Ensuring unbroken reliabilty of civil aircraft fleets

Ensuring unbroken reliabilty of civil aircraft fleets –

similarities and differences to other industries

ISLA – 7th. Service & Logistics Summit

Jörg Asbrand, Lufthansa Technik AG

ISLA - /th Service & Logistics Summit

Lufthansa Technik Copyright © 2013 Lufthansa Technik AG. All rights reserved. Subject to restrictions and disclaimer on last page.

2 ISLA – 7th Service & Logistics Summit

“To make a small fortune in

aviation, you need to start out with

a big one”


What‘s so special about the Aviation Industry ?

Spare Parts Services & Logistics to maintain high availability to aircraft

An industry in a break trough - strategic re-alignment of major players

ahead

Agenda



Small – expensive – long lasting


# Taxis in Germany: 50.000

# Commercial aircraft*: 18.000

Airbus A380

List price: 400 MUSD

1968 2013 - ? * Over 100 seats or 10 tonnes (freighter)




Over the next 20 years, add. growth is driving the market


Market projection for commercial aircraft*

* Over 100 seats or 10 tonnes (freighter) Source: Airbus Global Market Forecast 2013


Always dreamt of working for a non-profit organisation?

IATA Airlines cumulative profits 2001-2012 [bn USD]


Source: CAPA Study 2012


Airlines have not been able to recover their capital cost


Source: McK for IATA, 2013



Spare Parts Services & Logistics to maintain high availability to aircraft


ahead

Agenda



Let‘s take another transport equipment industry first


3+ years warranty !

But:

• Regular maintenance by OEM workshop only

• Original parts used

Buying it… Serviceing it…


Imagine…..


3+ years warranty !

But:

• Do maintenance yourself

• In case of trouble: find technical failure yourself

• Warranty rights only directly towards system providers

• For special service: No OEM wokshop existing…..

• For integral service: Go to Service Integrator

Buying it… Serviceing it…


Real life in Aviation


3+ years warranty !

But:

• Do maintenance yourself – JAR 145

• In case of trouble: find technical failure yourself

• Warranty rights only directly towards system providers

• For special service: No OEM wokshop existing…..

• For integral service: Go to Service Integrator

Buying it… Servicing it…



35%

55%

24%

45%

15%

13%

4% 4%

4%

DOC DOC

Direct operating cost of an aircraft

Up to 15% for maintanance

Fuel

Cockpit

crew

Maintenance

Cabin crew

Fees (landing, handling, etc.)

Material

Labor

Engine 40% / Heavy Maintenance 22% / Components 21% / Line Maintenance 17%


The Lufthansa Technik Group

Facts & Figures

The Lufthansa Technik Group is the leading manufacturer independent provider of MRO

services for civil aircraft:

Number of employees: app. 27.000

Number of customers worldwide: over 770

Aircrafts under exclusive contracts: over 2.800, Engines under contract: ca. 2.400

Revenue: 6,6 billion Euros, app. 20% for Lufthansa German Airlines

Corporate Headquarters: Hamburg

30 global subsidiaries


Lufthansa Technik Group

Subsidiaries and number of employees

Asia: 6.100

Germany: 14.300

other Europe:3.400

USA: 3.200


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Our customers

http://de.wikipedia.org/wiki/Datei:Logo_AeroLogic.svg

http://upload.wikimedia.org/wikipedia/en/d/df/Spanair_Logo.svg

http://upload.wikimedia.org/wikipedia/en/5/56/AirTransatLogo.png

http://upload.wikimedia.org/wikipedia/en/e/e5/Air_Berlin_Logo.svg

http://upload.wikimedia.org/wikipedia/en/b/b9/Corsairfly.png

http://upload.wikimedia.org/wikipedia/commons/5/5f/Swiss_International_Air_Lines_Logo.svg

http://upload.wikimedia.org/wikipedia/en/7/74/Asiana_Airlines.svg

http://upload.wikimedia.org/wikipedia/en/a/a1/Garuda_Indonesia_logo.svg

http://upload.wikimedia.org/wikipedia/en/3/36/CX_Logo.svg

http://www.qantas.com.au/travel/airlines/home/detect-context

http://upload.wikimedia.org/wikipedia/en/9/97/Norwegian_Air_Shuttle_logo.svg

http://upload.wikimedia.org/wikipedia/de/d/df/ADRIA_Airways_Logo.svg

http://upload.wikimedia.org/wikipedia/de/2/27/Aer_Lingus-Logo.svg

http://upload.wikimedia.org/wikipedia/de/1/1d/Emirates_Logo.svg

http://upload.wikimedia.org/wikipedia/de/7/74/Japan_Airlines_Logo_2011.svg

http://upload.wikimedia.org/wikipedia/de/4/49/Air_Macau_Logo.svg

http://upload.wikimedia.org/wikipedia/de/5/58/Croatia_Airlines_Logo.svg

http://upload.wikimedia.org/wikipedia/de/2/2f/LAN_Airlines.svg

http://upload.wikimedia.org/wikipedia/de/4/40/Pratt-&-Whitney-Logo.svg


17

Tailored to customer needs

Branded service products were new to the industry


18

Aircraft parts

As always: mainly the small parts create the hassle….

