As Delta Outsources More Work, Its Mechanics Stay Busy Doing Lucrative Tasks for Other Airlines

Old-timers might be shocked if they visited Delta Air Lines' Atlanta maintenance complex these days.

You're as likely to see employees at the massive facility repainting an ABX cargo jet or overhauling an American Airlines engine as you are to see them working on Delta's jets.

Almost half the 5,000-employee Atlanta shop's engine overhauls --- which can take two months and cost $1.5 million --- are for outside customers. Delta says its revenues from such "insourcing" rose to $312 million last year, from $50 million in 2000. Its maintenance operation, known internally as Tech Ops, is now the world's third-largest maintenance supplier run by an airline, according to Delta.

Meanwhile, however, Delta is doing less of the work on its own jets than it used to.

Delta's spending on outsourced maintenance has grown from a third to almost half of its nonlabor maintenance expense in recent years, according to government figures, after the carrier contracted out virtually all of its major aircraft overhauls. Such overhauls, which involve extensive inspections every six years or so, once filled many of Delta's hangar bays.

The changes are part of Delta's effort over the past few years to cut costs and rework processes to mirror industry trends.

Along the way, Delta cut its 9,500-employee maintenance staff by a third and shuttered hangars in Tampa, Dallas-Fort Worth and Atlanta.

Delta hit some bumps after it shifted overhauls to outside contractors, but executives remain committed to the strategy.

For instance, Delta earlier this month pulled the plug on a contract with Air Canada, which has been overhauling Delta's widebody Boeing 767s at its Vancouver, British Columbia, hangar. It was one of two five-year overhaul contracts Delta penned two years ago. Delta ditched its contract with Florida-based Avborne last spring.

Delta moved the work to contractors ranging from TIMCO in Greensboro, N.C., to SkyTeam alliance partner Aeromexico and Hong Kong Aircraft Engineering Co., or HAECO, in China.

Delta's top maintenance executive, Tony Charaf, said both outsourcing and insourcing are here to stay. He said such moves have netted $250 million in annual cost savings or revenues, compared to two years ago.

The strategy helped persuade Delta to drop tentative plans to sell Tech Ops. Instead, Delta announced about four months ago that it was calling back 700 idled mechanics.

"Our plan is working. We are delivering to Delta the product that keeps Delta competitive," said Charaf, who joined Delta in 1996. "At this point the study [of whether to divest Tech Ops] is on the shelf."

Charaf said Delta will keep doing specialized work such as engine overhauls and avionics repairs where the labor costs of its relatively well-paid mechanics are a smaller share of total costs. Delta's senior mechanics make about $59,000 a year, well above salaries at many independent shops.

"We outsourced where we knew we didn't have a competitive edge," said Charaf.

Delta still lags the industry in how much it has outsourced, but it's catching up. About one-third of Delta's maintenance spending went to contractors in 2004, compared to an industry average of 53 percent, according to a 2005 report by the Department of Transportation's Office of Inspector General.

By 2005, Delta's outsourced maintenance had jumped to 48 percent of its $775 million in nonlabor maintenance expense, according to OIG data.

Charaf argues that repair work on equipment sent back to the original manufacturers shouldn't count as outsourced. By that measure, "we outsource less than 20 percent," he said.

Airlines' heavier reliance on outside contractors worries some airline experts. The DOT's inspector general also raised red flags regarding the Federal Aviation Administration's ability to monitor outsourced work.

By transferring work from their in-house shops to contractors, especially those overseas, airlines are allowing more of their planes to be repaired by unlicensed and unscreened employees, with less monitoring by the FAA, critics contend. Moreover, outsourcing is growing even as the FAA cuts staff and the number of inspections it does, these people say.

The FAA is "not even authorizing any new repair stations right now because they don't have the manning" to inspect new maintenance shops, said Adon Clark, department chairman of the aircraft mechanic training program at Georgia Aviation Technical College in Eastman. "If they're stretched that thin now here, do they have the manning to properly oversee the process overseas?"

No, said Linda Goodrich, an FAA inspector and vice president of the Professional Airways Systems Specialists union.

"I would be very worried," said Goodrich. Because of understaffing, the FAA already does fewer inspections of independent repair stations in the United States and Canada than it does at airlines' in-house repair stations, she said. Inspections of independent shops in Mexico, China and other countries are even rarer and less effective because of language and bureaucratic barriers, she added. "It's kind of a joke," she said. "We're dependent on [airlines for] self-inspection."

The FAA and Delta both counter that safety hasn't been compromised because adequate safeguards are in place. The U.S. airline industry has enjoyed some of its safest years on record of late, despite restructurings and financial crises at several carriers.

Delta, nearing the end of a Chapter 11 restructuring, created a department of about 60 mechanics and other employees who monitor contractors through audits and on-site inspections.

"We've got our team there," said Delta spokeswoman Gina Laughlin. "They are looking at that plane before it ever leaves the facility."

She said the foreign firms it uses, such as HAECO, are also certified by the FAA. The Hong Kong-based company, which also has a large hangar complex in Xiamen, China, has long done aircraft maintenance for Cathay Pacific and major Japanese airlines. HAECO also does work for Continental, Northwest and UPS.

In e-mail responses to questions, FAA spokeswoman Alison Duquette said a "risk-based" monitoring system the agency adopted a decade ago is keeping up with the industry's shift to more outsourcing.

"The ultimate proof of the quality of maintenance work being done ... is the fact that the accident rate is at an historic low," she said.

Under that system, the FAA certifies repair stations, but relies on airlines to monitor outside repair stations' work and to conduct regular audits. The FAA targets companies for inspections based on risk indicators such as safety incidents and financial stability. Duquette said two FAA inspectors overseeing Delta are scheduled to do a "surveillance visit" at HAECO this spring.

While aviation experts debate outsourcing's safety, one thing most agree on: U.S. airlines will keep doing more of it.

"I definitely think it's here to stay," said Joy Finnegan, editor of Aviation Maintenance magazine, because airlines want to cut fixed overhead costs such as in-house maintenance. "They're focusing on their core capabilities."

FARMED OUT

Many big airlines now outsource most of their aircraft maintenance, according to expense figures the airlines report to the government.

2005

maintenance

expenses

outsourced*

Alaska Airlines............89%

Hawaiian ..................80%

US Airways ................77%

America West Airlines......76%

Northwest Airlines ........73%

Continental Airlines ......69%

JetBlue Airways............68%

United Airlines............64%

Southwest Airlines ........62%

Delta Air Lines............48%

ATA Airlines ..............46%

AirTran Airways............43%

American Airlines..........43%

Frontier Airlines..........19%

* Includes parts, materials and contract cost. In-house labor excluded.

Source: U.S. Department of Labor, Office of Inspector General



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