In the arcane world of airline technical services purchasing, the dynamics are changing along with the economics of the industry.

“Until a few years ago, the engineering staff played a much larger role in technical purchasing decisions than it does today,” says Jonathan Berger, vice president of MRO services for ICF SH&E, an international aviation consulting firm. “But technical staff input has been greatly reduced at most airlines and has shifted to supply-chain and purchasing management groups. Typically, they have more of a business than an engineering background.”

John Hunt, managing director of Technical Engineering Group, an Irish manufacturer of aerospace parts, has seen an identical trend in Europe. “Until recently, you just had an airline service engineer looking for a part. Now, people want some understanding of what it will cost—sooner and faster—than before,” he says. Hunt attributes this to persuading more purchasing people involved at an earlier stage of the acquisition process. “From our viewpoint, they are being a lot more professional about it,” he adds.

Alex Vlielander, president of Liebherr-Aerospace-Saline, reports that this trend is especially noticeable at the larger operators. “In the past, we may have dealt with just one department or division—now we find more 'cross-functional' or interdisciplinary committees involved with purchasing,” he says.

Vlielander, whose Saline, Mich.-based company repairs Liebherr-Aerospace components for landing gear, flight controls, and engine-bleed and cabin-air-management systems, observes that there is now “more direct involvement” from upper management and with emphasis on the financial side.

“Typically you see titles such as 'commodity manager' and 'asset manager' becoming involved,” he notes.

Cross-functionality is, in fact, integral to technical services and supply-chain oversight at Southwest Airlines, says Bill Tiffany, the carrier's senior director of supply-chain management. “It falls under two groups: one is responsible for the procurement of engineering and MRO services and components; the other focuses on inventory or supply planning,” he notes. “Both are positioned to work side by side.”

As Tiffany explains, this setup allows the carrier to “purchase the right quantities” of inventory. “The goal is to perform to specification with less inventory than we had in the past,” he says.

At the same time, Tiffany points out that the two groups also are working with Southwest's finance people to make sure that all inventory purchasing stays within or below budget. “With the AirTran acquisition last year, we are also reviewing and becoming more aggressive with our material planning and allocation process, not only with respect to purchasing new material, but sending it out for repair, and returning it to inventory.”

Tiffany reports that, at the same time, Southwest has become more engaged in vendor contract management and performance, taking a more hands-on and less passive approach. “When we bought AirTran, it was an opportunity to revisit a lot of vendor relationships. There were opportunities to reduce costs and improve our bargaining position by more actively managing our supply base.”

As Tiffany points out, the Southwest/AirTran combination accounted for more than 500 different suppliers. “That required us to focus on those suppliers where there is high volume and spending. As the contracts with those vendors expire, we are looking at those that need to be revisited.”

One change is to migrate away from “evergreen contracts” that are renewed automatically every 1–2 years, says Tiffany. “We want to make sure that the supplier provides the materials or services at the most competitive market prices, which tend to change year by year.”

Any focus on supplier contracts now includes a greater emphasis on performance measurements. As an example, about three years ago, JetBlue Airways introduced a reliability measurement that tracks the time between unscheduled removals of components, as well as the average number of days it takes to carry out repair orders.

“We measure the time from when a component is picked up from our loading dock to when we receive it back from the repair vendor for return to serviceable stock,” says Ken Highlander, JetBlue's manager of technical purchasing and repairs. “We are capturing the whole supply chain process.”

Highlander says the airline continuously monitors its supplier performance through quarterly meetings and a scorecard. Over the past 18–24 months, “the performance measurement system” has reduced component repair cycles to 20 days from an average of 35. “We have established lean industrial processes on our end, and have worked with our suppliers to do this, as well. The benefit has been greater material availability.”

Prior to instituting performance measurement, JetBlue had nearly $85 million worth of components out for repair at any given time. Under the new system, that has been reduced to about $41 million. “We have been able to grow the airline without having to buy additional inventory,” says Highlander.

