Optimization of Outsourcing Agreements

Transcription

1 Optimization of Outsourcing Agreements Mr. Tiymor Kalimat MCTF Chairman, Cost Control Manager, Royal Jordanian IATA Maintenance Cost Conference October 19, 2010

2 Passenger & Cargo Airline PLC A340, A310,A320 Family, EMB 195/175 With 787 in Order Amman-Jordan 56 Destination Oneworld 675 Destinations

3 Outsourcing Agreement Optimization

4 Overview Introduction Definition of Outsourcing Mechanism of Outsourcing Agreement and Cost Agreement and Quality Agreement and Exclusivity Bundled Services Agreement samples Engine $/H Agreement Airframe Agreement Agenda

5 Overview Global maintenance cost breakdown (MCTF 2009) By Element Outsourced Percentage is around 44% Total spending 12.2B

6 Global maintenance breakdown Engine outsourcing is around 57% Airframe outsourcing is around 12% Component outsource is around 23% Line maintenance outsourcing is around 8% Overview

7 Introduction What can be and cant be outsourced It s a fact the industry have seen that airlines outsourced aircraft maintenance Airframe Engine Component Line The outsourcing varies based on airlines different definition Of core Activities Strategic drafting to their business model

8 Introduction Back into history people used to go to the neighboring market and used to trade on spot We are living in a smaller but more complicated world with different legal structure in countries A documented agreement between the parties has to be drafted, agreed, and signed Identify the liabilities The boundaries of service And of course $$$$

9 Definition of Outsourcing To subcontract (work) to another company To buy in (component for a product) rather than manufacture To obtain good or services from outside source

10 Definition of Outsourcing To send out (work, for example) to an outside provider or manufacturer in order to cut costs (The American Heritage Dictionary) What's behind the word cost What are the cost drivers And how its linked with a documented agreement

11 Mechanism of Outsourcing Parties will spend moths of effort and expenses formulating and negotiating an agreement, Document that define the liabilities of parties Such agreement can be in the form of hundred of pages, exhibits, attachments and appendices

12 Mechanism of Outsourcing Agreement take a real work and effort to achieve and implement the terms and condition of the contracted services Airlines will be under pressure finding new efficiencies and means to reduce cost under such agreement Its different than if airlines are doing the work in-house

13 Mechanism of Outsourcing In any agreement there will time when airlines will be asking for services that are not mandated under such document In any agreement its impartment to align interest and common goals

14 Mechanism of Outsourcing Out of all that, My take away note: How to build an agreement structure that govern and facilitate such flexibility Also my question, how to reduce cost?

15 Agreements and Cost An additional cost will incurred for both parties Layers are expensive Certain level of management participation Time consuming What to look in an agreement Right definition and boundaries of service Flexible terms for future coming discussion Commercial and financial terms Quality and time of service

16 Agreements and Cost Right definition and boundaries of service Definition Technical A check higher and lowers work Base maintenance Out of scope / Non routine Financial and commercial Fixed Prices Vs. Time & Material Regular Vs. Schedule Core packages / Workscope Inclusion and Exclusions

17 Agreements and Cost Right definition and boundaries of service Boundaries of servcies Service provider liabilities on service Clear definition on the scope of the service Obligation on scope exclusivity Clear definition on the service levels When to provide the service Assignment and delegation rights

18 Agreements and Cost Right definition and boundaries of service Boundaries of service Airlines liabilities on provided services Communication When and what are the nature of service to be provider Documentation Aircraft history information and supporting manuals Confidentiality

19 Agreements and Cost Flexible terms for future coming discussion Changes in airlines needs Provider to adapt to changes in airlines needs Add or modify covered services The financial behind the service» invoicing mechanism ($/H Vs. T&M) Wiliness and readiness to change to take different scale / scope of services Hidden Cost Anything not covered will add additional charges (legal and commercial) Supplier know the business more that the airline

20 Agreements and Cost Commercial and financial terms Pricing and payment Payments clauses can have many from and mechanism Dispute resolution Escalation Insurance

21 Agreements and Quality Minimum desired quality of service Release certification desired duration of operational functionality In an engine maintenance agreement Desired time on wing, based on organizational fleets planning, forecasting and staggering Appropriate certification allowing installation conditional to leasing obligation and aircraft registration In an airframe maintenance agreement Number of defect after to released to service Packages deferred tasks completion

