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Shared aircraft spares holdings or pooling: To increase air carrier operational costs

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This is a term papers I submitted for a class I took at ERAU

This is a term papers I submitted for a class I took at ERAU

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  • 1. SHARED AIRCRAFT SPARES HOLDINGS OR POOLING: TO DECREASE AIR CARRIER OPERATIONAL COSTS by Mersie Amha Melke An Air Carrier Operations Research Paper Submitted to the Extended Campus in Partial Fulfillment of the Requirements of Master of Aeronautical Science ASCI 620 Embry-Riddle Aeronautical University Worldwide Online October 2009
  • 2. ABSTRACTResearcher: Mersie Amha MelkeTitle: Shared aircraft spares holdings or pooling: To decrease air carrier operational costsInstitution: Embry-Riddle Aeronautical UniversityDegree: Master of Aeronautical ScienceYear: 2009Air Carriers emerge with the goal of making profit fromselling seats and freight accommodations. The long termcost of airlines decreases as the airlines dispatch morerevenue generating flights. Aircraft are vital in therevenue generating process. However, aircraft require arobust spares availability service to optimize revenuegeneration. Currently, the airline industry employsdifferent methods of maintaining spare parts. The questionof which method is the optimal choice could determinewhether the air carrier gains or looses financially. Thispaper addresses the question of how to achieve this robustspares availability service. ii
  • 3. 1 INTRODUCTION Background of the Problem One of the defining features of the airline industryis its capital-intensive nature. In fact it had beendescribed as, “a nasty, rotten business” by former AmericanAirlines Chief Executive Officer (C.E.O.) Robert Crandall(Petzinger, 1996, p. ix). Such remarks of disgust generatefrom the complexity of the variables that comprise the safeand efficient operation of air carriers. In addition, thesevariables tend to change, thus requiring a vigilant followthrough, without which the demise of the air carrier wouldbe eminent. Airlines operate to generate profit from the transportof people and cargo. In such an endeavor, the air carriersemploy aircraft of different capacity, range andmaintenance requirements. In addition to the initialinvestment cost of acquiring these aircraft, airlines facethe cost of ownership of the aircraft. Cost of ownership of aircraft relates to themaintainability of the aircraft in the fleet of the aircarrier (Wells & Chadbourne, 2003). Concurrent with this,maintainability and reliability that are desirable traitsof an aircraft need optimization, in order to have a fleetof aircraft that is ready to generate revenue. Of the total
  • 4. 2operating cost of an airline, maintenance costs typicallyrepresent a 10-15% portion (Seritso & Vepsalainen, 1997).Swan and Adler in their paper addressing aircraft tripcosts specify this estimated range, stating the following,“Maintenance costs for airplanes compose 13% of airlineoperating costs, in general. This figure includes directoverheads associated with the upkeep of maintenancefacilities and tools” (Swan & Adler, 2006, p. 108). Consequently, due to the technical and mechanicalcomplexity in engines, avionics, and aircraft systems ofcurrent commercial aircraft, incremental changes in certaininfluential factors of the cost of ownership arise. Thesefactors are the availability of the spare part required,technical proficiency of maintenance personnel, cost ofmaintenance, sophistication of test and maintenanceequipment and overall thoroughness of the maintenanceprogram (Wells & Chadbourne, 2003). Statement of the Problem The factors mentioned above are amongst the ones thatrequire vigilant follow through. This vigilant followthrough includes studying the industries practices andappropriate working procedures with regards to thesefactors, devising of operating policies and procedures and
  • 5. 3implementation of these procedures and iterativelyevaluating and upgrading of working policies. However, the intent of this paper is not to addressthe details of the above-mentioned processes. In thispaper, the area of focus would be limited to the researchon one of the factors mentioned above, namely availabilityof spare parts. To address the safe operation of aircraft,manufacturers have defined a customized maintenanceprogram. Consequently, the implementation of thismaintenance program calls for a robust spares availabilityservice. However, the answer to the question, which type ofavailability service an airline should use could be thedifference between profit and loss for the airline. Thispaper analyzes real world spares availability services toanswer this question. REVIEW OF RELEVANT LITERATURE AND RESEARCH Economics of Airlines Economists usually describe the certificated airlineindustry as closely approximating an oligopolistic marketstructure (Wells & Wenseveen, 2004, p. 210). An oligopolyis an industry composed of a few firms producing eithersimilar or differentiated products (Wells & Wenseveen,2004, p. 210). One of the defining characters of such anindustry, relevant to the topic of this research paper, is
