Running head: ADVANTAGES AND DISADVANTAGES OF THIRD-PARTY MROS
Advantages and Disadvantages of Third-Party MROs
Timothy Timmons
Embry-Riddle Aeronautical University
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ADVANTAGES AND DISADVANTAGES OF THIRD-PARTY MROS
Abstract
The outsourcing of maintenance activities by the major domestic airlines has been a relatively
recent development in the last decade. As late as the 1999 all major US airlines were still
conducting the majority of their maintenance. That has dramatically changed in the last decade
beginning around 2001 after the tragic events that occurred on September 11, 2001. There are
many reasons for the shift away from maintaining organic maintenance resources within the
airline. Many of these reasons deal with money and have been initiated by the financial
hardships that almost all domestic airlines currently find themselves in. This paper will explore
the history behind the outsourcing trend in the US and examine the advantages and
disadvantages associated with contracting out maintenance activity to third party organizations
commonly referred to as MROs or maintenance repair organizations.
Keywords: MRO, outsourcing, airlines, maintenance
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ADVANTAGES AND DISADVANTAGES OF THIRD-PARTY MROS
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Advantages and Disadvantages of Third-Party MROs
The outsourcing of maintenance activities by the major domestic airlines has been a relatively
recent development in the last decade. There are many reasons for the shift away from
maintaining organic maintenance resources within the airline. Many of these reasons deal with
money and have been initiated by the financial hardships that almost all domestic airlines
currently find themselves in. This paper will explore the history behind the outsourcing trend
and examine the advantages and disadvantages associated with contracting out maintenance
activity to third party organizations commonly referred to as MROs or maintenance repair
organizations.
Outsourcing as a business concept in the United States is a relatively recent development.
The business model in the 20th Century for large companies was to “own, manage, and directly
control” all assets associated with the company (Handfield, 2006, para. 1). As such airlines
owned and controlled all the assets which were related to their business. This included
maintenance, reservations systems, and marketing and advertising assets just to name a few. By
the 1970’s the United States was experiencing an economic down turn in the form of a recession.
Companies were looking to become more efficient but under the old business model companies
had grown so large and unwieldy by owning all of their assets that it was difficult to affect cost
savings. Outsourcing was formally identified as a business strategy in 1989 (Handfield, 2006).
Outsourcing quickly came into vogue with American companies during the 1990s as a way of
reducing overall cost. With outsourcing a company could focus exclusively on its core business.
All other activities not associated with the core business were contracted out to third parties.
Throughout the 1990’s many American businesses would turn to outsourcing in an effort to
ADVANTAGES AND DISADVANTAGES OF THIRD-PARTY MROS
become more efficient and better focused. It would take the airline industry another 10 years
before they began to seriously investigate outsourcing as a business strategy to reduce cost.
Early in the history of airlines there were no third party MROs. Airlines had to create an
internal maintenance capability to service their fleets. This practice continued well into the
1990s. As late as the 1999 all major US airlines were still conducting the majority of their
maintenance (Transport Workers Union of America [TWU], 2011). That has dramatically
changed in the last decade beginning around 2001 after the tragic events that occurred on
September 11, 2001. The US Airlines now operate on an extremely thin profit margin with
almost all major US airlines have filed for bankruptcy protection within the last two decades.
US airlines are always looking for ways to improve operational efficiency and reduce cost.
Outsourcing maintenance operations through MROs has been one of the major outsourcing
initiatives within the industry. Today of the six major carriers each has turned over a major
portion of their maintenance to outside MROs (TWU, 2011). Of all domestic outsourcing 30%
is performed by MRO’s based overseas (TWU, 2011).
Another motivation for change has come in the way of competition. Major US airlines have
also had to cut cost in order to remain competitive with low cost regional airline competition.
Low cost and start up carriers usually leverage third-party MRO support to keep company
infrastructure minimal and reduce initial capital investment. Iberia’s Jose Quiros, Business
Development Director for Iberia Maintenance and Engineering stated “focusing on the core
business is something that airlines have been doing for the past 10 years and there is very few
startups that have developed MRO in-house capacity other than line maintenance” (Sparaco,
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2000, p. 50). Alexander Kuile of the international air transportation consultancy SH&E summed
it up by saying “The airlines emphasis on profitability drives the management’s focus on core
airline activities, leading to outsourcing of non-core functions” (Sparaco, 2000, p. 50). The
major airlines took note of the business strategy of these low cost start-ups and felt that it could
work for them as well.
