The alliances may well be looking at joint purchasing of MRO as part of their drive to achieve cost synergies, but whether it gains serious traction remains in doubt, asserts ICF SH&E Vice President David Stewart.
Many airlines, including alliance partners, will already be contracting together on line maintenance (probably on a bilateral basis) but will do so through International Airlines Technical Pool (IATP), not via the alliance, he says.
The success rate and the benefits of cost synergies, including MRO, on the alliance level are much lower than the commercial (market and revenue) upsides because, Stewart notes, “to make material levels of savings means taking typically long-term, difficult-to-exit decisions that almost always also compromise each airline’s own individual product, brand or service standards.”
Logically and given historical experience, joint purchasing of aftermarket services should likely start with those items that are essentially “commodities,” which are highly standardized. Examples include consumables, economy-class seats and tires, Stewart believes.
He says the other potential area for leveraging buying power is to focus on joint “strategic” purchasing of items where the costs (and therefore potential savings) are substantive, yet there are only a few suppliers available in the market. Examples are landing gear and auxiliary power-unit-related expenditures.
“The more complex the harmonization of the standards required in a contract, and the higher the barriers to exit, the more problematic the joint purchasing becomes. So it would be very complex, for example, for a group of airlines to agree to a single total maintenance support package [covering e.g., rotable management] with one supplier [if indeed this was even strategically desirable],” warns Stewart.
And could the pooling of MRO potentially also lead to competitive distortions? It seems sort of logical that work would be kept within the alliance. “There would be competitive tensions and also much debate on ensuring that the ‘pooled’ MRO supply is at a competitive cost,” Stewart contends.
“The MRO market is highly competitive, and many airlines will not want to give up the freedom of choice and their ability to get the best deal, in or out of the alliance.” Major MRO services providers such as Star’s Lufthansa Technik and SkyTeam’s Air France Industries KLM E&M are not always the lowest-cost provider in the market “nor do they necessarily want to be,” he adds.
The keys to success are, he concludes, “senior management commitment; identifying areas for cooperation where commonality of interest and standards are more readily aligned; and ensuring that the cost benefits are quantified, validated and material enough to justify the investment of management time.”