  • 6. 4the economy of scale involved. By economy of scale,economists mean decrease in a firm’s long-term averagecosts as the size of its operation increases (Wells &Wenseveen, 2004, p. 210). In the airline industry, the product the air carriersprovide to the public is a seat on a departing flight.Thomas Petzinger Jr., in his book Hard Landing, vividlydescribes this concept as follows, An airline seat is like fresh food - a grapefruit, say-in that it spoils after so much time on the shelf. Every empty seat taking off on every flight is a spoiled grape fruit and exactly as valueless. Both required time, effort, and money to create, and both came to a wasteful, meaningless end. And on an exceedingly large number of flights, the sale of one last seat, according to the First Rule of Airline Economics, could easily decide whether the plane flew the entire distance in the red or the black. (Petzinger, 1996, P. 57)Airlines being oligopolies must be able to sell as manyseats as possible in order to lower their costs. To achieve economies of scale in production, theairlines, like other oligopolies, utilize the mostefficient and productive equipment (Wells & Wenseveen,
  • 7. 52004). One example of this equipment is the aircraft in theair carrier’s fleet. Currently aircraft maintenance in anairline environment is comprised of three steps (Sachon &Pate-Cornell, 2000). First, the flight crew identifies andreports a problem by means of a pilot report (“pilot’swrite-up”). Second, once the plane arrives at an airport,technicians perform troubleshooting (“verification”) on thereported problem. Third, confirmed problems are repaired(Sachon & Pate-Cornell, 2000). It is during this last stagethat the resourcefulness of the air carrier is tested. Theresources necessary include but are not limited to theavailability of skilled work force and the availability ofappropriate repair materials or spares. The availability ofthese resources determines whether the air carrier willhave an increased economy of scale. Aircraft Availability Commercial aircraft are a system with a common goal oftransporting passengers and/or cargo safely andefficiently. Here a system means a group of aircraftcomponents, both functional and dormant in flight or on theground. Functional components are those components of theaircraft that actively work every time the aircraft is inflight or on a ground maneuver. Dormant components are
  • 8. 6those that function passively during the aircraft flight orground maneuver like the aircraft structure. Consequently, airlines prefer not to have a groundedaircraft in their fleet because such an aircraft would be adirect obstacle in achieving their economies of scale.However, the components comprising these aircraft are life-limited and require maintenance in order to achieve the“safe” portion of the common goal described above. In orderto meet this requirement of minimally affecting aircraftrevenue-generating time, aircraft manufacturers haveincorporated a design philosophy that modularizes thecomponents. Aircraft components that have such a character are theones defined above as functional components. An example ofsuch a component would be the avionics system installed onan aircraft. Modularizing such components helps airlines toreplace them immediately from the aircraft with outaffecting the revenue-generating time of the aircraft.Here, one has to keep in mind that there are other factorsthat affect the revenue-generating time of aircraft, butthat is beyond the scope of this paper. Consequently, the availability service of repairableaircraft components, secures aircraft utilization byproviding a supply of functional spare units to back up the
  • 9. 7critical functions of the aircraft (Kilpi, Toyli, &Vepsalainen, 2009). Availability service is the managementof the number and location of spare components (Kilpi &Vepsalainen, 2004). The easily replaceable modules of theaircraft are Line Replaceable Units or LRUs (Kilpi et al.,2009). Discrepancies related to these LRUs, whether theyhappen at the air carrier’s home base or a location at apoint in its network; require readily available spares thatwould replace them immediately. Thus, spares availabilitylinks inherently with an aircraft’s availability, making itone of the focus areas for an air carrier working to expandits economy of scale. Spares Availability services Regardless of the initial quality of material andworkmanship, the product of any manufacturer (aircraft inthis case) eventually ceases to conform to designspecifications and failure occurs (Cohen & Lee, 1990).Airlines use different techniques in availing the necessaryspare that would support their aging aircraft. The most commonly used strategy is stocking of sparesby individual airlines depending on their fleet type.Maintaining in-house capability is an alternative thatsustains sovereignty but also ties up valuable capital in a
