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January 21, 2005

Airlines, Facing Cost Pressure, Outsource Crucial Safety Tasks
Heavy Maintenance on Planes Entrusted to Contractors;
A Busy Hub in El Salvador

By SUSAN CAREY in Chicago and ALEX FRANGOS in Comalapa, El Salvador

JETBLUE AIRWAYS DOESN'T OFFER passenger service to El Salvador. But this year, the discount airline will fly at least 17 of its 68 Airbus A320 jets to that country.

There, over six days, local mechanics working for an aircraft-overhaul shop under contract to JetBlue will inspect each plane nose to tail. They'll examine hydraulic and pneumatic systems, lubricate joints, service brakes and paint tray tables and toilet seats. Then the jets will fly back to the U.S.

America West Airlines also is sending some of its planes to El Salvador for checkups required by the U.S. Federal Aviation Administration. Northwest Airlines flies wide-body jets to Singapore and Hong Kong for service by outside contractors.

As beleaguered U.S. airlines seek to cut costs, they are outsourcing a job that is crucial to passenger safety: long-term maintenance. While airlines continue to use their own mechanics for lighter maintenance between flights to ensure punctuality, half of U.S. carriers' heavy-overhaul work is now performed by outside vendors in the U.S. and overseas. That's up from less than a third in 1990, says consulting firm BACK Aviation Solutions in New Haven, Conn. The world-wide aircraft maintenance market is worth an estimated $37 billion annually.

Although U.S. airlines have had a good safety record recently, with 34 deaths from crashes on scheduled commercial flights between 2002 and 2004, some experts worry that the shift of work to third parties could result in weaker regulatory scrutiny. Only supervisors at the outside repair stations -- not individual mechanics -- must be licensed by the FAA. At some shops, workers tend to be more transient and less well-trained than those employed by the airlines. Meanwhile the major U.S. airlines have been furloughing veteran mechanics.

Airlines are slashing maintenance spending drastically, which is prompting concerns among unions, pilots and government regulators that corners may be getting cut, writes Scott McCartney2.

Last year, the National Transportation Safety Board found that deficient maintenance by an outside vendor and lack of regulatory oversight contributed to a 2003 crash of a commuter flight in Charlotte, N.C., that killed 21 people.

In a 2003 report, the federal Department of Transportation's inspector-general faulted the FAA for inadequate oversight of outside contractors. Despite the rise in outsourcing, the FAA "has continued to concentrate its resources on oversight of air carriers' in-house maintenance operations," the report said. One airline outsourced 44% of its maintenance budget in 2002, the report said. The FAA did 400 inspections of that airline's own maintenance facilities but only seven at the outside shops.

The FAA concurred with the report's recommendations for tighter scrutiny of contractors. It is now phasing in rules requiring better record-keeping and training at contractors and raising the requirements for supervisors' experience.

Uniform Standards

All U.S. and foreign repair services that work on U.S. planes and parts must be authorized by the FAA and adhere to the same safety standards. James Ballough, the FAA's director of flight standards, says his branch inspects 4,500 domestic and 650 foreign repair stations. Nearly 700 inspectors are assigned to these outside servicers, while 220 inspectors look after U.S. airlines' in-house overhaul activities. Mr. Ballough concedes the FAA isn't present "for the turning of every wrench," but says "there certainly is no degradation of safety due to outsourcing."

Decades ago, airlines hired unionized employee mechanics to do most maintenance work. The jobs usually required each employee to have an FAA "airframe and power plant" license, and they paid well. Top airline technicians today can command as much as $37 an hour plus benefits. In the 1980s, U.S. airlines began sending engines for overhauls to the companies that built them, such as General Electric Co. and Rolls-Royce. Then they began seeking specialists to repair specific equipment such as landing gear and cockpit avionics.

The latest push involves outsourcing heavy inspections including those that take a few days and others, lasting as long as a month, in which planes are torn apart, inspected for cracks and wear, and then rebuilt. JetBlue's A320s go through checks every 15 months or 5,000 flight hours; the fourth check in this regimen, after 60 months, is a partial teardown and the eighth check is a big teardown. In these procedures, 65% to 80% of the total cost is labor, according to airlines and overhaul specialists.

Low-cost carriers such as Southwest Airlines and freight carriers such as FedEx Corp. have always outsourced most maintenance, but now older carriers are feeling pressure to follow suit. Even after extracting concessions from unions, the largest old-line U.S. carriers still have labor costs of $65 to $70 per employee-hour including supervisors and counting wages and benefits, according to Team SAI, a consulting firm in Lakewood, Colo. Outside shops in North America, Europe and Asia command only $40 to $50 an hour, while Latin American shops charge as little as $20 to $26.

One recent day in San Salvador, 29-year-old Oswaldo Colorado was underneath the wing of a JetBlue plane, lubricating parts for his employer, Aeroman. Aeroman is the maintenance subsidiary of Grupo Taca, a consortium of Central American carriers based in San Salvador. JetBlue started sending some of its planes to El Salvador last year. Mr. Colorado, a 10-year veteran of Aeroman, calls it "a beautiful place to work."

Aeroman was founded in 1983 and started performing third-party work in the mid-1990s. It has about 1,200 workers. Mechanics come from local technical colleges and the military, submit to lie-detector, drug and alcohol tests, and spend five to six months doing classroom work, then an equal amount of time as apprentices.

