Maintenance Idea May Be the Right Fix

At Northwest Airlines, the mechanics union is on strike because the carrier wants to cut hundreds of employees and outsource the work to a cheaper provider.

At Delta, maintenance on half the fleet is being outsourced to companies in Miami and Canada. Delta expects to eliminate 2,000 jobs and save $240 million over five years.

United is going even further to cut costs. It announced Tuesday that maintenance on its Boeing 777s will be handled by a Chinese company in Beijing.

Against these trends comes American Airlines. It not only is keeping most of its maintenance work in-house, it's trying to land additional work from other carriers.

American's audacious goal is to turn maintenance into a profit center, a notion that's either crazy or crazy genius.

Maintenance is a big-time expense in the airline business. It's vital, of course, but it's often a blow to the bottom line.

So it's not surprising that airlines have gone to great lengths to shave costs.

Discount carriers have always used outsiders to help with this specialty work, and legacy airlines have followed the money.

The Transportation Department reports that more than half the maintenance work on U.S. airlines is performed by outside vendors, including many located in other countries.

In contrast, American says that its employees handle all of its heavy maintenance and up to 90 percent of the total maintenance work. American prefers it this way, because it can control the entire process, ensuring everything from safety standards to scheduling.

And American sees this as a competitive advantage, as long as the costs are in line.

But the company estimates that overseas vendors have a cost advantage of at least 25 percent. So how can American compete, either on its own planes or on those operated by others?

American's maintenance facility in Tulsa, OK, which employs 7,000, is a prime example of the work in progress. Employees and management have been meeting for months to figure out ways to become more efficient.

This spring, they set a goal of netting $500 million through a combination of cost cuts, delayed capital spending and new revenue. Hit those numbers, and Tulsa doesn't cost American any longer -- it pays.

Not surprisingly, employees fretted that if they did their work too well, American would reduce the staff. But American pledged to not lay off anyone because of efficiency gains and instead agreed to devote that extra worker time to outside assignments that would bring in revenue.

For the first six months of the year, Tulsa's money-saving tracker totaled $72 million. The facility has a long way to go by the end of 2006, but it has momentum.

It also landed a major contract with a Latin American airline, which is an intriguing role reversal for outsourcing. How often do Latin American companies come here for service?

American also has maintenance facilities at Alliance Airport in Fort Worth and in Kansas City, Mo. Alliance recently scored a $900 million contract extension for work on Rolls Royce engines, and if it goes well, that joint-venture deal would be extended for an additional $700 million.

Mike Boyd, an airline consultant with the Boyd Group of Evergreen, CO, says that the Transport Workers Union at Alliance suggested reclassifying some jobs so that employees' skills were a better match to the work and pay scale.

"American clearly is a model in this," Boyd says about the level of cooperation. "And American is making a fool of the analysts and academics who said that legacy carriers couldn't get their costs down and reinvent themselves."

American workers have suffered plenty. About 4,500 full-time jobs have been eliminated in maintenance and engineering since 2003, roughly one-third of the companywide layoffs during that time.

And like all employees, mechanics took deep cuts in pay and benefits, so the airline could compete with low-cost airlines like Southwest and AirTran.

But American drew the line on outsourcing maintenance. The company doesn't tout the safety advantage, but others have.

An investigation by CNN contrasted American's approach with other airlines, and it noted numerous complaints about work conducted by outsiders.

Richard Gritta, professor of finance and transportation at the University of Portland, recently toured airline facilities in Brazil and was surprised by the number of U.S. aircraft being serviced there.

"I don't care if food and clothes come from abroad, but airplane maintenance just seems different," Gritta says.

Whether or not American's initiative succeeds, the company deserves credit for trying to build a better mousetrap -- and balancing its employees' concerns against the bottom line.

On that score, the approach is reminiscent of American's handling of the pension issue. American is bucking the industry trend there, too, by pumping hundreds of millions into its pensions. Most of its competitors are trying to slip the burden.

The common theme here is that American is blazing a risky trail, largely because employees have made these matters a priority.

American is betting that it will be more competitive, day in and day out, if everyone contributes and pulls together.

Gritta is a believer: "Happy people do a better job, and that's going to come across to customers who are flying," he says.

If American Airlines ever gets a break on oil prices, it could become of one of the great turnaround stories of our time.

Staving off bankruptcy in 2003 was an achievement in itself. Posting a small profit in this year's second quarter was another milestone.

Next year, will the industry be saying that American reinvented its maintenance business the right way, not the easy way?