International Bureau of Aviation Concludes that Additional Maintenance Costs are Close to $2 Billion as Aircraft Acquisition Favors Operating Leases
September 23rd 2015, MIAMI: International Bureau of Aviation (IBA) has analysed the typical key redelivery conditions and estimates that each redelivery of a single aisle aircraft at eight years old adds approximately $1.65mUSD to the maintenance costs for an airline over and above the basic MPD (Maintenance Planning Document) requirements. This figure can be over $3mUSD for a twin aisle aircraft. These disquieting facts have been derived from research conducted with airlines and MROs during a programme of Maintenance Cost Workshops that IBA has supervised globally in association with MRO Network throughout the year.
Operating Leasing adds costs to the overall mix because airlines have to provide aircraft in a condition that generally supersedes “airworthiness-only” condition, attaining a condition suitable for re-use at time of redelivery for the next operator.
IBA’s maintenance cost benchmarking exercises combined with its own studies shows clearly that the true overall MRO spend is greatly increased from the basic requirements that are driven by the OEM MPD.
“Maintenance tasks are brought forward during the redelivery phase so the airline meets the commercially negotiated conditions for redelivery. It is inevitable that these tasks, as well as observations made by lessors’ representatives at the redelivery, add to the scheduled maintenance costs “says Phil Seymour, Chief Executive Officer at IBA.
So what is the impact and is there anything that can be done?
“The financial impact can be significant and often not visible until it is too late. This causes friction between the airline finance department and the technical teams. Airlines are having to adapt to the redelivery business, and they are learning the hard way” explains Seymour.
“Taking staff away from their day jobs which are focused on keeping the fleet flying and complying with regulatory issues, is totally different to the approach and organisation required for redelivery. IBA is seeing an increase in airline driven RFPs to outsource this function.”
The costs of redelivery to the typical European airline in terms of labour resources alone are approximately $150,000USD per redelivery, and this is in addition to other maintenance costs. Lessors also face similar costs accrued from locating their team on-site during redelivery periods.
IBA predicts that it will be some time before redelivery paperwork becomes on line or virtual, however the increasing use of digital records and systems will create a simpler process. A high level of subjectivity remains around decisions about ‘condition’ and what is fair wear and tear, as well as differences in opinion over what constitutes adequate back-to-birth records and repair and modification files. The older the aircraft the more likely it is that disputes will arise and there have been several cases of litigation over the redelivery process – causing hundreds of thousands of potential costs to become multi-million dollar issues.
Stress-free redeliveries saving millions of dollars in unscheduled costs can be facilitated by IBA’s Leased Aircraft Redelivery Management service. Also since this service is bespoke to each lessor’s redelivery conditions it not only saves the airline significant time, but also reassures the lessor that an experienced and professional team is performing the redelivery, not hard-pressed airline managers diverted from their daily responsibilities.
Outsourcing is becoming an increasing part of the airline business model says Seymour. “We are moving towards the ‘virtual’ airline that simply operates a flight from A to B. Heavy maintenance of engines and aircraft is commonly outsourced and very few, if any, new airlines are set up with in-house maintenance facilities as part of their structure.
“Managing maintenance costs is a key feature for many aircraft owners. Airlines need to know what to accrue for future maintenance, either as ongoing expenses or capital costs; lessors need to understand how the aircraft maintenance condition will impact the long term residual value and remarketing of the aircraft when it transitions from one airline to another. Of course the MRO industry also has a direct impact via the labour rates, mark ups, and fees it charges.”
Associated with the leasing of aircraft are the maintenance reserves that a lessee may pay to a lessor to compensate for the use of the high cost parts such as engines and landing gears. According to IBA, there is a direct correlation, but not always agreement, between airline maintenance costs and the lessors’ view on reserves. IBA’s Maintenance Cost and Reserve Model helps airlines to manage and understand this by providing an objective number for these costs and allocating them into cost per hour/cycle and/or month.
Phil Seymour is guest speaker at the 11th IATA Maintenance Cost Conference in Miami – 23/24th September 2015 – he is addressing the delegates on ‘Aircraft Leasing, Valuation and Maintenance Related Issues’.
ABOUT IBA
The International Bureau of Aviation (IBA) was established in 1988 to provide independent expert business analysis to the aviation industry. IBA advises commercial and business aviation clients, aircraft/engine manufacturers and operators. Services include asset valuations, technical and engine management, consulting and commercial services, industry and sector research and analysis. For further information on the services offered by IBA, please contact Owen Geach, Commercial Director, on [email protected] or call +44 (0) 1372 224488.