JetBlue's performance measurement effort has impacted 85% of the airline's Airbus A320 components. It has also been extended to those used on the Embraer 190, since in many cases the carrier's suppliers handle material for both aircraft types.

David Seymour, senior vice president of operations for US Airways, reports that during the past decade, the airline has taken a more strategic view of technical services by focusing on long-term partnerships. “By making the vendor an extension of the US Airways organization, it gives him the opportunity to establish an experience base with us, and to find ways to deliver a more reliable component, within the prescribed turn time,” he says.

Depending on the system involved, some contractual relationships can be as long as 20 years, as in the case of engines, and 5–10 years on components. Given the contractual lengths, this puts a heavy emphasis on vendor specialization.

“We look for core competency in the specific components we want repaired, and getting away from one-stop shops with expertise in some systems, but in reality, [we] subcontract out the rest that they claim to service. We say to a company, 'Tell us what you're good at.' That's the key to building a reliable supplier base,” says Seymour.

At US Airways, vetting a supplier is a team effort, he says. “We have gone from vendor selection just by our sourcing group to include participants from our engineering, reliability, component and heavy maintenance groups. However, our sourcing staff will lead the effort. By applying this methodology, everyone gets an opportunity to voice any concerns, and we make a good selection, instead of grabbing the first thing that comes along.”

In addition to quarterly meetings with suppliers, US Airways uses what Seymour calls “a very comprehensive” scorecard system to measure reliability. Among the factors on which the vendor is evaluated are repair turn time and reliability.

“Some suppliers have put the scorecard out on the shop floor so that their employees can see it, giving them the motivation to improve upon the process. We have found that this process keeps getting better as it has evolved,” says Seymour.

The scorecard has resulted in savings and efficiencies through consistency of turn times. “I know that if a component needs to be repaired it will be spending less time in the shop, and will be more available for my mechanics to use. At the same time, I won't have to buy as much inventory for new aircraft coming into our fleet,” he says.

Repair reliability also has improved because more parts are staying on-wing for their expected design limits, he says.

Contractor performance evaluation, reports Southwest's Tiffany, “is one area that needs improvement” at the airline.

He thinks the airline has done a “pretty good job” with companies it contracts to perform heavy maintenance. “Where we can do better is with component repair and overhaul. That is why we are currently developing performance-measuring methods to drive down costs and make sure we get the quality and performance levels we need from our suppliers,” says Tiffany.

In fact, vendors should expect to see more oversight from their customers. “Getting wrapped into a long deal with a poor provider can be a nightmare,” states Mike McBride, vice president and principal at consulting firm TeamSAI. “That is why I rarely visit a supplier when I don't see a customer rep auditing or working on location to ensure quality and delivery targets are in line with expectations.”

Along with that, and closely related, MRO contract lengths are increasing, and airlines are transferring even greater risks to their vendors, according to ICF SH&E's Berger. Those risks, he explains, include material availability and service level guarantees, which, if not met, can “bring on significant financial penalties,” depending on how the contract was negotiated.

In tandem with that, Berger says more airlines are moving away from ownership of material and toward leasing, which “affords greater flexibility,” especially as older fleets are retired and new aircraft come into the fleet. “All the inherent risks involved with supplying and maintaining components are being transferred today to the supplier,” Berger remarks.

According to Scott Gunnufson, vice president and general manager of sales at Rockwell Collins, the avionics manufacturer is “witnessing greater sophistication with provisioning models” (component supply and servicing agreements), especially as aircraft become more complex.

“Over the past 5–6 years, the models are becoming tighter in order to provide more efficient and less capital-intensive plans,” he says. “We have worked with the airlines to develop these models due to customer demand.”

Part of this, Gunnufson explains, involves a shift in component ownership and management to large-system integrators with contractual performance clauses focusing particularly on asset availability and reliability. “This is going hand in hand with the outsourcing evolution.”

