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

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

  1. 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. 2. ABSTRACT Researcher: Mersie Amha Melke Title: Shared aircraft spares holdings or pooling: To decrease air carrier operational costs Institution: Embry-Riddle Aeronautical University Degree: Master of Aeronautical Science Year: 2009 Air Carriers emerge with the goal of making profit from selling seats and freight accommodations. The long term cost of airlines decreases as the airlines dispatch more revenue generating flights. Aircraft are vital in the revenue generating process. However, aircraft require a robust spares availability service to optimize revenue generation. Currently, the airline industry employs different methods of maintaining spare parts. The question of which method is the optimal choice could determine whether the air carrier gains or looses financially. This paper addresses the question of how to achieve this robust spares availability service. ii
  3. 3. INTRODUCTION Background of the Problem One of the defining features of the airline industry is its capital-intensive nature. In fact it had been described as, “a nasty, rotten business” by former American Airlines Chief Executive Officer (C.E.O.) Robert Crandall (Petzinger, 1996, p. ix). Such remarks of disgust generate from the complexity of the variables that comprise the safe and efficient operation of air carriers. In addition, these variables tend to change, thus requiring a vigilant follow through, without which the demise of the air carrier would be eminent. Airlines operate to generate profit from the transport of people and cargo. In such an endeavor, the air carriers employ aircraft of different capacity, range and maintenance requirements. In addition to the initial investment cost of acquiring these aircraft, airlines face the cost of ownership of the aircraft. Cost of ownership of aircraft relates to the maintainability of the aircraft in the fleet of the air carrier (Wells & Chadbourne, 2003). Concurrent with this, maintainability and reliability that are desirable traits of an aircraft need optimization, in order to have a fleet of aircraft that is ready to generate revenue. Of the total 1
  4. 4. 2 operating cost of an airline, maintenance costs typically represent a 10-15% portion (Seritso & Vepsalainen, 1997). Swan and Adler in their paper addressing aircraft trip costs specify this estimated range, stating the following, “Maintenance costs for airplanes compose 13% of airline operating costs, in general. This figure includes direct overheads associated with the upkeep of maintenance facilities and tools” (Swan & Adler, 2006, p. 108). Consequently, due to the technical and mechanical complexity in engines, avionics, and aircraft systems of current commercial aircraft, incremental changes in certain influential factors of the cost of ownership arise. These factors are the availability of the spare part required, technical proficiency of maintenance personnel, cost of maintenance, sophistication of test and maintenance equipment and overall thoroughness of the maintenance program (Wells & Chadbourne, 2003). Statement of the Problem The factors mentioned above are amongst the ones that require vigilant follow through. This vigilant follow through includes studying the industries practices and appropriate working procedures with regards to these factors, devising of operating policies and procedures and
  5. 5. 3 implementation of these procedures and iteratively evaluating and upgrading of working policies. However, the intent of this paper is not to address the details of the above-mentioned processes. In this paper, the area of focus would be limited to the research on one of the factors mentioned above, namely availability of spare parts. To address the safe operation of aircraft, manufacturers have defined a customized maintenance program. Consequently, the implementation of this maintenance program calls for a robust spares availability service. However, the answer to the question, which type of availability service an airline should use could be the difference between profit and loss for the airline. This paper analyzes real world spares availability services to answer this question. REVIEW OF RELEVANT LITERATURE AND RESEARCH Economics of Airlines Economists usually describe the certificated airline industry as closely approximating an oligopolistic market structure (Wells & Wenseveen, 2004, p. 210). An oligopoly is an industry composed of a few firms producing either similar or differentiated products (Wells & Wenseveen, 2004, p. 210). One of the defining characters of such an industry, relevant to the topic of this research paper, is
  6. 6. 4 the economy of scale involved. By economy of scale, economists mean decrease in a firm’s long-term average costs as the size of its operation increases (Wells & Wenseveen, 2004, p. 210). In the airline industry, the product the air carriers provide to the public is a seat on a departing flight. Thomas Petzinger Jr., in his book Hard Landing, vividly describes 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 many seats as possible in order to lower their costs. To achieve economies of scale in production, the airlines, like other oligopolies, utilize the most efficient and productive equipment (Wells & Wenseveen,