All of the major domestic carriers have turned over all or a portion of their maintenance
activities to third party MROs. Many of the major airlines have also seen their maintenance
subdivisions get into the third party MRO business. United Services is the United subdivision
which conducts aircraft maintenance. Its main maintenance facility is located at San Francisco
International Airport (Mecham, 2006). For United the catalyst for making a change was
bankruptcy. While restructuring the company following bankruptcy in 2006 United began
outsourcing its airframe work. United retained specialty maintenance capabilities and began to
receive third-party contracts for engines, APUs, and other specialty components at the San
Francisco facility (Mecham, 2006). Delta Airlines in house MRO services is conducted by its
TechOps division. Along with its own fleet TechOps services more than 150 other operators
(Arnoult, 2010). Original equipment manufacturers (OEMs) are very much into the MRO
business as well. GE Engine Services dominates the very lucrative engine overhaul segment
("Making Mischief," 2003).
Currently over 55 percent of airline maintenance is outsourced. For business and regional jet
maintenance the number is almost 100% ("Increased MRO Outsourcing," n.d.). The fasting
growing sector is the engine MRO segment ("Increased MRO Outsourcing," n.d.). Line
ADVANTAGES AND DISADVANTAGES OF THIRD-PARTY MROS
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maintenance is the slowest growing segment for outsourcing with most airlines retaining the
capability within their organization. Because of the logistical requirements and frequency of line
maintenance and ‘A’ checks most airlines continue to retain maintenance assets to perform these
highly repetitive services.
There are many advantages to be had by the airlines in choosing a third-party maintenance
provider. As previously mentioned one of the key advantages to outsourcing maintenance is that
it allows an airline to focus on its core business of transportation. After all maintenance of the
fleet has always been a byproduct of providing the transportation service. With outsourcing the
airline has multiple service options to choose from with hundreds of maintenance facilities
providing service. The airline can take a close look at a company’s culture, quality of work,
safety record and experience before choosing an MRO partner (Arnoult, 2010).
For a small airline or a new start-up airline a third-party MRO may be the only financially
viable option. For a start up airline utilizing the services of a third party MRO can help minimize
initial start up cost. Airlines with small fleets are also better off with a third-party MRO as the
capital cost associated with standing up an internal MRO capability can be huge and prohibitive.
An airline with new planes and a small number of aircraft would probably find little economic
sense in creating an internal MRO capability because the volume of maintenance work is just not
there to justify the expenditure. Jet Blue provides a good example of this. Jet Blue VP Dave
Ramage remarked “The cost for us to do anything other than the work we perform today would
be enormous” (Arnoult, 2010, para. 4). For established airlines with an in house maintenance
ADVANTAGES AND DISADVANTAGES OF THIRD-PARTY MROS
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department the move to an MRO could provide access to maintenance facilities that are more
robust and better equipped than the facilities that the airline currently possess.
Additional advantages of selecting a third-party MRO is the agility and flexibility that it gives
an airline. The airline no longer has to worry about having millions of dollars of capital tied up
in spare parts that may never be used. The cost associated with adding new make and model
aircraft to the fleet also becomes minimal from the maintenance stand point. The addition of a
new make and model only requires the company to find and enter into a service contract with an
MRO. An in-house maintenance operation would require the company to purchase new
facilities, new tooling, new test equipment, and additional personnel training. These types of
acquisitions would requires long term planning and financing in order to have the assets in place
by the time the aircraft is acquired. With outsourcing the assets already exist on the market, it is
just a matter of identifying them and entering into a contract, a process that while involved still
has a much shorter execution timeline. Because third party MRO services are scalable an airline
can quickly grow its fleet without incurring the penalty of additional maintenance infrastructure
cost. The cost associated with maintenance support becomes less of a factor in the decision to
purchase a new model making the airline more agile in its business decisions for expanding
service on existing routes or establishing service on new routes.
