Making A Profit: The revenue side

Sept. 1, 2001

Making A Profit

The revenue side

By Bill de Decker September 2001

In my last column (AMT July 2001), we talked about the fact that a manager has no direct control over the profitability of an operation, because profit is what is left over after the expenses are subtracted from the revenues. This means that to make a profit, we need to focus on managing revenues and expenses. Last time we looked at expenses. This month we will look at some key ingredients on the revenue side.

Pricing determines how much your organization will be paid for a particular job. What all of us would like to do is to figure out all our costs for a job, add our overhead, add a healthy profit and present the resulting bill to the customer. Unfortunately, it usually doesn’t work that way. Most of the time, the marketplace determines the price the customer is willing to pay. This means that we are faced with some simple choices if we want to make a profit — reduce our cost or figure out a way to charge more than our competitors.

Fixed costs
As we discussed in our last column, the key to reducing costs is to focus on the fixed costs and productivity. Fixed costs are incurred regardless of whether there is work on the hangar floor and can add up very quickly. One way to mitigate the impact of fixed costs is to increase productivity of both maintenance personnel and facilities. Increasing hours of service is a very effective way of increasing the productivity of the facilities (and is also, incidentally, a terrific marketing tool). Productivity of maintenance personnel can also be improved in a number of ways that we discussed in the last column.

"Flat rate" system
Another way of increasing productivity is the use of what in the car industry is called a "flat rate manual." This manual establishes a fixed number of labor hours to accomplish a specific task. For example, to remove and replace a starter/generator on a certain type of aircraft might be listed at 4 hours. Or a 100-hour inspection may be flat rated at 20 hours. Under this system, the technician is paid for the stated number of hours whether it takes shorter or longer. And, of course, if during an inspection, unscheduled work is found, there will be an additional charge to the customer. But, given a comprehensive flat rate system, even these unscheduled repairs can be quoted to the customer at a fixed price. This has a number of advantages for the customer, the maintenance technician and the organization. To the customer, it gives them the assurance that they know before the work is started how much it will cost (barring unforeseen circumstances). For the technician, it means that, since they get paid a fixed amount for a given task, they can significantly increase their income by completing maintenance tasks in less time than the stated time. In other words, it gives technicians an incentive to become highly productive. And the organization reaps the benefits of the increased productivity and the higher level of customer assurance.

But what about safety?
Some are concerned that with this type of compensation system, the incentive is to cut corners and jeopardize safety. The fact that all work must be inspected and signed off is a sufficient deterrent in itself to prevent sloppy work. Many automobile shops use an even more effective system — they measure the warranty repair rate for the work done by each technician and the required work is either done by that technician at no additional cost or the cost is subtracted from his or her pay. And, technicians that have more than a very small amount of avoidable warranty work don’t last long.
The system works well in the car and electronics industry and there really is only one major roadblock to implementing it in the aviation industry. There are no published flat rate manuals available for most of the aviation maintenance industry. This is a big stumbling block, but, it also provides an opportunity to innovate. Go through your records, talk with your technicians, talk with the manufacturers and start assembling your own "flat rate manual"!

Specialization and innovation
Specialization and innovation are powerful tools to increase prices and revenues. What happens when you innovate or specialize is that the number of organizations with which you compete and with which the customer can compare prices is reduced. Furthermore, customers tend to assign a higher value to specialization. For example, many aircraft operators will only take their aircraft to factory-authorized service centers and are willing to pay a higher price to meet this requirement. This doesn’t mean that the maintenance shop that is factory-authorized does better work. All it means is that the customer is willing to pay extra for the perceived extra value of the factory authorization. A good example, again from the world of cars, is the labor cost per hour for my car. The shop without factory authorization charges $60 per hour, while the dealer’s shop charges $85 per hour. Admittedly, to obtain factory authorization is not cheap — it requires an investment in training, facilities and inventory. However, that may well be worth it for the extra revenues and business that result.

Become an "expert"
Another way to specialize is to focus on a particular kind of equipment, component or repair. By becoming the "expert" for a particular item, you will again distinguish yourself from the competition and be able to charge a higher hourly rate. Older avionics and displays are becoming one such specialty for a number of avionics repair shops. As the new aircraft are switching over to electronic, digital displays, controls and black boxes; the skills required to repair the old analog, electromechanical equipment are rapidly disappearing. It’s an opportunity that some shops are grabbing with both arms.

Innovative practices
Innovation focuses on ways to truly distinguish your organization from the competition. This can be done by coming up with a new process that allows repair of components that previously could not be repaired. One example is an organization that figured out how to recoat a shaft that previously had to be discarded if the coating was damaged. The shaft cost $5,000. The repair cost $1,500 and while I have no idea what the profit is, I have no doubt it is substantial. In addition, the repair gave the customers a savings of $3,500. Another way to innovate is to provide a comprehensive maintenance management service such as is provided by one Canadian engine overhaul organization. Their focus is to help their customers manage maintenance of their engines in the most cost-effective manner given their particular operating environment. The result is that while they may make a little bit less revenue on each maintenance visit, they are reasonably assured of getting all of that customers engine business without having to compete each time.

Common denominators and distinguishing differences
There are obviously many more ways to increase prices and revenues, but they all have one thing in common. By distinguishing yourself from the competition, you can increase your prices and your revenues. And, those are key ingredients in increasing profits.