Downturn Raises Questions About MRO Contract Flexibility

Credit: MTU

DALLAS—The influence of aftermarket contracts on fleet utilization during the global airline downturn is prompting some in the industry to explore whether more flexible terms could help lessen the effects of major business interruptions.

Executives speaking at Aviation Week's Aero-Engines Americas shared examples of operators that parked aircraft under long-term, power-by-the-hour (PBH) or similar pay-as-you-fly agreements to avoid spending cash. Les Cronin, MTU’s senior director of sales in the Americas, said one U.S. airline had one aircraft type with two different engines under different support contracts. The sub-fleet with engines under PBHs were parked, while the variant under a pay-per-event contact continued to fly.

“They were able to kick the can down the road, and not worry about flying that [PBH] fleet and having cash coming out of the airline,” Cronin said.

Alaska Airlines made a similar choice with some of its Boeing 737s, said Ken Newton, the carrier's supply chain, engine and lease management director. But even then, minimum flight-hour guarantees meant that the company was paying for flight time it was not using. Revisiting how maintenance events are paid for and adding flexibility to adjust terms based on utilization is one possibility, he said.

“If you reduce your work scope, you have the mechanism to reduce the cost. If you reduce your flight hours, you change how you pay for the [shop] visit,” he said. “That's an additional level of flexibility that I think we need to think about.”

Variable terms may work for engines with established service histories and maintenance cost baselines. But setting up flexible, long-term deals that attempt to estimate shop-visit costs for some newer variants, like the CFM Leap series, is for more difficult.

"We're all trying to guess what the cost per flight hour of that engine type is,” Cronin said.

In these cases, “risk sharing of the effects from both sides is a good way forward,” added Sebastian Torhorst, Lufthansa Technik head of engine service sales for Americas.

Both Cronin and Torhorst said their companies are open to more flexible agreements. But both also emphasized that their day-to-day approaches prioritize helping customers when they need it, regardless of contract language.

"Nobody really knows what's going to happen tomorrow,” Cronin said.  “When stuff happens, we go and talk to [customers] about how to find a way to work it out. Some of our best relationships are with customers that went bankrupt. You build strong relationships by helping them through difficult times.”

Sean Broderick

Senior Air Transport & Safety Editor Sean Broderick covers aviation safety, MRO, and the airline business from Aviation Week Network's Washington, D.C. office.