Reducing and repositioning
product lines in airline
maintenance

A leading third-party provider of aircraft maintenance was being weighed down by a massive cost structure, causing large negative pressure on profitability, about 0.6%. Return on net assets measured 1.2%, well below the company’s cost of capital of roughly 8%.

Downsizing and restructuring had become the norm for the commercial airline industry driving major changes on the maintenance floor. This condition was particularly apparent for facilities operating large airframe repair, engine overhaul and component repair – the situation of the the client company, which carried several product lines of varying margin and market demand.

The objective was to resize the cost structure in line with market demand and improve profitability.

The financial impact of the recommended actions included the following:

• Reduced cost by 13%
• Resized the business from $798 million to $737 million
• Improved EBIT from $5 million to $46 million/year
• Improved Return on Net Assets from 1.2% to 12%

Recommended Actions

Because the business consisted of four separate service lines, each with a distinct cost structure and different competitors, actions were specific to the service line as follows:

Wide Bodies

• Establish a customer service center to lock in customer retention
• Consolidate the market (strategic alliance with KLM or acquisition of FLS) to extract scale advantages, including
  – Leverage the experience curve
  – Improve labor utilization
  – Raise prices

Narrow Bodies

• Exit narrow-body maintenance by divesting ABC cannot be cost competitive on D and IL checks as
  follows:
  – Boeing 727-D
  – Boeing 737-D
  – Airbus 320-IL/C
  – Boeing 7373-IL
  – Airbus 320-IL

Engines

• Reduce work scope and labor by outsourcing low-level work
• Target CFM and CF6-80 engine maintenance for significant profitable growth and offer customers financial packages, including Power-by-the-Hour contracts

Components

• Offer customers integrated packages to finance new and spare components
• Establish a hub in the U.S. for significant profitable growth

We performed a comprehensive analysis of the company’s cost structure by product line, the respective market demand of each, and their competitive position.

• We discovered that the company comprised four maintenance lines of business, each with a distinct cost structure, different set of competitors, and different markets, including wide-body airframes, narrow-body airframes, engines, and components:
  • Wide-body checks
    • Boeing 747-D
    • Boeing 747 Cargo-D
    • Airbus 300-D
    • Airbus 310-D
  • Narrow-body checks
    • Boeing 727-D
    • Boeing 737-D
    • Airbus 320-IL/C
    • Boeing 7373-IL
    • Airbus 320-IL
  • Engines
    • CF6-50
    • CF6-80
    • CFM56-5A
    • CFM56-5C
  • Component repairs
    • Avionics
    • Pneumatics
    • FTRs
    • Electro-mechanical equipment
    • Hydraulics
• Estimated demand for each product line by the following market segments:
  • Regions
    • North America
    • Europe
    • Asia
    • Africa
  • Type of carrier
    • National
    • Major
    • Captive
    • Other
• Conducted a detailed analysis of competitors by line of business, including
  • Type of competitor
    • Third-party airlines
    • Independent shops
    • OEMs
  • Competitive position
    • Market share
    • Relative cost position
    • Financial strength

Results indicated that the narrow-body product line was not differentiated and actually incurred large negative net margins, contrary to the company’s cost accounting.  Competitive analyses showed that the product line operated at a cost disadvantage due to the high labor content and the expensive cost of labor.  Market projections presented significant losses.

The wide-body maintenance sector was projected to grow at 0%, and ABC’s line of business operated at sub-scale size.  ABC’s wide-body maintenance endured a high labor rate but enjoyed significant advantage of experience curve and labor utilization, resulting in overall cost advantage.

Engine maintenance services conducted more in-house work than its competitors.  Also, it did not offer contract options for younger engine technologies (CF6-80 and CFM) as required by customers.

Component maintenance suffered a high labor cost in the home country.  Noticeably, the U.S. represented a large, growing market with a relatively lower labor rate.  Also, component maintenance did not offer service packages to finance new and spare parts as demanded by customers..