Technical Engineering Group's Hunt notes that European carriers are adopting the model as well. “Nobody wants to hold inventory. We saw that start about 3-4 years ago, with Ryanair as the pace-setter.” He sees legacy airlines going in that direction, too, but at a slower pace because many still have large in-house support organizations.

Hunt says operators are negotiating more just-in-time (JIT) type contracts and are incorporating penalty clauses if the supplier fails to deliver when promised. “This has become more common because, due to the financial uncertainties in Europe, everyone is being extremely cautious. By going to JIT, it keeps inventory down,” he says.

But for the supplier, supply/management contracts hold inherent risks because customers can change aircraft or move to another vendor. “That's why it's wise to get a contractual commitment from your customer to purchase specific levels of inventory, usually within a 12-month period. That's a reasonable time to hold inventory and to assure your customer of an adequate supply of critical parts.”

In fact, Copenhagen-based Jet Time, with 12 Boeing 737s—including -300 and -700 models—has outsourced inventory management on complex technical components, such as avionics, under a power-by-the-hour agreement with AJ Walter Aviation in the U.K. “For an airline of our size, I don't see that changing in the near future,” says Klaus Ren, the airline's president and CEO.

Ren may not be stopping at component maintenance outsourcing, as the airline considers long-term fleet-renewal plans. “We have a dialogue going with Boeing, Airbus and Bombardier on our future fleet—and who will support them. We want to know that we can get some assurance from them that maintenance support will be at a certain level, because that is where you always take a chance.”

Tore Jenssen, fleet manager for Oslo-based Norwegian, reports that the carrier has selected Boeing's Edge (formerly GoldCare) to provide total logistics and maintenance support on the eight Boeing 787s it has on order. It also is considering similar programs for its on-order 737 MAX and Airbus A320NEOs. This is the first time that Norwegian has outsourced all logistics support on an aircraft, he says.

“With all the new technology involved on this airplane, it will be much more cost-efficient for our operation to go with Gold Care, and to let our engineering people focus on our current 737 fleet,” he explains. Norwegian flies 12 737-300s and 55 737-800s.

This is an example of a major trend in Europe toward greater participation of the large MROs and original equipment manufacturers in technical support, Jenssen notes. “It will be interesting to see how this plays out in the coming years. That could put pressure on the smaller MROs and reduce competition.”

But will the “outsourcing evolution” mean that operators will opt more for contractors that will relieve them of the maintenance planning and supply-chain management burden? The potential is certainly there, says McBride.

“There are several firms capable of handling this for a major carrier, and a number who have pitched it to the majors, but the big carriers just haven't been able to pull the trigger,” he says. “It's a tough sell, because of the involvement of large sums of money tied up in inventory, as well as extensive control. However, I think the supplier/management firms will win them over because they can do the job better and save the airlines money. I've seen the difference, and I know it's a chance worth taking for the airlines.”

McBride points out that any trends in that direction are more likely to happen with the low-cost carriers, which, he says, focus on their core-product revenue generation.

“Many already outsource maintenance programs, technical publications and inventory management, and I don't see that changing. As for the legacy carriers, it's on their radar, but not something they are pushing right now,” says McBride.

JetBlue Airways' Highlander notes that the airline actually considered—but opted against—technical purchasing outsourcing.

The airline found there were not cost-competitive because it only has a seven-person technical purchasing department,” says Highlander. Nonetheless, the carrier has “totally contracted out” its surplus inventory sales through an agreement this past January with VAS Aero Services. “We consign the surplus parts to VAS, which warehouses them and maintains the sales force and infrastructure, so there is no need for JetBlue to do this in-house,” he says.

The emerging policy at JetBlue is the use of more PMA (parts manufacturer approval) components, Highlander adds. In fact, he says the airline has already exceeded its full-year goal for 2012 of saving $1.5 million by using PMA.

“Right now, we are using PMA with cabin maintenance, including set parts, window shades, tray tables and seat covers,” he says. “We continue to use OEM parts for component maintenance, but as vendor contracts expire, we will look at PMA on a case-by-case basis.”