Sky Wars: Why Offshore Aircraft Maintenance is a Flawed Strategy
Published: March 10, 2014 in Knowledge@Australian School of Business
Aluminium smelting, oil refining, car making – the list of Australia’s vanishing industries grows longer. Among reasons for ceasing Australian operations, Holden, Ford and Toyota cited fierce global competition, a small local market and a relatively high wages bill. Now Qantas, in announcing plans last month to cut a further 5000 staff in the face of financial losses, has added arguments about the ‘unfair’ requirement that it service its aircraft in Australia. It's rival, Virgin, relies on overseas workshops.
Australian aircraft maintenance has been moving offshore for some time. This increasing trend has been put under the microscope by the Australian School of Business (ABS) during the past three years in an Australian Research Council study – The Future of Aircraft Maintenance in Australia: Aviation Safety, Workforce Capability and Industry Development.
The key researchers – ASB professor Michael Quinlan, associate professors Anne Junor and Ian Hampson, senior lecturer Sarah Gregson and research associate Doug Fraser – were inspired by concerns about the strategic and economic costs of offshoring, possible threats to passenger safety and a declining skill base in the Australian aircraft maintenance, repair and overhaul (MRO) industry.
The full study will be released later this year, but the researchers have utilised interim findings in an ASB Industrial Relations Research Centre submission to the federal government’s Aviation Safety Regulation Review, due to report in May. A key point in the submission is a looming skills crisis.
As local maintenance jobs have been cut, such as the 1000 positions Qantas is reported to have shed during 2012, the training capability for the next generation has gone into free fall. Junor has mapped MRO organisations and found as many as 50% have closed down in recent years and that difficulties in finding staff are prevalent among remaining providers. Defence facilities now account for about 75% of apprentice completions. One of the two civilian NSW centres presently approved by the Civil Aviation Safety Authority (CASA) to train aircraft engineers has 10-15 students this year. In 2013 it had 30. During the past 10 years it had about 100 per year.
Global Opportunity
According to Fraser, fostering MRO should be a no-brainer for Australian industry strategists.
“It’s no longer just a sideshow of running an airline. It’s a big global industry in its own right, worth around A$70 billion a year and likely to at least double during the next 20 years. It utilises the kind of highly skilled blue-collar labour that Australia has traditionally been good at developing. It offers many specialist areas of work where Australia’s comparative wage costs don’t seriously limit our competitiveness,” Fraser says.
“Above all, international authorities expect most regions of the world to fall well short of the training output needed to meet their own MRO requirements over the next decade.”
Fraser puts the decline in MRO skills down to a series of policy oversights by successive governments.
“Australia traditionally relied for the bulk of its technical training on big public-sector organisations such as the railways, Telecom and Defence establishments, and a few of the largest private companies,” he says. “In the 1980s we had Qantas, TAA and Ansett all running substantial apprenticeship programs. Qantas absorbed TAA, Ansett went out of business, and nobody else has stepped in to fill the gap.
"In effect, Australia's MRO training effort has been allowed to become hostage to the strategies and fortunes of a single company. If that company now can't look after itself, how is it going to look after the future needs of the Australian industry?"
The skills drain could leave the fledgling Australian aircraft-component industry in the same situation facing the car-component industry.
Says Junor: “At the moment, Australia is the biggest components supplier to Boeing outside the US. Running down the capacity of our automotive and aero-skills training facilities is hardly the way to ensure our continued integration into this large global market.”
Profits and Safety
And what impact will the cost-quality trade-off of offshoring maintenance have on Australia’s enviable airline safety record? Hampson sees gaps in the safety surveillance systems.
“There are doubtless many offshore shops which give top-quality service that Australian consumers can rely on,” he says. “We know from experience that there are some which definitely don’t. The problem is that we don’t have enough good information to tell which is which. Australia doesn’t even keep public records of which maintenance goes offshore, never mind where it goes. Once it does go offshore, no public records are kept of where the work has fallen short of standard, or what rework is needed in Australia when the plane comes back.
“The risk then is that because there isn't enough information about quality, choices will be made on the basis of price. This is a classic ‘market for lemons’ situation, where quality providers get driven out of the market and many others survive who don't deserve to."
Hampson believes market forces alone are unlikely to address this threat. Airline profits need to be balanced against the probability of a major accident. While any such incident would have fatal consequences for the business as well as for human life, it might or might not occur, and if it does, it will be at some unknown point in the future, possibly only once the aircraft has been sold on and become someone else’s worry.
“An Asian airline Boeing 747 in 1980 suffered a tail strike from landing too steeply. It was not repaired properly and cracks appeared and 22 years later the plane fell out of the air. Aircraft maintenance can be a health risk but it is difficult to know the extent,” Hampson says.
Relaxed Approach
The researchers note “a contrast between Australia's relaxed approach to the supervision of overseas repair shops handling Australian work, and the increasingly stringent regulatory approach which public concern in the US has obliged Congress and the US Federal Aviation Administration (FAA) to apply to offshore providers”.
The FAA is subject to political supervision and accountability in ways that Australia’s CASA is not. The FAA was recently compelled by congressional legislation to tighten up its regulatory and supervisory practices. In Australia, the trend is for CASA to offshore its responsibilities to foreign aviation authorities to ensure safety standards. This leaves the certification of maintenance on Australian aircraft to the safety oversight, training and licensing procedures of another country.
“We wonder how consistent this is with the Australian safety program, as well as International Civil Aviation Organisation requirements that the State of Registry be responsible for the safety of maintenance performed on aircraft even in another country,” say the researchers.
Back of the Queue
The expected worldwide shortage of aircraft maintenance engineers is likely to increase offshore wages, negating much of the cost advantage of offshore maintenance and affect the viability of relying on offshore maintenance as the primary means of meeting Australia’s airworthiness requirements. Australian carriers may find themselves relegated to the back of the maintenance queue by other players with considerably greater political and/or market power.
Junor predicts a dissipation of Australia’s aircraft maintenance capability will have particular impact on the general aviation sector – regional airlines, commuter operators servicing fly-in fly-out, tourism ventures and the transport, freight and emergency services that support rural and remote communities. The major airlines may be able to rely on offshore maintenance but the general aviation sector cannot.
The submission argues that in the interests of the safety of the travelling public, Australia will need to rebuild its MRO capacity and the workforce to support it. This would require extensive structural reform, well beyond what the present market is likely to bring about.