  7. 7. 5 2004). One example of this equipment is the aircraft in the air carrier’s fleet. Currently aircraft maintenance in an airline environment is comprised of three steps (Sachon & Pate-Cornell, 2000). First, the flight crew identifies and reports a problem by means of a pilot report (“pilot’s write-up”). Second, once the plane arrives at an airport, technicians perform troubleshooting (“verification”) on the reported problem. Third, confirmed problems are repaired (Sachon & Pate-Cornell, 2000). It is during this last stage that the resourcefulness of the air carrier is tested. The resources necessary include but are not limited to the availability of skilled work force and the availability of appropriate repair materials or spares. The availability of these resources determines whether the air carrier will have an increased economy of scale. Aircraft Availability Commercial aircraft are a system with a common goal of transporting passengers and/or cargo safely and efficiently. Here a system means a group of aircraft components, both functional and dormant in flight or on the ground. Functional components are those components of the aircraft that actively work every time the aircraft is in flight or on a ground maneuver. Dormant components are
  8. 8. 6 those that function passively during the aircraft flight or ground maneuver like the aircraft structure. Consequently, airlines prefer not to have a grounded aircraft in their fleet because such an aircraft would be a direct 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 order to meet this requirement of minimally affecting aircraft revenue-generating time, aircraft manufacturers have incorporated a design philosophy that modularizes the components. Aircraft components that have such a character are the ones defined above as functional components. An example of such a component would be the avionics system installed on an aircraft. Modularizing such components helps airlines to replace them immediately from the aircraft with out affecting the revenue-generating time of the aircraft. Here, one has to keep in mind that there are other factors that affect the revenue-generating time of aircraft, but that is beyond the scope of this paper. Consequently, the availability service of repairable aircraft components, secures aircraft utilization by providing a supply of functional spare units to back up the
  9. 9. 7 critical functions of the aircraft (Kilpi, Toyli, & Vepsalainen, 2009). Availability service is the management of the number and location of spare components (Kilpi & Vepsalainen, 2004). The easily replaceable modules of the aircraft are Line Replaceable Units or LRUs (Kilpi et al., 2009). Discrepancies related to these LRUs, whether they happen at the air carrier’s home base or a location at a point in its network; require readily available spares that would replace them immediately. Thus, spares availability links inherently with an aircraft’s availability, making it one of the focus areas for an air carrier working to expand its economy of scale. Spares Availability services Regardless of the initial quality of material and workmanship, the product of any manufacturer (aircraft in this case) eventually ceases to conform to design specifications and failure occurs (Cohen & Lee, 1990). Airlines use different techniques in availing the necessary spare that would support their aging aircraft. The most commonly used strategy is stocking of spares by individual airlines depending on their fleet type. Maintaining in-house capability is an alternative that sustains sovereignty but also ties up valuable capital in a
  10. 10. 8 property that is steadily losing its value (Kilpi & Vepsalainen, 2004). A second option used by air carrier’s in providing spare for their aircraft is by subcontracting the availability services for one’s fleet to a third party capable of providing the service. This process is commercial pooling (Kilpi et al., 2009). Subcontracting component availability services replaces capital costs with a constant cash flow, increasing business flexibility (Kilpi & Vepsalainen, 2004). However, this alternative also increases transaction costs and possibly lead-time, which is the amount of time one has to wait before getting the ordered spare part (Kilpi & Vepsalainen, 2004). Another option used by airlines for their aircraft spare need is spare pooling also known as cooperative pooling (Kilpi et al., 2009). According to Cohen and Lee’s descriptive paper on pooling as a policy of improving spare part 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. 11. 9 Spare pooling is a shared spare part availability service in which airlines obtain lateral supply of aircraft spares from spare holdings in the supply chain (Cohen & Lee, 1990). Airlines use one of these three methods in stocking their spare parts. As seen in Figure 1, these methods vary based on the actual contractual agreement involved and the number of participants. As one goes to the right of the graph, one can visualize the complexity in the logistics issues involved between the partners. Consequently, the left end of the graph signifies the non-existence of the logistics issues. However, airlines face an undesignated capital burden in the left part of the graph. It was estimated in 1995 that the aviation supply chain held US$45 billion in inventory, nearly 80% of which was owned by the operators (Flint, 1995). In addition, inventory pooling, an inter- company cooperation where the cooperating companies share their inventories, is an effective way to improve a company’s logistical performance without requiring any additional cost (Wong, Cattrysse, & Oudheusden, 2005).