  • 10. 8property that is steadily losing its value (Kilpi &Vepsalainen, 2004). A second option used by air carrier’s in providingspare for their aircraft is by subcontracting theavailability services for one’s fleet to a third partycapable of providing the service. This process iscommercial pooling (Kilpi et al., 2009). Subcontractingcomponent availability services replaces capital costs witha constant cash flow, increasing business flexibility(Kilpi & Vepsalainen, 2004). However, this alternative alsoincreases transaction costs and possibly lead-time, whichis the amount of time one has to wait before getting theordered spare part (Kilpi & Vepsalainen, 2004). Another option used by airlines for their aircraftspare need is spare pooling also known as cooperativepooling (Kilpi et al., 2009). According to Cohen and Lee’sdescriptive paper on pooling as a policy of improving sparepart inventory control, pooling involves the following Pooling is an important strategy for dealing with shortages caused by the uncertainty of both the supply and demand processes. Pooling groups can share supply and demand on a regular basis. This arrangement can shorten lead times and use system inventory more effectively. (Cohen & Lee, 1990, P. 61)
  • 11. 9Spare pooling is a shared spare part availability servicein which airlines obtain lateral supply of aircraft sparesfrom spare holdings in the supply chain (Cohen & Lee, 1990). Airlines use one of these three methods in stockingtheir spare parts. As seen in Figure 1, these methods varybased on the actual contractual agreement involved and thenumber of participants. As one goes to the right of thegraph, one can visualize the complexity in the logisticsissues involved between the partners. Consequently, theleft end of the graph signifies the non-existence of thelogistics issues. However, airlines face an undesignated capital burdenin the left part of the graph. It was estimated in 1995that the aviation supply chain held US$45 billion ininventory, nearly 80% of which was owned by the operators(Flint, 1995). In addition, inventory pooling, an inter-company cooperation where the cooperating companies sharetheir inventories, is an effective way to improve acompany’s logistical performance without requiring anyadditional cost (Wong, Cattrysse, & Oudheusden, 2005).
  • 12. 10Figure 1: Framework of cooperative strategies by Kilpi etal. 2009, P. 362. In order to have an optimal choice from the abovetypes of component availability services, a modelinganalysis will be helpful. Kilpi and Vepsalainen (2004), intheir research paper, had presented such a model based onfictitious air carriers that resembled real-world airlines.Consequently, the paper concluded that cooperative poolingis an optimal choice and that even relatively largeairlines should stay away from maintaining their own stock. The basic model presented by Kilpi and Vepsalainen(2004) illustrates the relations between the factors ofavailability (reliability, turnaround time, service leveland the number of units supported) and the number of spareunits needed. In the aviation industry, the most widely
  • 13. 11used measure of reliability is the mean time betweenunscheduled removals (MTBUR). Repair TAT is the elapsedtime between a failed component removal from an aircraftand the moment when it is stored after the repair and readyfor use as a spare unit. The required service level of the spares supply is theshare of the number of times of request fulfillment on acertain component when there is request for this component(Kilpi & Vepsalainen, 2004). The measure of number of unitssupported is the total number of the components in questioninstalled in all the aircraft in the airline’s own fleet aswell as in other fleets supported by the inventory (Kilpi &Vepsalainen, 2004). A review of the basic calculations that led to anassertion that cooperative pooling is an optimal choice forairlines shows the use of Palm’s theorem of theory ofqueuing items in demand (Kilpi & Vepsalainen, 2004). Thenext section shall review this theorem in relation withspares availability. Basics of Spares Availability Service Modeling According to Palm’s theorem, the stationarydistribution for the number of units to fulfill the demandof spares is a Poisson process with an assumption that theinterval between the arrivals of units is negative
  • 14. 12exponentially distributed (Kilpi & Vepsalainen, 2004). Thetwo defining statistical terms of this theorem are theusage of Poisson distribution to mimic aircraft sparerequirements and assuming aircraft spares need is astationary distribution. Therefore understanding these twostatistical terms is mandatory in visualizing the logicbehind Kilpi and Vepsalainen’s (2004) assertion.Basics of a Poisson Probability Model A probability model gives mathematical formulas tocalculate probabilities, determine long-term averageoutcomes, and figure the amount of variability one canexpect in the results from one random experiment to thenext. Many different probability models exist for differenttypes of situations. A Poisson process, named after SimeonDenis Poisson who is a 19th century ecologist, is aprobability or a mathematical model used to describe arandom process (Rumsey, 2006). A Poisson process may fittingly define a randomprocess if the events occur within a specified time orspace (Rumsey, 2006). Another requirement of a Poissonmodel is that the events occur independently of each other(Rumsey, 2006). A third requirement is that no two eventscan happen at exactly the same time (Rumsey, 2006).