22 Agreements and Quality Its highly important to airlines to define means how to measure the quality and how to control it The measurement can be in the form of predefined KPI The control can be in form of Periodical quality audits Representation on site Release certification After release packages review Incidents caused events Quality can have a direct impact on operational availability

23 Agreements and Quality Cabin maintenance is becoming more and more important Airlines in the region compete based on excellence of service Under cabin maintenance many delicate issues can be considered IFE Cabin cleanliness Overheads, side walls Galleys Seat cover and cushions Seat functionality Cabin maintenance is highly sensitive to airlines strategic direction and their offering to customers

24 Agreements and Exclusivity Provider interest is to sign an exclusive agreement Eliminate competition Ensure certain volume of work Capacity planning Certain investment of infrastructure Airlines in exclusive agreement Can not get the service from any other location for certain period of time Term Can not get benefits from any change in the industry or economy Gambling on the quality of service

25 Agreements and Exclusivity Airlines can get benefit from the exclusivity Airlines will ensure consistency in getting the service Minimize service provider customers discrimination Commercial benefits Spare parts availability Operational support Statistics data information sharing Lower financial figures Predicted consistent expenditure

26 Agreements and Exclusivity Exclusivity is linked with the Term The Term, is a kind financial hedge to expenditure based of certain financial escalations The Term, is: Highly linked with the nature of service or product In an engine agreement, terms take the form of many years In tires agreement, terms can take the from of month, or a limited number of years The Projected economical visibility

27 Agreements and Exclusivity Term and exclusivity clauses are linked with provider performance indicators Quality Quality measure can trigger exclusivity termination Quality measure can trigger term termination Time Cost Getting the product back TAT can trigger both the right of exclusivity and term termination The overall charges above contracted fixed prices

28 Bundled Service Normally supplier can provide a hand full of services Based on their size Nature of business (Airline, MRO, or OEM) Airlines can get benefits of scale and scope in a service agreement Scope will affect scale, and lower cost Volume discounts Commercial and financial bargaining power

29 Bundled service Engine repair agreement LRU and QEC Spare engine support Nacelles and T/R Airframe agreement Technical planning Inventory management Service engineering Access to line maintenance material Out station technical support

30 Engine $/H Agreement Newly designed intended to be leased Engine in the market leverage product operational risk Reduce additional leasing cost (M.R, and Redelivery) Reduce maintenance cost

31 Engine $/H Agreement leverage product operational risk OEM know the product No experience in the industry No material surplus No PMA or DER Limited number of service provider Limited Spare engines availability in the market

32 Engine $/H Agreement Reduce additional leasing cost (M.R, and Redelivery) M.R payment can be waived End of agreeemnt conditions Popular or restored Transfer right to lessor (Redelivery) (end of lease) Better visibility on airline maintenance cash flow Constant predefined payments

33 Engine $/H Agreement Reduce maintenance cost Commercial and financial terms Payments and invoicing End of service transfer rights Escalations Economical changes Predefined inclusion and exclusion of the service Bundle airline s need Spare engine (staggering or operational need) Nacelle and LRU (pool or home base kit) Guaranties and warranties (specifically fuel consumption) Mechanism to quantify it

34 Airframe Agreement Airframe base maintenance for A and C checks Leverage economical changes and geographical locations Maximize and control aircraft operational availability Maintenance cost reduction

35 Airframe Agreement Leverage economical changes and geographical locations Labor intensive We have seen big changes specifically in the past few years Provider increased cost of labor and overhead $/Euro exchange rate US, Asia competiveness Vs. Europe Location Of the provider: cost competitiveness Of the airline: limited options, no desire for ferry flights

36 Airframe Agreement Maximize and control aircraft operational availability Quality of service Defined reliability KPI» Defect after release» Base maintenance major caused incidents Defined warranties Release regulatory compliance Turn around time Pre defined TAT hours

37 Airframe Agreement Maintenance cost reduction Predetermine fix prices Regular base maintenance A, C checks No regular base maintenance engine change, boroscope, L/G change) Supporting service Service engineering, technical planning, material and storage Definition of inclusion and exclusion Define workscope CMP Mechanism to work reduction and addition Special project and major modifications mechanism

38 Wrap Up The relationship between the airline and the outsourcer Strategic in nature Collaboration Partnering The relationship can be Day-to-Day Over the Term

39 Wrap Up Day-to-Day Over the Term Resources Assets Skills Financial Development Mutual Benefits Task & Process Social & Culture Knowledge Sharing Contract Incentive Goals Commitment Attitude Tendency

40 Thank you