Regional airlines can cut costs by focusing on provisioning.
With bankruptcies, rising operating costs and changing operational conditions, regional airlines are under tremendous pressure to control their costs. In that changing environment, initial and ongoing provisioning—the process of bringing in and maintaining the right amount of inventory to support a fleet of new or existing aircraft and hubs—are areas with real financial implications, says Drew Skaff, Republic Airways' vice president of supply chain. “If we get provisioning right and exceed our performance parameters, our partners may moderately reward us,” Skaff explains. “If we don't have the right amount of inventory to meet minimum expectations, there are ramifications. It behooves us to carry enough inventory to support a network.”
At the same time, holding too much inventory also affects profitability. “Typically, an airline provisions to a 97% service level for no-go components,” says Skaff. “That means there's a factor of 3% of the time that we'll be in an AOG situation. That's a fact of life because it is too expensive to carry all the inventory you need to meet a 100% service level.” What's more, if an airline's operational needs change, there is a financial cost to rebalance inventory levels to get it right.
Anyone operating a fleet must provision. But regional carriers face some unique challenges, according to Tim Hoyland, a partner with the consulting group Oliver Wyman.
One is that regional airlines are required to set up operations wherever their airline partners need support, even if they haven't previously flown out of that area. That may result in carrying higher levels of inventory at that location than would otherwise be necessary if the regional could share parts with others.
The second is that inventory levels and reliability directly impact a regional airline's profitability. “Every airline wants to maintain the minimum level of inventory while still delivering high levels of service,” says Hoyland. “Since a regional airline is being paid a relatively fixed fee by its partners, and not the flying customer, the regional airline that performs better or cheaper has an opportunity to take market share or to prosper.”
Finally, most regionals are grappling with the cost of maintaining aging fleets, the discontinuation of 50-seat aircraft and the fact that flight characteristics have changed since 2008. For instance, stage lengths have decreased by 12% since 2008, from 468 to 413 miles, and the utilization of aircraft has decreased by 10%, from 9.2 hours a day to 8.3 hours a day, according to PlaneStats.com. That has left some regionals with too much inventory for their reduced operating conditions. “Regional airlines built predictive models and stocked inventory for a level of service they are no longer providing,” says Hoyland. “When that happens, the inventory requires an adjustment to those reduced levels.”
Despite these challenges, there are strategies to optimize initial and ongoing provisioning.
Optimizing Initial Provisioning
Initial provisioning is one area with opportunities for savings. “Airlines tend to bring in too much inventory too early because they forecast their needs based on the average age of their aircraft,” Hoyland says. “They end up spending money on assets that they don't need at that time.”
That's because the first four years of an aircraft's life is a maintenance honeymoon, with limited demand for parts. Maintenance requirements ramp up in years five through eight. After that, the demand for parts stabilizes and is more predictable. “After you undergo the first C check, the honeymoon is over,” says Hannes Sandmeier, vice president of applications development for software provider Oracle.
Instead of bringing in everything at once, airlines should model the demand for parts as an aircraft goes through that lifecycle. That is an approach embraced by Republic Airways.
“We make an investment in parts up front when we are doing a fleet renewal,” says Skaff, “but we don't bring in everything on day one because we know suppliers have designed parts to last for a specific length of time.”
For instance, if a Republic aircraft is flying 4,000 flight hours per year, Skaff will not bring in inventory for a part designed for 20,000 hours of service until somewhere between years four or five. “You don't necessarily need that part on day one, unless it's a no-go part that would ground an aircraft,” he says.
There is also an opportunity to use inventory already available to support the existing fleet. That available inventory is referred to as float. “Initial provisioning provides an opportunity to calculate how much float is required based on reliability data and the planned utilization of an aircraft,” says Willem Gouws, a solution management executive with SAP. “That information can be used to generate parts records and then generate the purchase requirements.”
That is one strategy used at Republic, where planners rely on a robust reliability program that considers reliability information from suppliers, the airline's own maintenance history with each part and industry data. “If you take all three, you can make a pretty good decision on the proper provisioning for that component and determine if you already have enough stock or you need to acquire more parts,” says Skaff.
Republic's planning and engineering teams have created their own software tools to model, analyze and forecast the demand for parts. However, initial provisioning packages are available from software providers, including ERP vendors like SAP and Oracle. “If you have experience with an aircraft model, you have a sense of the need for parts over the lifecycle of the airplane,” says Oracle's Sandmeier. “What that doesn't tell you, is your actual consumption of parts based on how you're operating that aircraft. It also doesn't take into consideration your past non-routine parts removals, which might impact your forecast of your needs going forward. Those are both things that a provisioning module can do.”
Finally, airlines often miss the opportunity to sell unused initial provisioning parts back to the original supplier. “There are often buyback clauses for initial provisioning parts if they are not used within a defined period of time,” Gouws says. “Too often, airlines are not identifying those parts up front and then tracking them as they age.”