  • 15. 13 The Poisson process, like other probability modelswork on individual random variables. These random variablescould be the total number of times a coin turns up headswhen flipped 1,000 times (Rumsey, 2006). It could also bethe length of time of a phone call, the measure of whichcan technically be to a millionth of a second (Rumsey,2006). Statistically speaking the former variable is adiscrete random variable because it is enumerable. However,because the latter is not enumerable (numerous possiblesignificant digits could quantify its value), hence it is acontinuous random variable. The difference between these two variables being theone mentioned above, models like the Poisson distributionhandle the probability of their occurrence over a range oftheir own type in two different ways. Continuous randomvariables do not actually assign probability in terms of apoint event. Rather it assigns density, which tells howdense the probability is around a certain value for thatspecific value (Rumsey, 2006). Thus, the term ProbabilityDensity function (PDF) is used. Conversely, the probability mass function (PMF) fordiscrete random variables is a function that assignsprobabilities for each random event (Rumsey, 2006). Itshows how much probability, or mass, each value of the
  • 16. 14random event has. Since in the case of aircraft sparesavailability, the random variable is actually a countableone, the PMF is the appropriate choice. The PMF of the Poisson process is used by Palm’stheorem to determine the probability between the arrivalsof units and was described as a negative exponentiallydistribution. Kilpi & Vepsalainen (2004) mathematicallymodeled it as follows. Here D equals the expected demand of spare unitsduring repair turn around time (TAT) of components inrepair; k equals the number of unscheduled removals duringTAT and k! is the product of all the values less than orequal to k, e equals the base for the natural logarithmsand p(k) equals the probability of exactly k unscheduledremovals to happen during TAT. A key factor in these types of models is often theample server assumption; that is items that require repair
  • 17. 15never queue up but go in to service immediately (Gross,1982). Statistically, this means successive orderreplenishment times (TAT) are independent (Gross, 1982).Therefore, the Poisson process will be a good approximationunless there is dependence among entities that cause thenumber of unscheduled removals to be dependent (Crawford,1981).Basics of Stationary Distribution Stationary distribution also referred to as steady-state distribution is a probability-modeling tool thatassumes that the number of events, in this case the numberof unscheduled removals over a period, does not undergo adramatic change from previous experience (Crawford, 1981).In order to understand this, a typical example of a non-stationary distribution is helpful. According to Crawford(1981), the increased firepower available to most of theworld’s forces suggest that if hostilities breakout betweenmajor powers the escalation of combat flying activitieswill be abrupt and demanding on spares supply. This abrupt demand is typical of a non-stationaryevent distribution. However, the normal airline operationscovered by Kilpi and Vepsalainen (2004) bases on years ofhistorical data, which most probably do not have the suddendemands in aircraft spares mentioned. Consequently, a
  • 18. 16stationary distribution such as Palm’s theory could be afitting probability modeling tool. Managerial Issues in Spares Availability Service Another aspect of the choice between independentspares availability and shared spares availability thatneeds due consideration is the managerial one. Managerialissues encompass but are not limited to availability oftrust between the airlines in the alliance, efficiency ofthe issuing and receiving procedure of the logisticssystem, maintenance philosophy of the airlines planning tobe part of the alliance etc. However, one of the determining factors of all thepossible influencing issues (listed or not listed above) isthe commonality of the fleet considered for a sharedaircraft spares holding. Airlines have a long history ofcustomizing their aircraft (Feldman, 2000), thus providingthe airline industry with a huge variety of differentlyconfigured planes all looking the same from the outside andalmost the same from the inside (Kilpi @ Vepsalainen,2004). The author of this paper had been able to participatein acquisition process of new aircraft. Consequently, theauthor had observed vendors that are equally certified and
  • 19. 17capable of providing the same components for an aircraft.However, one could have noticed the issue of operatingenvironment of the airline acquiring the aircraft,maintenance philosophy of the specific airline and priceconcessions from vendors and issues of the like take theforefront of vendor selection process. Consequent sparesavailability from a shared aircraft spares holding vantagepoint had less priority as compared to the other pointsmentioned. For instance, one can mention a choice of tiresuppliers for aircraft. In choosing between vendors, theauthor had witnessed factors like proximity of the tiremanufacturers supply warehouse, operating environmentissues such as high altitude airport takeoffs and priceconcessions offered; take priority over which airline inthe vicinity is using which tires and other pertinentissues of a shared spares holding. Maintenance philosophy is also a determining factor.The authorities overseeing the airline’s operation imposeone of the documents that determine this philosophy. Thisdocument, the master minimum equipment list (MMEL),provides for the operation of the airplane, approvedprovisions with certain instruments and equipment in aninoperable condition (Holt & Poynor, 2006). Pertinent with
