Rolls-Royce first launched the “Power by the Hour” (PHB) initiative in 1962 for their Viper engines, which were used in 125 business jets. The engine manufacturer agreed to provide replacement and maintenance for all engine accessories under such a contract at a set cost per flying hour.
The notion of the Power by the Hour, or engine maintenance program, emerged from the low despatch dependability rate of vintage turbine fan jet engines. Nevertheless, Power by the Hour contracts are popular today, even in the absence of malfunctioning engines.
The size of the global Power by the Hour market is shown in the following graphic from Global Market Insights (GMI), along with a breakdown of spares and components, line maintenance products, and engine components by category. The study estimates that the global market size was more than USD 20 billion, using 2018 as the base year. For the forecast period of 2019 to 2025, the estimated CAGR growth is 6.3%. The estimated amount for 2025 is USD 30 billion!
It should come as no surprise that the rise in commercial aviation has been fueled by a number of factors, including a surge in tourism in the Middle East and Africa, air travel in the Asia Pacific area, and passenger traffic from China and India. In addition, the sector has witnessed an increase in narrow-body aircraft demand, primarily from low-cost carriers.
The industry has benefited from strict regulatory compliance, the introduction of Aerospace 4.0, or digitalization, and other factors. Apart from this, the adoption of a service-based approach against a product-centred one has seen service quality excellence on the rise thanks to operational reliability and more. However, the industry is plagued by high manufacturing costs and a need for more competent labour.
With a quarter of the global PBH market, the North American market has dominated other regions. This is a result of the region’s leading airlines, engine, component, and aircraft manufacturers’ supremacy.
For instance, VivaAerobus, a Mexican airline, and Pratt & Whitney inked a deal in 2019 for the supply of GTF engines for 41 of their A321 Neo aircraft. As part of the PBH agreement, comprehensive engine maintenance services were provided for 12 years.
Air Canada and Rolls-Royce signed a PBH agreement in August 2019 so that Air Canada could supply Trent 700 engines for their fleet of Airbus A330 aircraft. The airlines made the long-term decision to go with the TotalCare Flex arrangement. Airlines looking to manage older engines cost-effectively should consider the TotalCare Flex program. There is quite a bit of customization there.
PBH is a contract that an airline operator has with its suppliers, such as engine, component, and aircraft manufacturers or MRO service providers. Under the terms of the agreement, the suppliers provide a set quantity of spare parts at the customer’s location or stocking locations, and the airline operator pays them according to the number of aircraft used. At the same time, a high degree of service quality is maintained to assure reliability in operations.
Under a PBH contract, an aircraft owner or operator pays a manufacturer or service provider an hourly rate for each hour of flight for a predetermined amount of time. This has a number of high-impact benefits and is comparable to, say, a term life insurance policy. Exceptions persist, such as the occurrence of catastrophic unscheduled disasters and the incidence of having to cover the cost of repairs after that. Therefore, it might be financially crippling for the asset owner to be without a PBH contract.
It is the responsibility of aircraft operators to carefully consider AOG support and Turn Around Time (TAT) when choosing a vendor. Importantly, tracking vendor performance and subsequent review will give the airline or aircraft operator adequate justification to opt for the same or a different PBH supplier once contract renewals come up.
Today, a number of businesses provide coverage for older engines; these companies include some helicopter manufacturers as well as piston aircraft.
In addition to engines, these contracts can cover avionics and airframes, which can result in significant future maintenance cost savings for the owner/operator.
Operators/owners will only seek shortcuts or compromise when aircraft maintenance and repairs are concerned, especially owing to a lack of appropriate cash. A lender or lessor is guaranteed funds within the scope of a PBH program, whether for engines, airframes, or other similar items, in the event of a repossession or default. Key benefits that a PBH contract brings to the fore are appended below:
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Minimising Financial Uncertainty
When funds are desperately needed for critical repairs—the failure of which could lead to the liquidation of an aircraft—PBH contracts can avert severe financial catastrophes. Power by-the-hour (PBH) contracts provide more effective and efficient budget management. Budgets for maintenance, repair, and operation (MRO) services can thus be better spent.
Airframe, landing gear, brake, stock, rotable, component, repair, overhaul, engine, logistical, contractual, purchasing, and essential response service coverage are all part of these programmes, which can be tailored to meet the needs of clients’ budget planning. All sorts of operators, from commercial airlines to flight schools and management firms, stand to gain from these plans.
As owners strive to reduce the cost of repairs, workforce, goods, and inflationary tendencies, ageing aircraft covered by a Power by the Hour contract can become less of a challenge.
These PHB agreements provide cover for modern, new-generation commercial aircraft. Rumour has it that these contracts are used by over 50% of the airlines. Customers in the Power by the Hour market include commercial helicopters and business jets, as well as commercial aviation.
- Carriers can rely on the Power by the Hour service provider to handle service bulletins and airworthiness directives (AD) in the event that an operator receives one. The provider will then arrange for the aircraft to be repaired.
- Increasing the worth of an item: When it comes to costly repair and maintenance jobs, opting for a PBH strategy pays off handsomely. Due to the funds being set aside for MRO services from the initial payment made during sign-up, these services are pre-paid. Having an asset enrolled for a longer period raises its worth, which is especially helpful when selling it.
- The benefits of Power by the Hour ownership include a better understanding of an asset’s history and value, which is especially useful when selling the asset. Having a Power by the Hour contract for repairs and maintenance improves ownership significantly.
“Improve product availability and reduce the cost of ownership by tying a supplier’s compensation to the output value of the product generated by the customer.” That is what Wharton professors Cohen and Netessine, along with doctoral student Sang-Hyun Kim, have to say regarding performance-based contracting in their research presentation. Clear and concise.
A “Power-By-Hour” arrangement allows airlines and aircraft operators to spend significantly less in the end. Engine manufacturers will keep pouring money into costly R&D in search of better, cleaner, and greener technology, even if they won’t get any return on investment from idle engines. Making engines that are lighter, more fuel-efficient, and less noisy is a major goal here.
The pictures below are a strong indication of how airlines have been hit effective end of 2019, with a number of their aircraft parked. The severely affected are Power by the Hour suppliers, as their clients will only pay for each hour during flight operations.
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AFI/KLM
Power by the hour (PBH) industry heavyweights include:
JSSI, A J Walter Aviation Limited, EFTEC (UK) LIMITED, Lufthansa Technik, Rolls-Royce plc, SIA Engineering Company, ST Engineering, Textron Inc., and Turkish Technic Inc. are all part of AAR.
Conclusion
The aviation industry has found success with Power by the Hour schemes in reducing inventory costs. Operators can achieve service or operational excellence as needed without owning inventory, which reduces recurring overheads.
In their paper titled “Power by the Hour: Can Paying Only for Performance Redefine How Products Are Sold and Serviced?” Wharton scholars Prof. Cohen, Prof. Netessine, and Doctoral student Sang-Hyun Kim state that this is possible. Disclose that the Power by the Hour service contracts cause substantial economic effects… “Up to seven times as much profit as do sales of original products over the lifetime of product use.”