TU-Berlin Logistik Praxisseminar, Internationale Ersatzteillogistik, 22. April 2014

3 Landing Gears 2 Engines 15 Structural segments > 1000 Components


19

What do we consider a Component?

Generally: a Repairable Aircraft Part

TU-Berlin Logistik Praxisseminar, Internationale Ersatzteillogistik, 22. April 2014

≈ 400.000€

≈ 20.000€

≈ 4.000€

≈ 150.000€

Engine Control Unit

Escape slide

Flight Data Recorder

Coffee Maker

All aircraft parts are

normally repaired up to

70% of the list price

(BER limit) with

predetermined tasks

(Test, Repair, Overhaul),

documented in the

Component Maintenance

Manual


All parts are categorized by the aircraft manufacturer in a Minimum

Equipment List (MEL). Acknowledgement of the local aviation authorities

required.

The MEL describes, under which circumstances or to which extend an aircraft

can be released to service with inoperative equipment.

Limitations, procedures and substitutions may be used to provide conditions

under which the inoperative equipment will not make the operation unsafe or

the aircraft unairworthy.

Examples:

• Engine failure No-go item

• Emergency slide defect Go-if item – aircraft can be operated with limitations

• Window wiper No-go item in India during Monsoon

• Toilet broken Go-Item – only passenger comfort effected

Criticality of components are described precisely



Standard model: Airlines invests in own inventory


Airline‘s

home-

base

inventory

Numerous vendors 6-10 weeks

Typical protection level:

MEL A: 98%

MEL B: 95%

MEL C: 90%


Benefits of cross-customer pooling are shared


Lufthansa Technik

Component Pool Airline‘s

Home Base

inventory

Lufthansa Technik

Repair and overhaul

Single-source

supply

Vendors

3-10 days

Reduced home base inventory level driven by: • Size and type of fleet

• Short replenishment between Home Base and Pool

• Transportation and customs clearance time

• Customers personal risk preference (service level)

• Operational parameters (Fh p.y., cycle ratio, etc.)

• MEL items


Aviation parts logistics is…..


… … …

• Place of demand ist always an airport

• Industry-wide communication: The user speaks

the same language, uses same docs

• A part number is a part number…

• All relevant serial numbers have complete back-

to-birth history

• All material demanding customers have own

means of transportation

• Customs exemptions apply in case of own

equipment and AOG situations

• Industry-wide help organized (IAT Pool)

• Common spare parts model includes

constant change of title of parts (Cross-

border problems, accounting problems)

• Restrictions apply for dual use goods

• National aviation authorithies require

individual documentation (CAAC, JCAB..)

Complicated!


24

Central Pooling Warehouse

Facts & Figures

Location: Cargo City South, Airport FRA 8.500 qm Area

30.000 Components Value app. 400 MEUR

State-of-the-Art-Technologies and -Processes

100+ employees



Spare Parts Logistics to maintain high availability to aircraft


ahead

Agenda



Two main drivers lead to a low cash flow period


Older aircraft being taken out of service:

• Surge of available surplus parts

• Material sale strongly effected

• MRO revenues replaced by used parts

Surplus on

legacy aircraft

Tiered

supplier structure

on new a/c

Smaller number of Tier 1 suppliers:

• High price entry ticket: 600 MUSD+

• Strong dependency on Airbus or Boeing

• Long payback time – 16 years+

• Increased technical risk

• Increased takeover risk

Long period of low cash flows Countermeasures:

• Control aftermarket chanels

• Increase material list price (5% yoy)

• Capitalize on Intellectual property


Does not look too nice…

Surplus on legacy aircraft



4 main factors for increased aircraft tear down




Remember the „replaced“ portion?



Source: Airbus Global Market Forecast 2013


Industrialization of aircraft manufacturing triggered

massive changes in the service industry

Tiered supplier structure on new aircraft


Concentation of supplier base down to 46 Tier 1‘s



Source: ICF, LufthansaTechnik


Aircraft OEM plan to become a major player in Service





• Intellectual property rights

• Proactively carve out relevant data from Maintenance manuals

• Split information relevant for maintenance and repair of parts

• Prohibitive pricing of test equipment

• Automatic test equipment (ATEC) mandatory to repair avionics

• ATEC pricing raised from 1.2 to 10 MUSD, killing every business plan

• Licence fees

• Request license fees for continous support with tech data or even „purchasing license“

• License fees easily reach 50+ MUSD

• Limit number of licencees down to 2 or 3 globally

New entry barriers are establish to keep competition out




Future state of the industry players is yet unclear

Outlook





Documents

Ensuring unbroken reliabilty of civil aircraft fleets