The High Cost Of Inefficient Engine Sparing...2012/09/27 · The High Cost Of Inefficient Engine...
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The High Cost Of Inefficient Engine Sparing Airlines over-invest in engine spares to protect themselves. In this economy, airlines have been under tremendous pressure to cut costs and improve revenues. Spiking fuel costs, narrower RASM increases, uncertain demand in ma- ture economies and intense competition have become con- stant struggles. In addition, Oliver Wyman’s 2012 analysis of airlines in the U.S. found a disheartening trend: With break- even load factors above 80% for most carriers, there is little room for more load factor growth. In other words, future profits will depend on yield increases or cost improvements. Fortunately, there is an enormous opportunity for savings that many airlines have overlooked: better management of spare engines and APUs. We estimate that worldwide, the airline industry holds more than 6,100 spare engines, rep- resenting $30 billion-plus in non-revenue generating assets. Obviously, airlines cannot eliminate the need for spare en- gines altogether. But they can optimize far beyond the indus- try rule-of-thumb of 10% sparing level on top of their own on-wing fleet. Doing so would save capital by reducing extra inventory. It would save expense dol- lars by trimming the maintenance costs associated with keeping spare engines. And it would improve the carrier’s op- erational efficiency. In short, it is time to stop treating a multi-million dollar prod- uct like other, lower-cost LRUs [line replaceable units]. Many carriers overly rely on experience to set sparing levels, rather than taking a more quantitative, probabilis- tic approach. That results in inconsistent sparing decisions across the enterprise and, ultimately, wasted resources. Using sophisticated modeling tools would enable airlines to more accurately forecast engine fleet fluctuations (based on, for instance, evolving fleet size and utilization rates, maintenance requirements and turnaround time, and al- tered operational schedules). However, such tools require knowledge of queuing theory, statistical modeling, reliability modeling and Total Cost of Ownership financial modeling, to name a few—expertise that not every carrier has in-house. The decision to use, say, a Monte Carlo probability model versus Poisson, will have real implications in terms of ef- ficient engine-sparing management. To improve engine-sparing management, carriers should consider where they operate, based on their current sparing levels. The cost and lead-time of transporting engines to a Departures Opinions expressed are not those of Aviation Daily or McGraw-Hill. Bylined submissions should be sent via e-mail to Darren Shan- non at [email protected] and limited to 680 words. The DAILY reserves the right to edit for space. A photo of the author, in print form or via e-mail, is welcome. Submissions become the property of McGraw-Hill and will not be returned. Opinions On Current Issues In Aviation particular removal site, for instance, may influence whether an airline chooses to own or lease additional spare engines. Carriers should assess the sensitivity and risks associated with the inputs that drive sparing levels–such as if they ex- pect utilization rates to drop or rise significantly in a given timeframe, or if their maintenance repair capacity is ade- quate to deal with peaked removals, to avoid bottlenecks and longer turnaround times–and calculate the total cost of sparing decisions. And they must carefully select decision frameworks and protocols that will minimize costs as well as protect the airline from service disruptions. Carriers ac- quiring new fleets need to consider other factors, such as how best to spare during the fleet ramp-up period, and what their sparing needs will be after the first set of overhauls. Efforts like these require time and resources, but the payoff can be substantial. For instance, leading carriers are adopting new rigorous modeling tools to identify fleets that are under-spared and fleets that have unneeded engines. Armed with this new knowledge, they can confidently sell their extra en- gines to free up cash quickly and re- duce storage costs. They are revising their approaches to scheduling engine overhauls by utilizing scenario-based modeling to optimize engine removal schedules. In addi- tion, they are engaging suppliers in negotiations to establish tighter contractual performance and reduced sparing lev- els through engine induction slot availability and turnaround time guarantees. Collectively, these practices enable carriers to reduce their investments in spare engines, increase their overall service levels and improve their ability to react to unexpect- ed changes in operational requirements. An inability to accurately model, understand and project sparing needs carries unwelcome and costly consequences: Airlines over-invest in engine spares because they want to protect themselves against under-spared situations. They create multiple buffers—hot spares, ghost spares, owned engine spares and leased engine spares. John Seeliger and Derek Costanza can be reached at [email protected] and [email protected] By John Seeliger and Derek Costanza, Oliver Wyman www.aviationweek.com/awin The business daily of the airline industry since 1939 Posted from Aviation Daily, July 16, 2012, copyright by The McGraw-Hill Companies, Inc. with all rights reserved. This reprint implies no endorsement, either tacit or expressed, of any company, product, service or investment opportunity. #C11540 Managed by The YGS Group, 800.290.5460. For more information visit www.theYGSgroup.com/content. July 16, 2012
Transcript of The High Cost Of Inefficient Engine Sparing...2012/09/27 · The High Cost Of Inefficient Engine...
The High Cost Of Inefficient Engine Sparing
Airlines over-invest in engine spares to protect themselves.
In this economy, airlines have been under tremendous pressure to cut costs and improve revenues. Spiking fuel costs, narrower RASM increases, uncertain demand in ma-ture economies and intense competition have become con-stant struggles. In addition, Oliver Wyman’s 2012 analysis of airlines in the U.S. found a disheartening trend: With break-even load factors above 80% for most carriers, there is little room for more load factor growth. In other words, future profits will depend on yield increases or cost improvements. Fortunately, there is an enormous opportunity for savings that many airlines have overlooked: better management of spare engines and APUs. We estimate that worldwide, the airline industry holds more than 6,100 spare engines, rep-resenting $30 billion-plus in non-revenue generating assets.
