply chains, carriers should more actively implement e-enabled management systems, which can significantly ease the process of parts procurement at any location in the world, whether it is China, the United Kingdom, Brazil or Ukraine. Unfortunately, the development of own system for the needs of even a small airline would require considerable investments, left alone the time and HR-related costs. For that reason some airlines may find it reasonable to integrate the already existing platforms, which provide easy access to already verified and trusted local suppliers, as well as assist in forming and managing online joint component pools between airlines. The latter, for instance, is a particularly effective solution for airlines and airline groups which operate similar fleets and serve nearby destinations,’ commented Zilvinas Sadauskas.