In fact, vendors should expect to see more oversight from their customers. “Getting wrapped into a long deal with a poor provider can be a nightmare,” states Mike McBride, vice president and principal at consulting firm TeamSAI. “That is why I rarely visit a supplier when I don't see a customer rep auditing or working on location to ensure quality and delivery targets are in line with expectations.”
Along with that, and closely related, MRO contract lengths are increasing, and airlines are transferring even greater risks to their vendors, according to ICF SH&E's Berger. Those risks, he explains, include material availability and service level guarantees, which, if not met, can “bring on significant financial penalties,” depending on how the contract was negotiated.
In tandem with that, Berger says more airlines are moving away from ownership of material and toward leasing, which “affords greater flexibility,” especially as older fleets are retired and new aircraft come into the fleet. “All the inherent risks involved with supplying and maintaining components are being transferred today to the supplier,” Berger remarks.
According to Scott Gunnufson, vice president and general manager of sales at Rockwell Collins, the avionics manufacturer is “witnessing greater sophistication with provisioning models” (component supply and servicing agreements), especially as aircraft become more complex.
“Over the past 5–6 years, the models are becoming tighter in order to provide more efficient and less capital-intensive plans,” he says. “We have worked with the airlines to develop these models due to customer demand.”
Part of this, Gunnufson explains, involves a shift in component ownership and management to large-system integrators with contractual performance clauses focusing particularly on asset availability and reliability. “This is going hand in hand with the outsourcing evolution.”
Technical Engineering Group's Hunt notes that European carriers are adopting the model as well. “Nobody wants to hold inventory. We saw that start about 3-4 years ago, with Ryanair as the pace-setter.” He sees legacy airlines going in that direction, too, but at a slower pace because many still have large in-house support organizations.
Hunt says operators are negotiating more just-in-time (JIT) type contracts and are incorporating penalty clauses if the supplier fails to deliver when promised. “This has become more common because, due to the financial uncertainties in Europe, everyone is being extremely cautious. By going to JIT, it keeps inventory down,” he says.
But for the supplier, supply/management contracts hold inherent risks because customers can change aircraft or move to another vendor. “That's why it's wise to get a contractual commitment from your customer to purchase specific levels of inventory, usually within a 12-month period. That's a reasonable time to hold inventory and to assure your customer of an adequate supply of critical parts.”
In fact, Copenhagen-based Jet Time, with 12 Boeing 737s—including -300 and -700 models—has outsourced inventory management on complex technical components, such as avionics, under a power-by-the-hour agreement with AJ Walter Aviation in the U.K. “For an airline of our size, I don't see that changing in the near future,” says Klaus Ren, the airline's president and CEO.