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Hourly cost maintenance programs

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Meeting current and future business aircraft operating and maintenance needs requires innovative strategies.


By Don Van Dyke
ATP/Helo/CFII, F28, Bell 222.
Pro Pilot Canadian Technical Editor

Aircraft in their early operational lives are covered by a range of warranties. As aircraft mature, these warranties cease their validity. In post-warranty periods, owner/operators must either accept ongoing MRO responsibilities directly or subcontract them to aftermarket service providers. Maintenance cost-growth through the first 5–15 years of operation is roughly 3.5% per annum.
Given the unprecedented malaise in today’s aviation environment, many conservative owners tend to retain and operate their aircraft for longer periods rather than replace them with newer models.

An airworthiness program reflects 3 main parameters – utilization (flight hours), cycles (landings), and calendar-based events (scheduled maintenance).

Related maintenance, repair, and overhaul (MRO) costs depend on aircraft make, model, age, and types of operation. Over time, these costs may account for as much as 35% of an aircraft’s annual operating budget.

Within a strategy of operating mature aircraft for extended periods, MRO takes on even greater significance in preserving aircraft value. It is therefore useful to understand the 4 epochs of an aircraft’s maintenance life.

Warranties. Original equipment manufacturers (OEMs) issue separate, limited warranties on new products and components so that, in the event of accident or equipment fault involving these proprietary items within linked periods, related expenses are largely covered.

Table 1 presents warranty coverage typically offered for business jets. Several OEMs offer extensions, such as 2 years or 500 engine operating hours, to provide protection beyond the original warranty period. Warranties add appreciably to aircraft value.

According to Conklin & de Decker, during the warranty period, labor for new aircraft may cost 15% less, and parts 30% less. However, increases in MRO costs observed as aircraft come off warranty do not stem from increased maintenance as much as they result from the transfer of maintenance cost responsibility from the OEM to its owner.

Related operational planning and financial budgeting must consider the impact of inspections, airworthiness directives (ADs), and service bulletins (SBs) on the maintenance budget. In addition to airworthiness requirements, provision must be made for future regulatory mandates likely requiring aircraft modifications or upgrades.

The resale value of aircraft under warranty benefits from covered repairs of faults identified during pre-purchase inspections. Buyers are usually willing to pay more for aircraft transferred under benefit of this protection.

Post-warranty. The post-warranty period, commonly referred to as the aftermarket, begins with expiration of OEM warranties, often coinciding with completion of the first D-check (depot-level heavy maintenance that includes inspections of primary structures for corrosion, cracks, and fatigue damage).

During this active and complex period, OEMs continue to monitor reliability data so that maintenance programs prescribed for each aircraft, system, or component can be amended – subject to regulatory approval – to avoid unnecessary upkeep.

Unexpected maintenance is inevitable during the lifetime of an aircraft, but difficult to predict without qualified opinion based on a large database of events involving like aircraft by make, model, and employment.

Aging. Airworthiness requirements and maintenance costs are affected by technical aging which degrades subassembly form, fit, and function with time and utilization.

Economic aging is technical aging factored by prevailing economic data and paid at the time each maintenance event occurs. Finally, financial aging is an accounting method of provisioning for maintenance events which are not paid at time of occurrence.

Unmanaged, these aging factors make maintenance needs less accurately predictable and complicate related budgeting. Provisioning for unscheduled maintenance may be best developed by an independent broker or trusted consultant, especially for smaller operators.

Disposal. Aircraft value becomes critically important as disposal may refer to either a change-of-owner or an end-of-life decision. In either case, significant liability for maintenance expenditure may affect aircraft value adversely.

Some aircraft appreciate in value, keeping pace with inflation and market trends. Understanding terms like maintenance equity and maintenance exposure will help to quantify residual aircraft value at this point and provide additional analyses for consideration in finalizing disposition.

Table 1Aftermarket MRO providers

Aftermarket MRO may be performed in-house (self-insurance), by OEMs, or by 3rd-party contractors.

In-house. An in-house strategy requires the owner to assume total risk and related costs. If scheduled and preventative MRO are sustained reliably, and wide maintenance-cost data is available, operating cost forecasts can be compared with fixed-cost maintenance plans.

Even when costs are comparable, self-insured owners may choose to share scoped risk with an outside maintenance plan provider.

OEM. Factors favoring OEM providers include comprehensive coverage, plan price, and the value of brand-name recognition.

The OEM can often complete a repair more quickly on a component covered under its own plan. Finally, the OEM uses new parts for repairs and overhauls, particularly on engines it currently produces. In all cases, only OEM-authorized new parts and service are offered.

3rd-party provider. While OEMs appear to dominate the aftermarket, independent contractors can compete with flexibility (alternatives to comprehensive full-service contracts), mobility (supporting remote needs), and pricing (through greater use of quality used serviceable materials [USM] for both proprietary and non-proprietary designs).

Engines represent ~20% of new aircraft value. Nearer disposal, engines account for 80% of aircraft value. For this reason, aftermarket maintenance budgeting tends to focus on provisions for engine MRO.

Hourly cost maintenance programs

Rolls-Royce announced its trademarked Power-by-the-Hour maintenance management framework in 1962 to support the Viper engine on the Hawker Siddeley HS.125 business jet. Confident of its predicted maintenance costs, complete engine and accessory replacement was offered on a fixed-cost-per-flying-hour basis.