Cost is another major advantage to outsourcing with an MRO. Because MROs compete
against each other for service contracts they must be as lean and efficient as possible in order to
keep their service cost low. The airlines benefit from this open market competition between
MROs with reduced maintenance cost ("MRO Transformation," 2011). Because the MROs pay
ADVANTAGES AND DISADVANTAGES OF THIRD-PARTY MROS
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less wages, especially overseas, it gives the airlines access to even lower cost labor. For each
aircraft visit into maintenance about 80% of the cost is associated with manpower according to
United management (Mecham, 2006). It is much easier to reduce cost in material than in
manpower for most in-house maintenance programs ("Making Mischief," 2003). The airlines are
also free from dealing with organized labor and other employee issues. No labor unions to
negotiate with, no collective wage agreements, no employee long term pensions, no health care
cost, no workman’s compensation, and no disability payments among other things to deal with.
The MRO also gives the airline staffing flexibility. The airline only pays for work completed,
the work load can expand and contract without the need to hire additional personnel. With an inhouse capability the company must pay to maintain its work force regardless of the work load.
Even if the current work load is not utilizing all of the personnel completely the company is still
paying.
Despite the many advantages of contracting an MRO there are several disadvantages that
must be closely analyzed before making a decision on whether to outsource. Many of the cons
against third-party MROs have been levied by domestic union organizations representing the
individuals who have lost their jobs due to outsourcing. These critics claim that safety is being
compromised and that an aviation disaster looms in the future. However such a disaster has yet
to occur, in actuality the airlines are enjoying the best safety record in their history
(http://www.airlinesafetyrecords.com, 2012).
Once an airline decides to outsource its maintenance function it must spend considerable time
researching the third-party options available. Selecting the right MRO is an absolutely critical
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business decision for the airline. The continued existence of the airline could be at stake. A bad
decision and a poor performing MRO could cripple the airline with unacceptable fleet readiness
levels or worse a maintenance related accident that results in the loss of life and widespread
negative press coverage which could drastically reduce the airlines appeal to the traveling public.
Because most third-party MROs service multiple customers they have a very limited financial
stake in how well an airline performs. This lack of financial dependence could result in less of
an emphasis on quality and attention to detail by the MRO management compared to the airline’s
own maintenance management.
After the critical decision of choosing the right MRO the airline must be equally careful in
how it crafts its contract terms with the MRO. The airline must develop a contract with the
MRO very carefully ensuring guarantees on quality of work and response times for all of the
airlines scheduled and unscheduled maintenance needs. With multiple customers the MRO
cannot treat every airline it services as priority one. There must be an allocation of limited
resources to meet work requirements; the airline management does not really get a vote in how
work is prioritized or how resources are allocated. They may not even have any visibility at all
into the process leaving them only with the terms of their contract and trust in the MRO. This
could really present problems if the third-party MRO is servicing two competing airlines and
back door deals have been made to prioritize one over the other.
Another major disadvantage of outsourcing stems around the amount of control an airline
gives up by using a third-party MRO. The airline has little control over an MROs internal
operations, culture, and employee training. Many foreign MROs also lack considerable FAA
ADVANTAGES AND DISADVANTAGES OF THIRD-PARTY MROS
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oversight of their operations. Despite this lack of control the airline is ultimately responsible to
the FAA for all of the work performed by the MRO. In contrast by maintaining an organic
maintenance capability the airline maintains total control over every facet of the operation. The
airline also has no guarantee that a third-party MRO will be around tomorrow. This should be a
major concern for a company which is completely dependent on the MRO to continued
unimpeded operations. An MRO in poor financial health could go out of business with little or
no notice, employees could go on strike, be effected by third-world political instability, or worst
case the MRO could have its certification pulled by FAA regulators for unsafe practices. This
would leave the airline with no maintenance service resulting negatively on its ability to do
business (Arnoult, 2010). The loss of control not only concerns management and labor but also
security. The level of security for the aircraft can be compromised in a third-party MRO
especially foreign MROs. Foreign MROs are not required to drug & alcohol test their
mechanics. The individuals with access to the aircraft can also be suspect. A member of the Al
Qada terrorist network was discovered working as a mechanic on Qantas aircraft for a major
MRO in Singapore.