  12. 12. 10 Figure 1: Framework of cooperative strategies by Kilpi et al. 2009, P. 362. In order to have an optimal choice from the above types of component availability services, a modeling analysis will be helpful. Kilpi and Vepsalainen (2004), in their research paper, had presented such a model based on fictitious air carriers that resembled real-world airlines. Consequently, the paper concluded that cooperative pooling is an optimal choice and that even relatively large airlines should stay away from maintaining their own stock. The basic model presented by Kilpi and Vepsalainen (2004) illustrates the relations between the factors of availability (reliability, turnaround time, service level and the number of units supported) and the number of spare units needed. In the aviation industry, the most widely
  13. 13. 11 used measure of reliability is the mean time between unscheduled removals (MTBUR). Repair TAT is the elapsed time between a failed component removal from an aircraft and the moment when it is stored after the repair and ready for use as a spare unit. The required service level of the spares supply is the share of the number of times of request fulfillment on a certain component when there is request for this component (Kilpi & Vepsalainen, 2004). The measure of number of units supported is the total number of the components in question installed in all the aircraft in the airline’s own fleet as well as in other fleets supported by the inventory (Kilpi & Vepsalainen, 2004). A review of the basic calculations that led to an assertion that cooperative pooling is an optimal choice for airlines shows the use of Palm’s theorem of theory of queuing items in demand (Kilpi & Vepsalainen, 2004). The next section shall review this theorem in relation with spares availability. Basics of Spares Availability Service Modeling According to Palm’s theorem, the stationary distribution for the number of units to fulfill the demand of spares is a Poisson process with an assumption that the interval between the arrivals of units is negative
  14. 14. 12 exponentially distributed (Kilpi & Vepsalainen, 2004). The two defining statistical terms of this theorem are the usage of Poisson distribution to mimic aircraft spare requirements and assuming aircraft spares need is a stationary distribution. Therefore understanding these two statistical terms is mandatory in visualizing the logic behind Kilpi and Vepsalainen’s (2004) assertion. Basics of a Poisson Probability Model A probability model gives mathematical formulas to calculate probabilities, determine long-term average outcomes, and figure the amount of variability one can expect in the results from one random experiment to the next. Many different probability models exist for different types of situations. A Poisson process, named after Simeon Denis Poisson who is a 19th century ecologist, is a probability or a mathematical model used to describe a random process (Rumsey, 2006). A Poisson process may fittingly define a random process if the events occur within a specified time or space (Rumsey, 2006). Another requirement of a Poisson model is that the events occur independently of each other (Rumsey, 2006). A third requirement is that no two events can happen at exactly the same time (Rumsey, 2006).
  15. 15. 13 The Poisson process, like other probability models work on individual random variables. These random variables could be the total number of times a coin turns up heads when flipped 1,000 times (Rumsey, 2006). It could also be the length of time of a phone call, the measure of which can technically be to a millionth of a second (Rumsey, 2006). Statistically speaking the former variable is a discrete random variable because it is enumerable. However, because the latter is not enumerable (numerous possible significant digits could quantify its value), hence it is a continuous random variable. The difference between these two variables being the one mentioned above, models like the Poisson distribution handle the probability of their occurrence over a range of their own type in two different ways. Continuous random variables do not actually assign probability in terms of a point event. Rather it assigns density, which tells how dense the probability is around a certain value for that specific value (Rumsey, 2006). Thus, the term Probability Density function (PDF) is used. Conversely, the probability mass function (PMF) for discrete random variables is a function that assigns probabilities for each random event (Rumsey, 2006). It shows how much probability, or mass, each value of the
  16. 16. 14 random event has. Since in the case of aircraft spares availability, the random variable is actually a countable one, the PMF is the appropriate choice. The PMF of the Poisson process is used by Palm’s theorem to determine the probability between the arrivals of units and was described as a negative exponentially distribution. Kilpi & Vepsalainen (2004) mathematically modeled it as follows. Here D equals the expected demand of spare units during repair turn around time (TAT) of components in repair; k equals the number of unscheduled removals during TAT and k! is the product of all the values less than or equal to k, e equals the base for the natural logarithms and p(k) equals the probability of exactly k unscheduled removals to happen during TAT. A key factor in these types of models is often the ample server assumption; that is items that require repair
  17. 17. 15 never queue up but go in to service immediately (Gross, 1982). Statistically, this means successive order replenishment times (TAT) are independent (Gross, 1982). Therefore, the Poisson process will be a good approximation unless there is dependence among entities that cause the number 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 that assumes that the number of events, in this case the number of unscheduled removals over a period, does not undergo a dramatic 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 the world’s forces suggest that if hostilities breakout between major powers the escalation of combat flying activities will be abrupt and demanding on spares supply. This abrupt demand is typical of a non-stationary event distribution. However, the normal airline operations covered by Kilpi and Vepsalainen (2004) bases on years of historical data, which most probably do not have the sudden demands in aircraft spares mentioned. Consequently, a