This philosophy aligned the interests of the OEM and the operator, who only paid for engines that performed reliably. Other OEMs followed quickly with a range of additional features and benefits that made the concept more attractive, evolving into hourly cost maintenance programs (HCMPs).

Although originally perceived as a form of insurance, HCMPs are more closely allied with pay-forward savings accounts which materially help to sustain operational efficiency, improve financial stability, and stabilize asset value.

HMCP goals are to avoid unplanned maintenance, downtime, and organizational stress; preserve service availability and operating flexibility; stabilize costs to improve budgeting; improve maintenance planning and scheduling; protect leasing and finance terms; enhance aircraft resale residual value; and reduce administrative burden by annual consolidation of billing.

Given current industry volatility and vulnerability, well-founded forecasts of future MRO requirements are as needed as they are difficult to formulate. HCMPs remove cost uncertainty by providing predictability for scheduled maintenance budgeting while concurrently mitigating the consequences of unexpected repair costs.

Although offered under different names, applications, and terms, HCMPs are available from all major airframe, engine, APU, and avionics OEMs, and one non-OEM – Jet Support Services Inc (JSSI).

Their shared objective is to improve safety and efficiency by optimizing asset reliability, longevity, and durability while making related costs and maintenance events predictable. Table 2 identifies commonly available HCMPs by airframe and companion engine/APU OEMs.

HCMP coverage

HCMP providers achieve economies of scale by aggregating MRO services and offering the savings to clients to buffer the cost of aircraft ownership.

These programs raise an expense based on disclosed or estimated aircraft utilization for defined major components (eg, engines, avionics, APU) up to virtually the entire aircraft. HCMP enrollment of a used aircraft with no accompanying HCMP may require a substantial buy-in fee.

HCMP providers may offer different levels of coverage tailored to customer requirements. Pratt & Whitney Canada (P&WC) offers 5 differently-priced levels of its Eagle Service Plan (ESP) coverage of certain turbofan engines. JSSI makes available options covering different aspects of the overall engine maintenance requirement, thus allowing owner/operators to avoid paying for unwanted services.

HCMP coverage can help to stabilize maintenance-related financial exposure, particularly for those owners or operators without significant internal resources to support their aircraft maintenance needs. The backlog on certain engine programs and the normal lag time of aftermarket activity has allowed certain independent shops to remain open, particularly in North America.

Many business aircraft operators are choosing to use this downturn to complete inspections or book their assets for early maintenance and upgrades.

Retained value. A well-structured and managed HCMP can also help to retain asset value by providing a secure, verifiable database of related maintenance activity.

This avoids issues in technical documentation and records which can otherwise reduce significantly retained asset values – or even render them worthless.

Aging aircraft operated under an HCMP are thus made more marketable for resale, often with shorter resale times. Importantly, this encourages viewing the aircraft – from at least one perspective – as a financial instrument.

Table 2Other HCMPs

The benefit of connectivity on business aviation are profound, and the avionics industry is at the forefront of connected aerospace.

Maintenance plans are customized to cover avionics equipage and requirements of the flight deck and cabin, including entertainment, communications, and information technology. Customized coverage for APUs is another important HCMP variant.

Extended coverage, often available for a small per-hour fee, includes many of the additional charges associated with APU repairs such as labor for APU and line replaceable unit (LRU) removal and reinstallation, freight-in and freight-out expenses, and allowances for lengthy troubleshooting, among other common expenses.

HCMPs for avionics and APU are both typically fully transferable without fees to the new owner. A more recent HCMP variant regards nacelles, which traditionally have not been included under engine maintenance programs, and which fall into the coverage gap between airframer and engine OEM.

Rolls-Royce’s CorporateCare program includes nacelles on engines for which it has a direct procurement relationship with the nacelle provider. In selecting an HCMP, the owner should determine what maintenance events the program covers, what the costs are to enroll an aircraft and whether a buy-in fee is required, the program’s term length, whether it’s renewable and transferable – with or without a fee – and if the program coverage ceases past a certain aircraft age.

Conclusion

Return on investment in an HCMP will reflect the value of reliably meeting operational and utilization goals against associated maintenance costs and asset management. Maintenance planning and budgeting only from an airworthiness perspective, not including cost-saving measures, and failing to account for operational demands, are serious management oversights.

HCMP frameworks ensure a formal approach to asset management which satisfies diverse ownership and operational needs. Enrolling an asset in an HCMP is a sound strategy to improve the reliability, usefulness, and accuracy of budgeting and planning for one of the most critical cost centers in aircraft operations.

Pilots can contribute their knowledge and experience to decision-making meeting today’s financial, operational, and cultural challenges, and thereby help to develop deeper understanding of aircraft maintenance management.


Don Van Dyke is professor of advanced aerospace topics at Chicoutimi College of Aviation – CQFA Montréal. He is an 18,000-hour TT pilot and instructor with extensive airline, business and charter experience on both airplanes and helicopters. A former IATA ops director, he has served on several ICAO panels. He is a Fellow of the Royal Aeronautical Society and is a flight operations expert on technical projects under UN administration.

 

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