NEWS & EVENTS


GUARANTEED ENGINE MAINTENANCE PROGRAMS

They are known by names such as "ESP", "MSP", "JSSI Complete", "Power-by-the- Hour", but they all have one thing in common -- comprehensive turbine engine maintenance and overhaul coverage at a fixed price per hour. This coverage is now offered by almost all of the major turbine engine manufacturers, as well as one independent company. They are available for almost all engines in common use on helicopters, turboprops and jets.

These programs generate a lot of heated debate, with some believing they can get their engine maintenance for a lot less money. Others are convinced that it is the best thing since sliced bread. Still others provide the full range of opinions in between. What is without debate is that they have become quite popular.

What is also without debate is that, as managers, we have to take a step back and look at these programs from a management point of view.

Perceptions aside, the real questions you must answer are:

 How do the costs compare?
 What are the benefits of these programs?
 How can this help your organization?

First, lets look at the costs. This is where a lot of the confusion gets started, because many people think the maintenance cost of the engine is the same as the hot section inspection and overhaul cost. For one popular engine the cost of the hot section inspection and overhaul is about $71.50 per hour, while the guaranteed maintenance cost is about $110 per hour. One possible conclusion is that the company providing the guaranteed maintenance program is making one heck of a profit! However, although these programs come in many different flavors, the most popular ones (including the one in the example) are the comprehensive ones. These include a lot more than just hot section inspections and overhauls. They also include consumables, maintenance of the accessories, recommended and mandatory service bulletins, loaner engines, coverage for premature removals, unscheduled maintenance and replacement of life limited parts. If each of these additional coverage items is priced out, it increases the cost per hour from $71.50 to $114.50 and all of a sudden, the guaranteed maintenance charge of $110 per hour looks pretty reasonable!

Second, let's look at the benefits. The major ones are:

Guaranteed maintenance plans take the uncertainty and unpredictability out of one of the major cost areas on any aircraft. Engine maintenance costs are nearly negligible until heavy scheduled or unscheduled maintenance is required. For example, a typical overhaul on a small jet may cost $200,000 per engine. If that small jet is used in charter service, it may generate about $1,000,000 in charter revenue for a year. Overhaul of two engines will be about $400,000, or 40% of the revenues for that aircraft for the year. If the year hasn't been all that good, this will be a nightmare for the Chief Financial Officer. At the same time, it distorts the financial picture -- the years prior to the overhaul will show a higher profit than was warranted and the year with the overhaul will show a huge loss. Thus, from both a cash flow and a financial management point of view, it is in fact much better to spend a fixed hourly fee for each hour flown and avoid the huge expense peaks associated with paying for heavy maintenance as incurred. This applies whether you are with a small charter operation or with the corporate aviation department of a Fortune 50 company -- both watch their cash flow likes hawks.

Aircraft brokers will tell you that it is easier to sell an aircraft that is on a guaranteed engine maintenance program. In addition, the aircraft will bring a higher price. For example, the Aircraft Blue Book valuation of used aircraft with Allied Signal engines is based on the engines being on "MSP", the Allied Signal guaranteed engine maintenance program. If the engines are not on "MSP", the valuation is reduced by the number of engine hours multiplied by the MSP rate. Aircraft with other engines that are on a guaranteed engine maintenance program get treated in a similar manner. In other words, you get the unused portion of the money spent on guaranteed engine maintenance programs back in the selling price of the aircraft.

You get support when you need it most -- such as when you need loaner engines, or you have had an unscheduled engine removal. Part of most guaranteed maintenance agreements is that loaner engines will be provided at no charge when your engine(s) are off the aircraft for repair or heavy maintenance. The companies providing guaranteed maintenance program have significant pools of spare engines to provide this support. Also, when an engine has just had an unscheduled failure is not the time to have to become an expert on the where and how of the best way to get the aircraft back in the air. With a guaranteed maintenance program, that expertise is one phone call away. And best of all the advice and the repairs are all included in the hourly fee. So how can these guaranteed maintenance programs help your company? First, it makes budgeting and cash flow management much easier. Financial types really dislike huge expenditures of a variable size that occur on an infrequent basis. They dislike these because it makes their financial planning very difficult. Second, guaranteed engine maintenance programs, by requiring pay-as-you-go monthly payments give a much more realistic picture of the cost of operation of your aircraft and, if you are a commercial operator, a more realistic picture of your profitability. Remember, if you pay for engine heavy maintenance as incurred, you will be understating the real cost of operation for most years and overstating it in the year when the heavy maintenance is done. Third, it is like an insurance policy that covers unexpected expenses such as expensive mandatory service bulletins and premature engine removals.

As a manager, these are powerful arguments in favor of guaranteed maintenance programs. After all, one of the important tasks of department managers is to provide as much operational and financial stability and predictability for their departments as possible. That doesn't mean that guaranteed engine maintenance is for every one. It does mean that the advantages and disadvantages for your operation should be subjected to very careful scrutiny.

If you think that these programs are just for the "little" operators, keep in mind that within the last year both the lowest cost major airline (Southwest) and one of the most innovative (American) have started switching to guaranteed maintenance contracts for the engines in their respective fleets.

Written By: Bill de Decker