  18. 18. 16 stationary distribution such as Palm’s theory could be a fitting probability modeling tool. Managerial Issues in Spares Availability Service Another aspect of the choice between independent spares availability and shared spares availability that needs due consideration is the managerial one. Managerial issues encompass but are not limited to availability of trust between the airlines in the alliance, efficiency of the issuing and receiving procedure of the logistics system, maintenance philosophy of the airlines planning to be part of the alliance etc. However, one of the determining factors of all the possible influencing issues (listed or not listed above) is the commonality of the fleet considered for a shared aircraft spares holding. Airlines have a long history of customizing their aircraft (Feldman, 2000), thus providing the airline industry with a huge variety of differently configured planes all looking the same from the outside and almost the same from the inside (Kilpi @ Vepsalainen, 2004). The author of this paper had been able to participate in acquisition process of new aircraft. Consequently, the author had observed vendors that are equally certified and
  19. 19. 17 capable of providing the same components for an aircraft. However, one could have noticed the issue of operating environment of the airline acquiring the aircraft, maintenance philosophy of the specific airline and price concessions from vendors and issues of the like take the forefront of vendor selection process. Consequent spares availability from a shared aircraft spares holding vantage point had less priority as compared to the other points mentioned. For instance, one can mention a choice of tire suppliers for aircraft. In choosing between vendors, the author had witnessed factors like proximity of the tire manufacturers supply warehouse, operating environment issues such as high altitude airport takeoffs and price concessions offered; take priority over which airline in the vicinity is using which tires and other pertinent issues of a shared spares holding. Maintenance philosophy is also a determining factor. The authorities overseeing the airline’s operation impose one of the documents that determine this philosophy. This document, the master minimum equipment list (MMEL), provides for the operation of the airplane, approved provisions with certain instruments and equipment in an inoperable condition (Holt & Poynor, 2006). Pertinent with
  20. 20. 18 this, the document provides the minimum repair time for the inoperable items. Each airline can prepare its own customized MEL in a format equal or more stringent to the one given in the MMEL. In preparing its MEL, the airline may gather the following inputs under the limitations of the MMEL. One input is from the FAA’s maintenance review board report. This report contains the initial scheduled maintenance program for U.S. operators and subsequently all operators that fly commercial aircraft over U.S. national airspace (Kinnison, 2004). Operators use this document to develop their own maintenance document. Boeing and Airbus Industries refer to such customized document as a maintenance-planning document (MPD) (Kinnison, 2004). McDonnell-Douglas called it the on aircraft maintenance planning (OAMP) document (Kinnison, 2004). These documents contain all the maintenance task information from MRB report plus additional tasks suggested by airframe manufacturers (Kinnison, 2004). In preparing the MPD, operators use their own experience of aircraft components and associated costs in determining whether to use the components until failure or define a removal and repair schedule to have an increased MTBUR from the component. This choice affects most of the
  21. 21. 19 components on the MEL and prioritizes the specific airlines spares availability. Consequently, considerations of spares pooling with other airlines will lack synchronization, as airlines are quite suspicious about each other’s maintenance philosophy and the quality of their maintenance work (Kilpi & Vepsalainen, 2004). SUMMARY It has been the aim of this paper to address the issue of air carrier operating cost reduction from the perspective of shared spare part holding. The paper identified the relevant cost drivers in order to derive a related solution. The possible solutions were, owning one’s spares or sharing them amongst other airlines with indications that airlines should avoid the former. However, the author also believes the latter option includes other variables that need analysis. For example, trust and logistical proximity between the cooperating airlines are points of further investigation. In addition, considerations of a shared aircraft spares holding should be from the beginning of the aircraft acquisition process. The airline history has clearly shown that the industry is competitive and allies at one time could be competitors at another. The case with British Airways and United Airlines bares witness to this fact (Petzinger,
  22. 22. 20 1996). Therefore, a risk analysis of spare pooling partnership is in order before becoming part of one. In addition, the logistics involved of queuing of spare parts to satisfy demands need to be mathematical analyzed. Here, the assumptions taken should mimic the operations of the real world as much as possible. The mathematical model by Kilpi and Vepsalainen (2004) cited in this paper, bases on the Poisson distribution discussed earlier. The author believes one of the defining characters of this mathematical model namely the assumption that, “no two events can happen at exactly the same time” (Rumsey, 2006) is not typical of the real-world aviation industry. It would not be out of the ordinary to have two aircraft of the same model requiring a tire change exactly at the same time. Consequently, in deciding on becoming part of a shared aircraft spare holding, airlines must scrutinize managerial considerations like efficiency of the proposed system, the type of aircraft components the alliance should be for and questions pertinent to these issues.
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