Revenue FixBy John McCormick | Posted 2003-04-01 Email Print
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Before its industry went into a tailspin, Delta Air Lines invested $1.5 billion in an instant information network to serve customers better and save millions of dollars. Will that be enough to make it the last major airline able to attract price-conscious
Walter Taylor might seem a bit hard-core when it comes to Delta's aircraft maintenance and repair operations.
"My idea of a good time is having a tight budget and a tight focus," says the head of technology at Delta's aircraft maintenance, repair and overhaul (MRO) unit.
Taylor's mission is to automate key operations within Delta's MRO operation, including the unit's supply chain, its aircraft configuration management processes, and its technical documentation.
Consider this: A single Boeing 757 has 626,000 parts and another 600,000 bolts and rivets that hold all the pieces together. Almost all those parts will one day need to be replaced or repaired. The parts come with technical documents, kept in maintenance manuals that stack up well against the Encyclopædia Britannica. Now multiply by 822—the number of planes in Delta's fleet.
While labor is an airline's highest cost, aircraft and aircraft maintenance is next—usually about 25% of an airline's costs. Typical costs for a commercial airliner are about $1,000 to $1,500 for every hour a plane flies.
So it's no wonder many airlines look at maintenance and repair as a money pit. But they shouldn't.
Airline experts say maintenance and repair is a tool that can be used to cut costs and generate revenue. "There's a huge opportunity," says Tony Rodde, a group vice president at Manugistics and an MRO expert.
Delta, however, is one of few airlines that actually is trying to make money on its maintenance and repair expertise, according to airline industry analysts.
About three years ago, Delta was confident enough in its skills and flexible, nonunion workforce to offer its maintenance and repair facility to other airlines.
At the same time, the company knew that if it was serious about starting up a new business it would need sophisticated information systems to support its effort.
"It's one thing to do something for yourself. It's another thing to do it for someone else," says Tom Cauthen, an associate partner in the airline practice at Accenture, which has done some work for Delta.
As a service operation, Delta would have to be able to quickly assess jobs and provide solid estimates on repairs. But in order to do that, it needed a good way to track people and parts.
Delta's technical operation employs 10,000 people and manages about 300,000 parts. But that doesn't always mean that the right people and the right parts are at the right place at the right time. The company had been keeping track of its resources in a homegrown system that was fed by a spreadsheet of past needs and other historical documents. It was an inefficient process.
"We always knew we had the right part. We weren't always sure if we had the right number of the right parts," says technology boss Taylor.
Typically, MRO would err on the high side, which meant excess inventories. At any point, Delta facilities could be holding on to $1 billion in inventory. Warehousing and paying interest on the money used to buy the parts can increase the cost by 20%.
To cut those costs and better manage operations, the company deployed a supply-chain management system from SAP. The move was done as part of a larger SAP implementation that incorporates other critical Delta business functions, including finance.
With SAP, Delta calculates fleet airtime, aircraft types, upgrade schedules and other factors to determine exactly what parts are going to be needed when.
"With SAP we get better visibility and we're able to bring down that inventory level and not impact the service that we're providing to that mechanic," Taylor says.
Taylor would not say how much SAP is saving the unit in inventory cost, other than to say it's "significant." But Stan Beal, an executive vice president at Xelus, a company that specializes in MRO software, says the right tools can reduce a large airline's inventories anywhere from $500 million to $700 million.
But not without some bumps along the way.
In the previous system, a part could be identified by a number of different codes and the system would accept whichever one a mechanic entered. But SAP systems are very exact when it comes to inputting data. Type in a wrong number for a part and the system won't respond. Taylor says it was common for mechanics to "fat finger" a part number or shop order, which resulted in poor systems performance.
Delta went back and cleaned up the data in its individual MRO databases, recoding parts information so that everyone was working with the same names and numbers for each part. Delta also spent some extra time training its mechanics so that they knew the right codes and the right way to enter information.
Delta also noticed a couple of gaps in SAP's features.
Delta's inventory includes many "repairable" parts such as generators or hydraulic pumps.
Repairables are expensive—sometimes $300,000 to $400,000 a pop. Consequently, it is important to determine how many of these parts Delta should have and where these parts should be located. But there's also complexity: When flight or maintenance schedules change, Delta needs to determine how to relocate these parts and in what quantity.
However, says Taylor, currently, "SAP does not do a good job of planning [repairable] spare parts in an airline environment."
Delta is using a system from Xelus that is designed specifically for managing spare parts deliveries.
Despite the size of the job, Taylor says there has been little disruption to the airline's operations during the SAP deployment. "No aircraft has been canceled because of SAP", Taylor says. "We have 2,500 flights a day. And we may have had seven to 10 delays because of not ordering the part or not processing the part properly in SAP. "That's a small, small fraction."
Delta executives and airline experts say that by turning MRO into a profit center Delta is creating a sustainable advantage over its competitors with its MRO operation.
And Song will leverage this expertise. With an MRO operation as sophisticated as Delta's, says Mike Burkett, AMR Research's director of aerospace and defense research, "you get an edge'' in flying planes longer and keeping operating costs down.
Mechanics will benefit even more from a system Delta plans to deploy over the next couple of weeks that will take information from in-flight plane monitors—which radio status reports to flight operations while they're in the sky—and relay that information into its MRO systems.
Once the system is running, Delta mechanics will be able to better schedule preventive maintenance. For instance, if a plane is flying from Atlanta to Salt Lake City and then on to San Francisco, monitors might send back a signal between Atlanta and Salt Lake that an engine is running a little rough. Delta will then be able to determine which airport—Salt Lake or San Francisco—has the right people and parts to look into and, if necessary, fix the problem.
Delta's maintenance expense dropped 11% last year from $801 million to $711 million, saving $90 million. American, by comparison, decreased its maintenance expenses 5%, from $1.17 billion to $1.11 billion.
The airline also says its MRO business is thriving. Delta says it has signed long-term service and maintenance contracts with World Airways, Miami Air and two major contracts with Boeing to maintain a fleet of military and executive jets. The unit recorded $50 million in sales in 2000, $140 million in revenue last year, and says it's aiming to grow the business to around $500 million in revenue by 2005. Aircraft maintenance and repair experts estimate that an MRO operation could see a profit of up to 20 cents on every dollar of revenue, which could add $100 million to Delta's 2005 bottom line.