An analysis of outsourcing of Airlines maintenance and its impact on Airlines safety

The aerospace maintenance Industry is one of the most, if not the most globally oriented markets in the world. In fact, only 40 percent of the materials used to build an airbus aircraft in US are manufactured within the country, and as much as 60 percent of all of the airplane parts manufactured in US are sold overseas. Thus, aviation, no doubt, plays a very significant role in the US economy.

As per the discussions held by the sub-committee formed to pass the bill to restrict the use of foreign repair stations by U.S. Airlines, (October 9, 1997, U.S. House of Representatives, Subcommittee on Aviation, Committee on Transportation and Infrastructure,Washington, DC.),  there were 496 foreign repair stations certified by the FAA around the world, and over 4,000 certified repair stations in the US.

As per the FAA, all these repair stations, both foreign and domestic, are held to the same strict safety standards. Outsourcing can be defined as the concept of taking internal company functions to an outside firm to handle them at a cost. Outsourcing is usually adopted to save money, improve quality, or free company resources for other activities. The airline maintenance industry too opened its doors to outsourcing mainly to achieve the major objective of cost cutting.

However, given the questionable reliability of third party maintenance companies, the big question that arises is that does cutting costs have a greater importance than quality service, and that too, in a high-risk industry like the airline maintenance industry, where the lives of hundreds of others is at stake.

This paper attempts to study and analyze the pros and cons of adopting outsourcing as a practice in the airline maintenance industry.

The paper would include a thorough identification of outsourcing companies within and outside of the United States, an explanation of outsourcing as well as its level of experience vs. licensed airline mechanics, a study on accidents and incidences caused due to maintenance reasons, compare safety records of airlines that outsource vis-à-vis that don’t and study the various outsourcing companies for violations like mechanic qualification, drug testing and employing illegal immigrants.

The paper also aims to study the Federal Aviation Administration (FAA) regulations and the impact that outsourcing has had on the airline maintenance industry as a whole.

The current research focuses on the airline maintenance industry, the trend of outsourcing maintenance facilities and its impact on the safety of the airlines.

The airline industry is an intensely competitive industry with more and more new players joining in, offering a variety of fares and facilities to the customers. As per the Industry handbook of the Airlines Industry (Copyright © 2007 Investopedia ULC), the Department of Transportation (DOT) classifies the airline industry into four categories:

·         International - 130+ seat planes which can fly just about anywhere in the world. Companies in the International flight segment typically have annual revenue of $1 Billion or more.

·         National - 100-150 seat planes with revenues between $100 million and $1 billion.

·         Regional – Short haul flights with revenues less than $100 million.

·         Cargo – Flights used for the purpose of transporting goods.

Significant issues, which concern the Airline Industry, are:

·         Airport capacity

·         Route structures

·         Technology

·         Costs to lease or buy the physical aircraft

·         Weather -It is usually the most common cause of flight accidents.

·         Fuel Cost - Makes up almost 14-16% of an airline's total operating costs. Efficiency among different carriers varies widely with short haul airlines typically having lower fuel efficiency.

·         Labor – Makes up almost 40% of an airline's expenses. Includes salaries of pilots, flight attendants, baggage handlers, dispatchers, customer service, etc.

And last, but not the least,

·         Maintenance Costs - Is generally the second largest cost item behind labor for major carriers. Makes up almost 30% of an airline’s expenses. However, unlike other airline functions like catering or reservations, maintenance is an integral element of safety, because of which, it must be evaluated in terms beyond costs.

It is this significant issue of ‘high maintenance costs’ which has forced many carriers to outsource its maintenance work to third party companies. Heavy maintenance outsourcing can be said to have taken off largely in the last 10 years. In 1985, the outsourcing by U.S. major airlines was about US$250 million annually. Today, that figure has multiplied by almost 10 times, whereas total maintenance and overhaul has quadrupled in the last 10 years.

It is true that the overall contract maintenance pie is expanding. However, the percentage varies from airline to airline. As per World Airlines News (July 21, 2000),Trans World Airlines [TWA] outsourced only about 7.5 percent of its heavy maintenance work, whereas America West contracted out as much as 74 percent. The largest carriers of the US, American, United, and Delta Air Lines [DAL], do not believe in much outsourcing and tend to keep most of their maintenance work in-house.

Contracting out and hiring a third party Maintenance Company has both pros and cons. Southwest Airlines [LUV] has an enviable reputation for excellence in safety as well as reliability and it outsources most of its maintenance work.

America West, on the other hand, has had more problems than advantages from outsourcing, and is reconsidering bringing some of its maintenance work back in-house. Carriers get attracted to the idea of outsourcing because of the savings it might result in, but the stringent regulatory requirements and labor issues involved in outsourcing encourage them to keep work in-house. The large carriers, however, benefit from economies of scale and so, prefer servicing their own massive fleets.

The airline maintenance industry, being a ‘technically-skilled-people’ oriented industry, relies completely on the technical skills, work values and commitment of its employees for its success.

The criticality of this Industry lies in the fact that the lives of hundreds of passengers lies in the hands of the technicians who quality check the aircraft’s and approve them for flying.

Thus, airline carriers must be able to accurately measure and analyse the quality of maintenance servicing being provided by these third party companies and whether they meet the quality requirements as approved by FAA.

Analysing the pros and cons of outsourcing to the airline maintenance industry is the focus of this paper. The paper aims to identify outsourcing companies within and outside of the United States, to study and analyse accidents and incidences caused from outsourcing, to compare safety records of airlines that perform their own work vs. outsourcing to study the Federal Aviation Administration regulations and study the impact  of outsourcing on the airline industry.