POWER BY THE HOUR.
‘Power by the Hour’ (PHB) programme was first introduced by Rolls-Royce in 1962 covering their Viper engines, for 125 business jets. Under such a contract the engine manufacturer committed to offer replacement and maintenance of the entire range of engine accessories, for a fixed rate per flight hour basis.
The PBH or engine maintenance programme concept arose out of the instance of low despatch reliability rate of classic turbine fan jet engines . However, even without the presence of bad engines in today’s day and age, for most part, Power by the Hour contracts are in vogue.
The above image from Global Market Insights (GMI) depicts the size of the Power by the Hour market across the globe, as also category-wise break up of spares and components, line maintenance items and engine components. According to the study, with base year as 2018, the market size was in excess of USD 20 billion globally. The CAGR growth estimation for the forecast period 2019 to 2025 is pegged at 6.3%. The projection for year 2025 is USD 30 Billion!
Unsurprisingly, the growth has been fuelled by an increase in air travel in the Asia Pacific region, in passenger traffic from China and India, as also spurt in tourism in the Middle East and African regions – all of these have contributed towards commercial aviation. Furthermore, the industry has seen a rise in demand for narrow body aircraft mainly from low-cost airlines. Adherence to stringent regulatory mandates and the advent of Aerospace 4.0 or digitalization of the sector have all led to positive outcomes . Apart from this, adoption of a service-oriented approach versus a product oriented one has seen service quality excellence on the rise thanks to operational reliability and more. However, high cost of manufacturing and shortage of skilled resources are a bane for the sector.
Amongst regions worldwide, the North American market has held sway over others by capturing 25% of the PBH sector. This is because of a dominance of major airlines, engines, components, and aircraft manufacturers in this region.
For example, in 2019, Mexican carrier VivaAerobus signed a contract with Pratt & Whitney for providing GTF engines for 41 of their A321 Neo aircraft. The PBH agreement included undertaking comprehensive engine maintenance services for 12 years. In August 2019, Air Canada entered into a PBH agreement with Rolls-Royce to provide Trent 700 engine for their Airbus A330 aircraft fleet. The airlines opted for the TotalCare Flex agreement, on a long-term basis. The TotalCare Flex programme is ideally suited for airlines seeking economical management of more mature engines. Quite a bit of customisation there.
Operators and aircraft owners mainly bring components like the engine, landing gear and brakes – critical to every uneventful flight operation, under PBH contracts, since they require regular maintenance for smooth functioning. PBH is an agreement between an airline operator and suppliers like aircraft manufacturers, engine, component or MRO service providers, where the latter via the agreement provide a specific number of spares at the customer’s facility or at stocking locations, for which the operator pays up on a per aircraft utilisation basis. Thus, the operator benefits by not owning the items, resulting in reduction of inventory costs, substantially. At the same time, a high standard of service quality is maintained to ensure reliability in operations.
A PBH contract basically entails, an aircraft owner/operator paying a manufacturer or service provider an hourly rate, just for each hour flown, for a mutually agreed period. This is akin to let’s say, a term life insurance policy, and comes with several high impact benefits. Exceptions remain, such as the occurrence of catastrophic unscheduled events, and the instance of having to bear the cost of repairs subsequently. Devoid of a PBH contract therefore, can be financially debilitating for the asset owner.
Aircraft operators on their part must be thorough with their vendor selection, keeping in mind TAT (Turn Around Time) and AOG support. Importantly, tracking vendor performance and subsequent evaluation will give the airline or aircraft operator sufficient reason to opt for the same or a different PBH provider, once contract renewals come up.
There are several companies today that offer coverage for older engines, and these extend across piston aircraft, and some helicopter manufacturers.
Apart from engines, avionics and airframes can be brought under such contracts, that can bring in substantial savings on maintenance expenses going forward for the owner/operator.
Key Benefits of Power-By-The-Hour Aircraft Maintenance contracts…
According to a research paper presented by Wharton’s, Prof. Morris Cohen, Prof. Serguei Netessine and Doctoral student Sang-Hyun Kim, from the Operations and Information Management department, this new ‘Power by the Hour’ approach is already reshaping customer-supplier relationships.
No operator/owner will want short cuts or compromise where aircraft maintenance and repairs are concerned, especially due to lack of sufficient funds. Within the ambit of a PBH programme, a lender or lessor is assured of funds being available, be they for engines or airframes, and similar, in case of a repossession or default. Key benefits that a PBH contract brings to the fore are appended below:
PBH contracts help avoid deep financial crises when there is a dire need for funding for crucial repairs and the lack of which, can see an aircraft being liquidated. Power by the Hour (PBH) contracts allow better and efficient management of budgets. Thus, costs allocated towards MRO services can be rationalised. Such programmes can be customised to suit customers’ financial planning such as cover for airframes; landing gear and brakes; stock positioning; rotables; components and their repair and overhaul, engine management, contractual purchasing, logistics support and importantly critical response service. Benefiting for these plans are not just commercial carriers, but include flight schools, management companies, and other operators.
Aging aircraft covered under a PBH contract can become less challenging, as owners want to beat down cost of repairs, labour, goods as also inflationary trends. With value of aircraft depreciating over time, maintenance costs especially of many business jets, will outstrip the value of the aircraft or its parts.
These PHB agreements provide cover for modern, new generation commercial aircraft. Industry sources have it that more than half the airlines utilize these contracts. Apart from commercial aviation, business jets and commercial helicopters are participating customers in the PBH market.
Again, Wharton professors, Cohen, Netessine, and doctoral student Sang-Hyun Kim, have the following to say through their research presentation – about performance-based contracting, required in order to “improve product availability and reduce the cost of ownership by tying a supplier’s compensation to the output value of the product generated by the customer.” Well explained.
Operators gain by way of cash conservation, allocation of funds towards other projects that come with higher returns, and achieving a healthy balance between capital efficiency and mission readiness.
Airlines and aircraft operators then end up paying much less by entering into a “Power-By-Hour” contract. However, with more and more carriers opting for PBH agreements, what is standing out in sharp contrast, on the flip side, are the pain points of engine manufacturers due to the numbers of parked fleets around the world. Not only will the engine makers not see any revenue coming in from idle engines, they will continue to spend on expensive research and development in pursuit of newer, cleaner and greener technologies. An important objective here is to make engines quieter, more fuel-efficient and lighter.
The illustrations below are a clear indication of how carriers have been impacted effective end 2019, with a number of their aircraft parked, and severely affected are PBH providers as their customers will only pay for per hour during flight operations.
Some of the key players in the Power by the Hour (PBH) Market are:-
AAR; A J Walter Aviation Limited; EFTEC (UK) LIMITED; Jet Support Services, Inc. (JSSI);Lufthansa Technik; Rolls-Royce plc; SIA Engineering Company; ST Engineering; Textron Inc.; and Turkish Technic Inc.
Conclusion
Power by the Hour programmes are proven ways in the aviation business to cut down inventory costs. Airlines pay for PBH services based on aircraft utilization. The main benefit for operators is not owning inventory, and thereby reducing recurring overheads, and at the same time attain service or operational excellence as desired.
According to the study Wharton researchers Prof. Cohen, Prof. Netessine and Doctoral student Sang-Hyun Kim, in their study entitled ‘Power by the Hour’: Can Paying Only for Performance Redefine How Products Are Sold and Serviced? reveal that the PBH service contracts cause economic impacts of such significance… “Up to seven times as much profit as do sales of original products over the lifetime of product use.”
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