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For Airlines, Money Makes the Work Go 'Round

Contract maintenance has its critics, but without it, many carriers might be in dire straits.
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Editor's note: This is the second article in a series examining the growing trend of outsourced aircraft maintenance. Click here to read Part 1.

CHARLOTTE, N.C. -- Historically, the bulk of aviation maintenance has taken place in airline hubs within big buildings, staffed by stable workforces composed of union workers with mid-five-figure salaries.

The Federal Aviation Administration, which is charged with overseeing safety, had offices nearby. Its inspectors visited constantly, often daily. This system produced a transportation system that is extraordinarily safe, but also costly.

Now, the infrastructure is being decentralized, and the impacts of this decentralization are varied and potentially enormous. Consider that carriers, including cargo and package airlines, spent $12 billion on maintenance in 2005, the Bureau of Transportation Statistics says.

These days, work is scattered around the country, and around the world. As in many industries, more and more work goes to lower-paid, nonunion employees.

Some, like

Northwest

(NWA)

, have embraced the new model. Last year, the Minnesota-based carrier outsourced 69.5% of its maintenance.

"It does not matter where the work is accomplished as long as it is accomplished in compliance with the maintenance program requirements," says spokesman Roman Blahoski. "Northwest has strong surveillance systems to ensure that compliance with program requirements occurs."

Meanwhile, at

AMR's

(AMR)

American, around 23% of work is contracted out, but it also provides third-party maintenance.

The world's biggest airline operates under an old-school relationship with the FAA. The agency has offices in American's maintenance hangars in Fort Worth, Texas, and Tulsa, Okla., and an FAA inspector joins the airline's daily telephone conference on maintenance.

"We don't mind having them on with us," says Bob Reding, American senior vice president for technical operations. "We look at them as additional auditors, in addition to the self-auditing that we do."

About the Money

Between 2000 and 2005, the nine largest airlines increased their share of outside maintenance to 52% from 37% of total maintenance expenses, according to a recent report by the inspector general for the Transportation Department. Lower-cost, outsourced maintenance is an attractive alternative as airlines struggle to recover from $35 billion in losses incurred from 2001 to 2005.

"If everybody is doing one thing, that tells me there may be an opportunity for a guy not following the crowd," says Reding.

"Each carrier has to make its own decision, but we have invested a lot in our people, our equipment, our hangars and our other facilities," he continues. "For instance, we have 12,000 experienced technicians. Our average mechanic has over 16 years of experience. Rather than throw that overboard, we are using their knowledge and expertise."

But many carriers are doing precisely what American eschews.

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At Northwest and

United

(UAUA)

, union contracts with the Aircraft Mechanics Fraternal Association permit extensive outsourcing. AMFA won bitter union elections in 1998 and again in 2003, replacing the International Association of Machinists, which strictly limits outsourcing in its contracts. Both carriers now outsource airframe maintenance to various locations, including repair stations in Asia.

"The industry could not survive without outsourcing," says John Goglia, who previously worked for the National Transportation Safety Board and is now a consultant. "Many of the components have become so reliable that it is difficult for an airline to set up a specialty repair area in their shop and have enough flow-through to justify equipment and manpower."

The real concern, he says, is what happens when an airplane undergoes a heavy maintenance check.

"That work is much more complicated than component work and you need a lot more supervision to ensure it is being done according to airline policy and procedures. Very often, you don't see that kind of oversight provided in the repair shops, because the airlines don't put enough people in place to do that."

At

Frontier

, in-house work encourages more committed workers, says Ron McClellan, vice president of maintenance and engineering. "When you have people wearing Frontier uniforms and getting a Frontier paycheck, there is an enhanced safety element," he says.

Additionally, McClellan says, outsourcing has hidden costs, like the expense of flying planes to a remote site. By contrast, if a jet is being worked on in an airport hangar, an airline can borrow parts that are needed immediately for another plane.

Still, Frontier does make some use of third-party shops. It will, for instance, send out some heavy maintenance for its expanding Airbus fleet until it has enough planes to start a second line.

"I don't think it's as good as having your own staff there, but it's not far below that," McClellan says. "If you have good management people there, you can do a good job of surveillance."

Seeking Efficiency

American has a partnership with the Transport Workers Union, which represents its roughly 10,000 mechanics. The partnership was forged in 2003, as the airline struggled to avoid bankruptcy. Workers absorbed pay and benefit cuts, the airline kept work in-house and both sides agreed to cooperate and make the plan work.

Today, at maintenance bases in Fort Worth, Kansas City and Tulsa, American is on target to generate more than $1 billion in new revenue and cost savings by the end of 2008, primarily by seeking third-party business from other carriers and implementing worker suggestions to improve maintenance processes.

"We are changing the way we do business," says TWU President Jim Little. "The front line people have ideas that have made the operation run efficiently. In Tulsa, we can complete a heavy

maintenance check in 12 to 13 days instead of 20 to 25 days. Working as a team seems to have produced a lot of energy within the group."

But Little says workers are distressed that this year American managers were awarded about $150 million in stock bonuses. "I hate to see that," he says. "It makes the people we represent feel dismal toward American."

Ray Valeika, who headed maintenance operations at several airlines during a 40-year career, says the TWU's position raises the question of how long American will be able to make its situation work before demands for wage increases and cost inflation threaten profits.

At the moment, he says, American is swimming against the tide.