  • 20. 18this, the document provides the minimum repair time for theinoperable items. Each airline can prepare its owncustomized MEL in a format equal or more stringent to theone given in the MMEL. In preparing its MEL, the airlinemay gather the following inputs under the limitations ofthe MMEL. One input is from the FAA’s maintenance review boardreport. This report contains the initial scheduledmaintenance program for U.S. operators and subsequently alloperators that fly commercial aircraft over U.S. nationalairspace (Kinnison, 2004). Operators use this document todevelop their own maintenance document. Boeing and AirbusIndustries refer to such customized document as amaintenance-planning document (MPD) (Kinnison, 2004).McDonnell-Douglas called it the on aircraft maintenanceplanning (OAMP) document (Kinnison, 2004). These documentscontain all the maintenance task information from MRBreport plus additional tasks suggested by airframemanufacturers (Kinnison, 2004). In preparing the MPD, operators use their ownexperience of aircraft components and associated costs indetermining whether to use the components until failure ordefine a removal and repair schedule to have an increasedMTBUR from the component. This choice affects most of the
  • 21. 19components on the MEL and prioritizes the specific airlinesspares availability. Consequently, considerations of sparespooling with other airlines will lack synchronization, asairlines are quite suspicious about each other’smaintenance philosophy and the quality of their maintenancework (Kilpi & Vepsalainen, 2004). SUMMARY It has been the aim of this paper to address the issueof air carrier operating cost reduction from theperspective of shared spare part holding. The paperidentified the relevant cost drivers in order to derive arelated solution. The possible solutions were, owning one’sspares or sharing them amongst other airlines withindications that airlines should avoid the former. However,the author also believes the latter option includes othervariables that need analysis. For example, trust andlogistical proximity between the cooperating airlines arepoints of further investigation. In addition,considerations of a shared aircraft spares holding shouldbe from the beginning of the aircraft acquisition process. The airline history has clearly shown that theindustry is competitive and allies at one time could becompetitors at another. The case with British Airways andUnited Airlines bares witness to this fact (Petzinger,
  • 22. 201996). Therefore, a risk analysis of spare poolingpartnership is in order before becoming part of one. Inaddition, the logistics involved of queuing of spare partsto satisfy demands need to be mathematical analyzed. Here,the assumptions taken should mimic the operations of thereal world as much as possible. The mathematical model by Kilpi and Vepsalainen (2004)cited in this paper, bases on the Poisson distributiondiscussed earlier. The author believes one of the definingcharacters of this mathematical model namely the assumptionthat, “no two events can happen at exactly the same time”(Rumsey, 2006) is not typical of the real-world aviationindustry. It would not be out of the ordinary to have twoaircraft of the same model requiring a tire change exactlyat the same time. Consequently, in deciding on becomingpart of a shared aircraft spare holding, airlines mustscrutinize managerial considerations like efficiency of theproposed system, the type of aircraft components thealliance should be for and questions pertinent to theseissues.
  • 23. 21 REFERENCESCohen, M.A. & Lee, H.L. (1990). Out of touch with customer needs? Spare parts and after sales service. Sloan Management Review, 31(2), 55–66.Crawford, G.B. (1981, October). Palm’s theorem for nonstationary processes. Santa Monica, CA: Rand Corporation. Retrieved October 21, 2009, from http://www.dtic.mil/cgi-bin/GeTRDoc? AD:ADA117089&Location=u2&doc=GeTRDoc.pdfFeldman, J.M., (2000). The ‘Plain Vanilla Plane’. Air Transport World, 37 (12), 44–48.Flint, P. (1995). Too much of a good thing. Air Transport World, 32(7), 103–107.Gross, D. (1982, September). On the ample service assumption of Palm’s theorem in inventory modeling. Management Science, 28(9), 1065-1079.Holt, M.J. & Poynor, P.J. (2006). Air carrier operations. Newcastle, WA: Aviation supplies & academics, Inc.Kilpi, J., Toyli, J., Vepsalainen, A. (2009). Cooperative strategies for the availability service of repairable
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  • 25. 23Wells, A.T. & Chadbourne, B.D., (2003). General aviation marketing and management. Malabar, FL: Krieger Publishing Company.Wells, A.T. & Wensveen, J.G., (2004). Air transportation: A management perspective. Belmont, CA: Brookes/Cole – Thomson Learning.Wong, H., Cattrysse, D., Van Oudheusden, D., (2005). Stocking decisions for repairable spare parts pooling in a multi-hub system. International Journal of Production Economics, 93–94, 309–317.