The individual mechanics have licenses from the Salvadoran aviation authority. They aren't required to have an FAA license, but Aeroman pays for airfare and hotels for employees who choose to go to Miami to take the FAA exam, which is given only in English. They get a raise if they pass, and Aeroman says 30% to 40% of its technicians have these licenses.

Ranks of Inspectors

The Aeroman hangar was inspected 12 times last year by the FAA's Miami office, four times in 2003 and twice in 2002, the FAA says. Mr. Ballough says the facility also is scrutinized by other FAA inspectors assigned to JetBlue, the airline's own quality-assurance people, and the local aviation authority. Tom Anderson, JetBlue's senior vice president of technical operations and aircraft maintenance, says the facility also is examined by European regulators because it services European planes. "One could argue that the level of regulatory oversight they're getting is vastly superior to what they'd get on U.S. soil," he says.

Andrés F. García, Aeroman's commercial director, says the FAA checks are rigorous. "They say, 'What's that piece of paper doing there?' " he says, pointing to a candy wrapper on the shop floor that he jogs over to pick up.

Mechanics at Aeroman start at $300 a month and earn as much as $1,000 a month -- a good salary in a country where per capita income is around $2,200 a year. Workers also receive pensions, private health insurance, and free airline tickets.

Aeroman recently won a contract from America West, which has overhauled its maintenance practices after being cited by the FAA for deficiencies in the late 1990s and 2000. The airline thinks outsourcing makes sense. "It's very difficult for a small airline to get the volume to do [all maintenance] in-house," says Hal Heule, America West's senior vice president for technical operations. Outsourcing, he says, gives "a great deal of flexibility, particularly when you're growing. And it works when you're downsizing, too, because you don't have to have layoffs."

In the late 1980s, General Electric, which produces about 35% of the world's large commercial jet engines, had just three domestic shops that did engine-overhaul work for airlines. Today it has 17 facilities, half of them overseas in places like Brazil, Malaysia and Hungary. Revenues from spare engines, parts and maintenance, which stood at $3 billion a year in 1997, hit $5 billion in 2001 and, after an industry slump, are rising again, says Bill Fitzgerald, vice president of global operations for GE Aircraft Engine Services.

UAL Corp.'s United Airlines, parked in bankruptcy-court protection for more than two years, won union assent to close two heavy-maintenance bases and outsource as much work as it wants to outside vendors. Currently, planes needing heavy checkups go to Timco Aviation Services Inc., Greensboro, N.C., and ST Mobile Aerospace Engineering Inc., Mobile, Ala. In a new contract being voted on by its shrinking mechanics union, United is seeking permission to send some already-outsourced work overseas.

Greg Hall, senior vice president of the carrier's maintenance division, says United has found the outsiders' workmanship to be good. "We give them a lot of oversight," he says. "We give them training on our maintenance program and our tooling. We do frequent audits."

Northwest Airlines, also mired in losses, is bumping up against the maximum amount of work it can outsource under its contract with its mechanics. Northwest has been getting some DC-10s and 747s overhauled in Singapore, while farming out other 747 checkups to a Hong Kong servicer.

Some airlines admit to concern about turnover at contractors. Continental Airlines, which farms out about 60% of its maintenance work excluding line maintenance at airports, says it pulled out of some third-party sites in the 1990s because of high turnover. Southwest, which has an excellent safety record, has done the same on occasion. "We don't want transient labor on our aircraft," says Jim Sokel, Southwest's vice president of maintenance and engineering.

AMR Corp.'s American Airlines outsources only 20% of its maintenance. It keeps all of its heavy airframe checks in-house, says spokesman John Hotard, because it has "much more control over the whole repair process" and "a well-trained, seasoned work force." Still, to vie with competitors getting the work done for less, he says, American is working with its mechanics union to reduce costs.

Given that many vendors don't require FAA licenses and don't pay as much as the airlines, they are getting "warm bodies coming in off the street," says Brian Finnegan, president of the Professional Aviation Maintenance Association, a trade group that gets some support from mechanics' unions. "I don't take exception with the idea of outsourcing. I just want those people to be well-trained and supervised," says Mr. Finnegan.

Philip Anson Jr., president of STS Services, a Jensen Beach, Fla., company that places mechanics in maintenance jobs around the country, says outside vendors with which he is familiar generally pay up to $20 an hour.

Laid-off airline technicians are showing little appetite for the new jobs being created in their field. "We've lost a lot of guys to building maintenance and the police department," says Richard Turk, a United mechanic and union spokesman in San Francisco. "Most are smart enough to stay out of the airline business."

"The industry is losing its skills," says John Goglia, a former mechanic who recently stepped down after nine years as a member of the National Transportation Safety Board.

Jennifer Biddle, a mechanic at United's sprawling San Francisco maintenance base, was laid off in 2003 after eight years. She found a similar job in Oakland, Calif., for Alaska Airlines, only to lose that last September when Alaska shuttered its facility. Ms. Biddle, 39 years old, was a relatively junior mechanic although she held an FAA license gained after two years of schooling. She earned $63,000 a year at United before she was laid off.

She now works for a company that repairs laboratory equipment for the pharmaceutical and biotechnology industries, earning 30% less than she did at United. "I love airplanes," she says. "I wish I was still working on airplanes."

---- Melanie Trottman and Evan Perez contributed to this article.

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