Ongoing provisioning is the process of regularly analyzing inventory levels to keep a fleet or hub operational. It considers at least two types of stock.
The first is life-limited and time-controlled parts, like aircraft batteries, that must be replaced or recertified at certain intervals. Those may have to be kept in stock, regardless of the age of the aircraft. “If certain batteries have 600 hours and you need two batteries per aircraft, you know that every month you're going to need a certain number of batteries,” says Skaff.
On the other hand, Skaff has pooling arrangements for parts that have to be recertified at specific intervals, like evacuation slides that are recertified every 36 months. “The recertification process creates a spike in demand every 36 months that neither we nor our suppliers are going to provision for,” Skaff says. “Rather than purchase that inventory, we made a decision to create an exchange program for those kinds of parts.”
In addition to controlled parts, an airline should regularly compare the on-hand inventory of other parts, components and rotables against the actual usage of those parts. If operating conditions change, an airline may need to bring in more stock or sell some excess inventory.
SAP's Gouws advises clients to look at four parameters to recalculate the float of inventory:
• When fleet sizes or flying patterns change, or a minimum of once a year,
• When lead times or repair times change ,
• When reliability data changes, which is a reason why OEMs require Spec2000 Chapters 11 and 13 data from carriers ,
• When a carrier's own reliability data changes. “By keeping track of its own experience with parts, major deviations can be identified, discussed with the OEM and float levels adjusted,” Gouws says.
At Republic, planners regularly compare the inventory in stock against failure rates, the consumption rates, the parts that are out for repair and the turnaround time for critical parts. In addition, Republic maintains a hot report that monitors parts that have been difficult to source in recent months, either because there has been a change in their reliability, an issue with a supplier or a change in how Republic is utilizing its aircraft. “We monitor the hot report on a weekly basis and make efforts to keep those parts on the shelf,” says Skaff.
Along with changes in stage length and asset utilization, the retirement of 50 seat regional jets is creating an opportunity for regional carriers to balance their inventory levels by selling used parts or PMAs where available on the open market, according to Hoyland.
Hoyland estimates that parts that are no longer in production but still utilized can fetch 40-60% of their list price value if they are sold in a timely fashion, but considerably less if held onto for too long.
Improving Turnaround Times
While Republic continuously analyzes its reliability and performance, the biggest driver to correct provisioning is the turnaround times required to remove a part, get it repaired and reinstall it. “If a supplier's turnaround time slips 10%, that can have a tremendous impact on AOG activity or a reciprocal decrease in service levels,” says Skaff.
As regional airlines like Republic focus on turnaround times, one trend is to use vendor consignment stock for spares rather than to procure parts outright. “This is especially important when introducing a new fleet which requires a large number of new spare parts,” says Gouws. “The OEMs have seized this opportunity and we see offerings from all the major airframe carriers to provide consignment stock that only needs to be paid for at the time of consumption.”
's Collaborative Inventory Planning program for the replenishment of expendables is an example of this trend. Once a week, a participating airline provides an inventory report to Embraer. The OEM then agrees to replenish any parts that are at or below an agreed upon minimum inventory level within seven days. In addition, Embraer can create and manage the bill of materials for line related operations or any upcoming heavy maintenance checks. “Instead of carrying a 90-day supply of materials in the warehouse, airlines can carry just seven days worth of inventory,” says John Linn, vice president of customer support services for Embraer in North America.
According to Linn, Embraer is managing as many as 6,000 part numbers across 14 supply bases for one airline, and has supported fleets as large as 300 airplanes.
As regionals look for other ways to carry less inventory, Embraer has expanded the program to include the complete management of warehouse operations for expendables, rotables and the logistics involved in shipping those parts. “We can be a parts provider to those airlines that have an infrastructure in place or provide a complete service by doing the tagging, insuring the proper repair and certifying the materials,” Linn says.
At Republic, Skaff is exploring a program for rotables similar to programs offered by Embraer. “We will still inventory the parts in our warehouses,” Skaff says. “But behind the scenes we will rely on a partner to monitor, provision and manage the repair life cycle of the rotable components.”
He is also in discussions to have components provided on a service level basis by suppliers operating a pool for multiple customers. “By supporting various customers, their turn times can be significantly reduced and they can carry less inventory in their float,” says Skaff. He says a key for regionals is to negotiate service level agreements with their suppliers similar to those in place forand suppliers. He is in the process of creating a service level agreement with his suppliers that would require a turnaround on mechanical parts of 15 days and avionic parts in 10 days. “Those are the standards that Airbus requires for most of its suppliers and I consider them to be an industry standard,” says Skaff.
As regional airlines struggle to control their costs and maintain profitability, Skaff believes these type of supplier arrangements will become the norm for provisioning.