Obviously, airlines cannot eliminate the need for spare en-gines altogether. But they can optimize far beyond the indus-try rule-of-thumb of 10% sparing level on top of their own on-wing fleet. Doing so would save capital by reducing extra inventory. It would save expense dol-lars by trimming the maintenance costs associated with keeping spare engines. And it would improve the carrier’s op-erational efficiency. In short, it is time to stop treating a multi-million dollar prod-uct like other, lower-cost LRUs [line replaceable units].
Many carriers overly rely on experience to set sparing levels, rather than taking a more quantitative, probabilis-tic approach. That results in inconsistent sparing decisions across the enterprise and, ultimately, wasted resources. Using sophisticated modeling tools would enable airlines to more accurately forecast engine fleet fluctuations (based on, for instance, evolving fleet size and utilization rates, maintenance requirements and turnaround time, and al-tered operational schedules). However, such tools require knowledge of queuing theory, statistical modeling, reliability modeling and Total Cost of Ownership financial modeling, to name a few—expertise that not every carrier has in-house. The decision to use, say, a Monte Carlo probability model versus Poisson, will have real implications in terms of ef-ficient engine-sparing management.
To improve engine-sparing management, carriers should consider where they operate, based on their current sparing levels. The cost and lead-time of transporting engines to a
Departures
Opinions expressed are not those of Aviation Daily or McGraw-Hill. Bylined submissions should be sent via e-mail to Darren Shan-non at [email protected] and limited to 680 words. The DAILY reserves the right to edit for space. A photo of the author, in print form or via e-mail, is welcome. Submissions become the property of McGraw-Hill and will not be returned.
Opinions On Current Issues In Aviation
particular removal site, for instance, may influence whether an airline chooses to own or lease additional spare engines. Carriers should assess the sensitivity and risks associated with the inputs that drive sparing levels–such as if they ex-pect utilization rates to drop or rise significantly in a given timeframe, or if their maintenance repair capacity is ade-quate to deal with peaked removals, to avoid bottlenecks and longer turnaround times–and calculate the total cost of sparing decisions. And they must carefully select decision frameworks and protocols that will minimize costs as well as protect the airline from service disruptions. Carriers ac-quiring new fleets need to consider other factors, such as how best to spare during the fleet ramp-up period, and what their sparing needs will be after the first set of overhauls.
Efforts like these require time and resources, but the payoff can be substantial. For instance, leading carriers are
adopting new rigorous modeling tools to identify fleets that are under-spared and fleets that have unneeded engines. Armed with this new knowledge, they can confidently sell their extra en-gines to free up cash quickly and re-duce storage costs. They are revising their approaches to scheduling engine overhauls by utilizing scenario-based
modeling to optimize engine removal schedules. In addi-tion, they are engaging suppliers in negotiations to establish tighter contractual performance and reduced sparing lev-els through engine induction slot availability and turnaround time guarantees.
Collectively, these practices enable carriers to reduce their investments in spare engines, increase their overall service levels and improve their ability to react to unexpect-ed changes in operational requirements.
An inability to accurately model, understand and project sparing needs carries unwelcome and costly consequences: Airlines over-invest in engine spares because they want to protect themselves against under-spared situations. They create multiple buffers—hot spares, ghost spares, owned engine spares and leased engine spares.
John Seeliger and Derek Costanza can be reached at [email protected] and
By John Seeliger and Derek Costanza, Oliver Wyman
www.aviationweek.com/awin
The business daily of the airline industry since 1939
Posted from Aviation Daily, July 16, 2012, copyright by The McGraw-Hill Companies, Inc. with all rights reserved. This reprint implies no endorsement, either tacit or expressed, of any company, product, service or investment opportunity.
#C11540 Managed by The YGS Group, 800.290.5460. For more information visit www.theYGSgroup.com/content.
July 16, 2012
About Oliver Wyman
Oliver Wyman is a global leader in management consulting. With offices in 50+ cities across 25 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations, risk management and organization transformation. The firm’s 3,000 professionals help clients optimize their business, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is a wholly owned subsidiary of Marsh & McLennan Companies [NYSE: MMC], a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital. With 52,000 employees worldwide and annual revenue exceeding $10 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in risk and reinsurance intermediary services; and Mercer, a global leader in human resource consulting and related services. For more information, visit www.oliverwyman.com. Follow Oliver Wyman on Twitter @OliverWyman.
About the Authors
John Seeliger is a senior Partner at Oliver Wyman and leads the Operational Transformation practice. As an expert in the Aviation sector, he specializes in large-‐scale operational, organizational and process driven productivity agendas for airlines, manufacturers, and aviation industry suppliers. He can be reached at [email protected].
Derek Costanza is an Associate Partner in Oliver Wyman’s Aviation, Aerospace and Defense practice. He focuses on transformation and strategy consulting with a specialization in cost reduction and operational improvement, process redesign, labor negotiation, strategic sourcing, and financial and operational analysis. Derek can be reached at [email protected].
Kostas Varsos and Dan Leblanc also contributed to the development of this piece.
