TO KEEP PLANES ALOFT in a challenging market, some carriers have eliminated flights, reduced staff or tacked new fees onto customers' tickets. Now several are looking at their vendor contracts too. Creatively designed, or thoughtfully restructured, these supplier agreements have become effective sources of additional liquidity, yielding quick cash or debt relief. Often, they can sustain financial benefits over time.
One option involves consolidating repair contracts, inviting competing companies to vie for an entire portfolio. The fact that different contracts bear different terms makes the transaction all the more attractive to consolidators because the winning vendor can transition repairs into its own shop as old contracts expire. Suppliers may be willing to pay a premium up front to secure these revenue streams for longer periods, particularly if they otherwise are locked up with competitors.
Another approach: Outsourcing spares like engines, rotables or expendables to leaseback, pooling or consignment programs. Some carriers historically have preferred to hold these assets close, keeping tens if not hundreds of millions of dollars worth of spares on hand to keep planes in flight. But the advantages of using a reliable supplier are exhibited by more nimble, new-generation carriers. These include a big cash influx at the sale, with above-market prices often achieved by appending repair or procurement agreements. Longer-term cost advantages can accrue too, provided that airlines account for and correctly assess the full cost of ownership of these spares. Operational benefits arise as well, since suppliers are bound contractually to meet required service levels, incurring commensurate penalties for failures.
Partnering with suppliers launching strategic ventures is a third way to cut costs near-term and perhaps win cash injections. Carriers can expect a headache or two helping a supplier road-test new aircraft models, IT systems, IFE systems or a breakthrough service. But as long as the new program is in line with the airline's core business strategy, it should enjoy attractive pricing when, for example, new fuel-efficient planes are introduced.
The most aggressive contract option involves carving out entire divisions within an airline and selling them with a long-term agreement to purchase products or services from the divested entity. Carriers can realize gains from these sales and airlines have attempted to carve out maintenance, regional operations, frequent-flier programs, catering and airports with varying degrees of success.
But the transactions can't be undertaken casually. First, carve- outs usually involve altering in fundamental ways longstanding practices and priorities within the airline. Second, it typically takes 12 months or more to complete the transaction and take payment. Third, the higher the initial gain, the more the service will cost long term. The key to successful monetization is an agreement between the airline and the purchasing party that balances airline costs with the buyer's ability to make a fair profit.
For each of these approaches, carriers must consider the long-term financial implications, thoroughly analyzing the increased future costs they may incur as they realize short-term cash benefits. They also will need a compelling business plan to strengthen their position with vendors. After all, it's going to be well down the road before suppliers see benefits from any of these transactions, so they want to be sure the airline still will be going strong at that point.
The process might seem challenging for a carrier struggling to maintain operations. But many airlines need cash today, and they should look for ways to identify and secure new sources of liquidity in their contracts with suppliers. With oil at historic highs, carriers need new approaches to succeed. That begins with eased liquidity, and vendor contracts offer one place to find it.
Craig Segor is senior VP at Seabury Aviation & Aerospace