A Practical Guide to Aircraft Engine RPFH Agreements

For the ever-evolving aviation industry, the traditional time and material–based contracts between airlines and original equipment manufacturers (OEMs) for the maintenance of aircraft engines may not always be the most practical for aligning the parties’ interests. Recognizing the need for a different type of arrangement, the rate per flight hour (RPFH) agreement was born. Below we discuss the proliferation of these agreements, current RPFH offerings, and lessor and airline considerations.

Historically, airlines would acquire aircraft engines as part of an aircraft purchase package and then negotiate separate maintenance contracts to support the repair and overhaul shop visits of the engines. Such contracts were typically on a time and material (T&M) basis, meaning the time (labour costs) and materials (parts costs) were invoiced following the shop visit.

While these contracts were developed to include various pricing mechanisms such as fixed pricing, standard task and labour pricing, and ‘not-to-exceed’ pricing, the structure has the ability to create a misalignment between the parties. If engines are unreliable and shop visits are expensive, the aircraft engine OEMs would benefit while the airline customers would suffer higher costs.

There could therefore be a reduced incentive for OEMs to make reliable engine products or institute cost reductions to shop visits and engine parts pricing. As such, a requirement arose to introduce a different type of arrangement wherein the needs of both the airline and the OEM could be aligned, i.e., when an engine is working (the aircraft is flying) and generating airline revenue, the OEM would also benefit, but when the engine is not working and airline revenue is reduced, the OEM revenue is also reduced.

In the 1960s, Rolls-Royce (RR) developed an engine support service through which engines were maintained or replaced for a fixed rate per flying hour—coined ‘Power by the Hour’ (an RR trademark)—and the rate per flight hour (RPFH) agreement was born.

THE AIRLINE PERSPECTIVE

Under this type of arrangement, the needs of the airline and the OEM are closely aligned, driving better behaviours from the OEM who is rewarded when engines are performing reliably in service and generating revenue for the airline. Another benefit for the airline is a more predictable cost of operating the engine through its lifecycle and therefore improved budgeting and forecasting of costs due to smoothing out the significant cost spikes associated with paying for shop visits on a T&M basis.

These cost spikes can take place when shop visits occur in quick succession due to various factors, including closely clustered aircraft deliveries where multiple engines could require shop visits at a similar time and then such engines will likely not need subsequent shop visits for several years.

Additionally, as the design of new engines constantly develops due to competition between OEMs and the need to meet the evolving requirements of performance, cost, weight, fuel burn, noise and emissions, highly complex designs with new technologies and exotic materials are being incorporated into the design of aircraft engines.

When a new engine type is launched, these new technologies may not have been fully validated in revenue service, and as such the reliability will be somewhat uncertain and there could be an increased risk of early engine faults and failures. Further, for new engine types there will likely be no other option for engine repairs and shop visits than using the OEM facilities. RPFH agreements are attractive in these scenarios, as the OEM will effectively share the risk of the new technology reliability with the airline.

For recently launched engine types there has been increasing take-up of RPFH agreements with the OEMs, and for certain engine types 100% of airline customers have signed up for OEM RPFH agreements.

While the main providers of engine RPFH agreements are the engine OEMs, these arrangements can also be provided by third-party suppliers, especially independent (non-OEM) Maintenance, