Is the global financial crisis a threat to MRO standards?

Airline maintenance faces its own challenges within a beleaguered industry.

As airlines ground aircraft, delay deliveries and dig deep for cost savings in the face of an unprecedented slump in demand, one could be forgiven for wondering if safety might in some instances be compromised by maintenance shortcuts or omissions.

There is no doubt that maintenance regulation in much of the world is robust and that there is little room to manoeuvre to avoid the associated costs. But at the same time, airlines will undoubtedly be asking their internal MRO units and/or their outsource partners to find even the smallest savings. Such an environment should ring alarm bells for regulatory authorities, who may need to lift resource levels and tighten surveillance regimes.

There has been a litany of maintenance related failures around the globe in recent times, fortunately mostly with relatively benign outcomes. But even at the more visible level within the passenger cabin informed travellers have reported much higher than usual failures in equipment such as seats and their associated hard and soft ware.

Even before the current crisis, the US government was demanding that the FAA lift its game in terms of surveillance of outsourced airline maintenance, which now dominates the US airline scene. The government was critical of the fact that surveillance has apparently been slow to keep pace with the extent of the outsourcing, which is both onshore and offshore. That surely stands as a stark reminder of just how easily even the most rigorous regulatory regimes might become less effective. It's not necessarily a matter of deliberate circumvention of the standards, but rather a loosening of the framework which sustains them - perhaps exacerbated by resource stress within the relevant authority.

THE SAFETY NEXUS

MROs themselves are understandably defensive about any suggestion that standards might slip under financial pressure. They can not afford to abandon the line that maintenance standards are durable and robust, because to do otherwise would be to undermine confidence in their own businesses. Nonetheless, much of the defence they put forward makes sense.

"The safety standards are driven by the system of maintenance and it's extremely rigid," says John Holland Aviation Services' Andrew Henderson. "The only way you can change the system of maintenance is by being able to demonstrate that there is a legitimate reason for change."

Air New Zealand's engineering chief Chris Nassenstein firmly believes that, "By now the industry has accepted the fact that lowering quality to cut costs is really an issue that will work against you. Quality is really an issue of cutting out waste - and talking about waste as non-value added activities such as not having to write manuals, not having the right planning, not having parts in place, and having to re-do jobs instead of doing it right the first time - this is where at a time like this it puts more onus on these kinds of efforts. I think in general MROs are quite careful not to gain a reputation of cutting corners because these types of things always weigh against you."

And Malaysia Airlines senior general manager engineering, Mohd Roslan Ismail, takes a similar line: "Safety and also quality are the cornerstones of any airline's operations.  The question is more about efficiency and productivity, on how airlines can be more efficient and productive in the way they run their business, in all areas, including engineering and maintenance. This means doing structural changes that will result in real and lasting changes.

For example, for the past four years, we have been optimizing our E&M operations to be lean, productive and efficient. Without compromising on quality and safety, our aim is to complete more jobs with the same workforce and facilities. Productivity has improved and turnaround time has also reduced. This year, we will be putting in place another program to help us improve our productivity and efficiency."

But engineers themselves are not necessarily so confident. The secretary general of Aircraft Engineers International, Fred Bruggeman, believes that the current financial crisis will simply exacerbate problems that already exist in the system. He sees maintenance as a very visible area of high cost within an airline and hence a ready target for cost cutting. He says that what concerns AEI members is the insidious nature of maintenance cost cutting measures: "If you reduce maintenance levels to the bare minimums, it doesn't immediately or necessarily reflect in unsafe situations, it's a slow process. That's what we see, a slow erosion of maintenance standards. In the past check and recheck was the more or less the natural habit, but now more and more people say ‘why do you want people checking somebody else's work, he's good, he's trained etc.' In many cases it doesn't result in disasters, but you are increasing the number of faults made - and you can have a simple fault that in itself would never jeopardize lives, but of course if it is combined with a number of other errors or mishandling by pilots or whatever, it can lead to a disaster."

From a regulator's perspective, new CASA boss John McCormick believes that some less-buoyant organizations may be under pressure to slip closer to the minimum acceptable maintenance practices under stress, but that they are unlikely to deliberately cross that line.

Nonetheless, he sees that as sufficient reason for regulators to heighten their awareness of what is happening in those vulnerable organizations, whether they be airline or independent MROs.

"They are not necessarily unsafe, it's just that their ability to absorb unexpected events or extra pressure becomes less. It's a bit like the roadworthiness certificate for a car - where it's just meeting the minimas there can be a perception that if you look at the whole thing at arms length you're not given a great deal of confidence in that second hand car when it only just has enough tread on the tyres, just enough oil in the engine, and you're left with that feeling that perhaps this isn't really robust enough to undertake the wear and tear of normal operation. And the same is true of a system, and an airline is really just a system. If it is operating on the bare bones as far as margins to be non-compliant then it's really not very robust.

"Experience has shown - and luckily it's experience not gained in Australia, because quite often these things are rules that are written in blood - if you are continually sitting close to the bottom or on the bottom of all the minimum requirements there will come a time when someone within that organization will make a judgement call which, either intentionally or unintentionally, will be below the minimum and that is when incidents or accidents happen. That person who is making those judgements has to be much, much more aware that they really have no latitude left. They eat those margins up and that's the pressure that money puts on."

Summing it up nicely is Peter Marosskeky, who says: "MROs themselves have to express confidence in their standards because it is their business. I would say, however, that in some cases that level of confidence is a little bit ambitious. If I was a regulator I'd certainly be looking very hard at their entire operation, even if it's difficult in some cases to do so."

STRATEGIES UNDER STRESS

The pressure on MROs to shave costs comes directly from their airline customers, but there will also be that pressure inherent in their own need to be competitive in a time of diminished business. With grounded older aircraft and new technology aircraft coming on line, it would seem that the size of the heavy maintenance cake should be shrinking. Even line maintenance will suffer from reduced airline operations.

That sort of scenario should favour the larger MROs who will have the breadth and depth of established business to help sustain them. These entities will also have to find the right balance between ‘slimming down' and not losing precious skills that they will need when the good times return.

The smaller, perhaps more recently established or specialized MROs will be under greater threat.
And airlines will be asking themselves whether they should be outsourcing more MRO work or bringing more in-house if they have the capability. Offshore labour costs could in some instances make it appear more attractive to outsource work that would never have been exported before, such as heavy work on single-aisle aircraft. And regulators will come under concomitant stress to deal with the changing balance.

"What we are seeing at the moment is less demand for heavy maintenance and more demand for line maintenance," says JHAS's Andrew Henderson. "But heavy maintenance is driven as much as anything else by the aircraft life cycles... it's not really driven by the current circumstances.

"What we are also seeing is increased interest in reverting to what's called the MPD standard, which is the manufacturer's recommended maintenance arrangements. They are regarded as the most economical and most well-researched and most thorough maintenance systems. Airlines are examining their system of maintenance to see whether it's the most efficient way of doing it. And those airlines which don't run an MPD-based system generally speaking regret that they've moved away from it. And with old aircraft it's nigh on impossible to move back.

"Where the airlines will save money is more in the strategy not in the actual maintenance. Deciding to outsource, deciding to insource, taking a particular view for whatever reason will be the thing that will drive the change. So for instance, an airline that perhaps outsources some and insources some will probably find that to be a more expensive arrangement than doing it all in house or outsourcing all of it."

And Henderson doesn't believe the slump will result in more aircraft heading offshore for work: "For the narrow-bodied aircraft such as the 737s and the A320s the costs of ferrying an aircraft generally speaking make it unattractive to send it overseas... the larger aircraft like the 747s it might be a different picture, because they are flying internationally anyway and they don't necessarily have the ferry cost barrier to protect them."

Air New Zealand's Chris Nassenstein is also bullish despite the tough market: "For us it's an issue of being careful and adapting to the changes in the marketplace and where there are opportunities take advantage of them."

Peter Marosskeky thinks that outsourcing may not be the solution for difficult times: "Some of the airlines which will be surviving, those that are doing better than others, they might actually even bring work back in house, rather than outsource even more, because the nature of the work, which is generally the lighter area of work for new aircraft can be coped with by their existing organizations. But I should qualify that because there are some organizations which have reduced their MRO capabilities and it really depends on what they have in place and what they've given away previously as to whether they can continue operating in house MROs.

"In some cases it would be economically advantageous to them to keep the work inside. Sending aircraft to other MROs has obvious benefits in terms of being able to reduce your overheads, however in lean times if you've already got an organization in place it might be more advantageous to build that organization up slightly if not use it more effectively and efficiently. But if they don't have the infrastructure in place it will be very difficult for them to bring it back in house now."

ISSUES FOR REGULATORS

It would seem inevitable that a global financial crisis resulting in plummeting demand for airline seats would ring alarm bells in regulators' offices everywhere.

Even the airlines should surely expect more comprehensive surveillance. Chris Nassenstein at Air New Zealand says that if he was a regulator he would be "quite nervous about the potential lack of stability in the MRO industry".

What worries Peter Marosskeky is that a lot of regulatory authorities have been starved of the necessary resources for years, and that tough times will only stretch their restricted capability further: "The ability to effectively oversight by regulators is a concern, to the regulators themselves particularly. Regulators generally are lacking the ability to oversight maintenance at airlines and that could well be one of the drivers that will cause airlines to more effectively control their maintenance - and one of the ways they could do that is to bring more of it back in house and thus satisfy the regulators.

"The regulator's problem is not only lack of resources but also new technologies. Regulators generally have long-serving employees who have a reduced amount of airline experience because of that; and because of these new technology aircraft coming into service they don't always have the ability to maintain the level of expertise and experience they would like to see for some of their inspectors. That really applies worldwide and it's nothing new. The irony is that this new technology can make it simpler for regulators to oversight because of the modern technologies, not only from the aircraft perspective but also the way the airlines manage their operations. They have better computer systems, better reporting systems and more alternated reporting systems which make it much easier for regulators to observe activity.

The AEI's Fred Bruggerman is far less optimistic about the state of maintenance regulation, particularly in Europe. He laments the fact that many regulators no longer recruit from industry leading to a consequent lack of direct experience. And he believes that too many authorities are focused on procedures rather than more relevant intimacy with the industries they are charged with surveilling.

He sees a parallel with the recent collapse of much of the global finance system: "We have seen the bullshit that has been created by the lack of checks on the banking and insurance industries over the last few months. This is going to happen in the aviation industry as well in our view. The authorities have more and more of a stand-off attitude."

REGULATING OFFSHORE MRO

Having noted the US Government's concerns about the FAA's ability to effectively monitor offshore maintenance, what is the view of the local regulator?

CASA CEO John McCormick points out that offshore MRO is hardly a new phenomenon for the regulator to deal with, but he acknowledges that there may be a need to lift the rigour a bit right now.

"I think the issue of surveilling offshore maintenance has come under more focus in recent times, but maintenance has always been done in various parts of the world, some of it by necessity. If you wanted to convert a 747-400 passenger aeroplane into a freighter, as much as you may wish to do it in Australia you won't find the ability to do it.

"The newer Asian facilities still have to meet their own national standards, they've got to meet ICAO standards, they've got to meet our standards. If they meet our standards and they meet our MRO regulations - and we do that by audit inspection and physically go and make sure they do - then that's an approved organization to carry out that maintenance. Our awareness of those areas, our surveillance of those areas is very high anyway, it has always been recognized as being a higher risk activity.
"(But) again this is something that should be in the individual operator's risk management policies and their internal risk management procedures."

Peter Marosskeky is more skeptical: "Theoretically those MROs in Asia that hold FAA and EASA approvals are audited sufficiently, but there are areas where there are deficiencies and where oversight can't be very effective because of a variety of factors. With the Chinese MRO industry, it requires a lot of oversighting by foreign regulators, because apart from the political pressure of unions not wanting to see work go offshore, they have to also make sure that the certificates of approval that they issue are maintained effectively. So on one hand you've got a bit of disconnect where let's say an overseas MRO is approved by a regulator to perform work, they have now got to manage that as well as the airline customers that they've got, so they've got a double-barrelled workload to contend with."

IN SUMMARY

It would seem MROs are right to express confidence in their ability to maintain standards despite the pressure on costs at every level of the industry. But they would be well aware that they have to back up any assertions of confidence with an enhanced level of surveillance of their own operations to ensure they can deliver.

Airline-owned maintenance divisions may be called upon to handle more work than usual despite the grounding of part of the fleet. This potential stretching of resources (there won't be additional resourcing) carries its own dangers and will require careful management. There will also be a need for divisional managers to ensure that airline management and boards appreciate the vulnerability of quality when they are required to shave costs.

And, as has been accurately pointed out, regulators must above all be right on the ball as guardians of those standards. Many regulators have entered these challenging times with a legacy of question marks concerning their resourcing and their performance in good times, let alone bad. That's not a scenario to encourage confidence in the maintenance sector on a universal basis.