The quality of training at MROs also stands in stark contrast to domestic airline maintenance
facilities. Many of the overseas MRO mechanics are not FAA certified and do not speak or read
English even though aircraft maintenance manuals are written in English. This leaves one to
wonder just how maintenance can be performed in accordance with manufacturer procedures.
The ratio of certified mechanics to uncertified mechanics can also be much higher in overseas
MROs. China for example has a ratio of 500 uncertified mechanics to every one FAA certified
mechanic (TWU, 2011). This means all work performed must be inspected by very few certified
ADVANTAGES AND DISADVANTAGES OF THIRD-PARTY MROS
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mechanics. The work load can be so overwhelming that many of these inspections are likely
pencil whipped.
A final disadvantage to outsourcing maintenance is that airline management will have to deal
with several different companies in order to cover all of their maintenance requirements. If the
airline has a diverse fleet they may have a different MRO for each make & model aircraft.
Engines will most likely go to an additional specialized MRO. The amount of coordination
required could actually require additional manpower and management for the airline to
adequately control the process. MROs may also be in different time zones, especially foreign
MROs, making coordination during normal business hours even more difficult.
The future of airline outsourcing looks to be more of the same with the trend continuing
towards greater and greater utilization. It is predicted that 75% of airline maintenance will be
outsourced by 2017. In 2017 the MRO market is projected to be worth $61 billion with the
largest portion of $22.4 billion being in engines. There is however hope for a reverse in the
trend. New airframes and engine designs have the promise of reducing MRO requirements for
the airlines. With engine MRO being the biggest cost new designs could increase mandatory
service parameters substantially and overall reliability. The introduction of composites in
airframes like the Boeing 787 also has the potential to reduce airframe maintenance cost. These
improvements could reduce the need for MRO by the airlines by as much as 30% ("MRO
Transformation," 2011).
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It is hard to blame US airlines for outsourcing maintenance given their situation.
Following the Airline Deregulation Act of 1978 competition became very stiff and profit
margins very slim. The US airline industry has lost $55 billion over the last 10 years (Smisek,
2012). The FAA continues to pile on regulatory requirements which further increase the airlines
operating cost. Organized labor continues to demand more and more concessions from the
airlines making the cost of labor skyrocket. The situation is becoming dire and airlines are doing
everything they can to stay alive. Recently the CEO of United Airlines made a plea for a
National Airline Policy in the company’s seat back magazine Hemisphere claiming the countries
“confused policies toward the aviation industry” and “absurd tax burden” have made the air
transportation industry “the most regulated deregulated business in the world” (Smisek, 2012, p.
1). US airlines were some of the last US industries to move toward the outsourcing strategy yet
they have been harshly criticized for this action with the allegations that the flying public’s
safety is being placed in jeopardy. With their backs up against the wall financially outsourcing
may really be a last gasp at staying viable in the current austere economic times. The alternative
to not outsourcing may be much more unattractive, the disappearance of major US airlines from
the skies over America.
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References
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Arnoult, S. (2010). Maintenance special report: The MRO quandary. Retrieved from
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Handfield, R. (2006). A brief history of outsourcing. Retrieved from http://scm.ncsu.edu/scmarticles/article/a-brief-history-of-outsourcing
Increased aircraft MRO outsourcing helps drive growth. (n.d.). Retrieved from
http://www.reliableplant.com/Articles/Print/2210
MRO - ready for transformation. (2011). Retrieved from http://www.iata.org/pressroom/airlinesinternational/february-2011/pages/mro.aspx
Making mischief for MRO. (2003, Nov/Dec). Aircraft Economics, 30-31.
Mecham, M. (2006, September 4). Leaner MRO. Aviation Week & Space Technology, 165(9),
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Sparaco, P. (2000, October 30). Airline alliances ponder MRI intiatives. Aviation Week & Space
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my plane? Hurst, TX: TWU Air Transport Division.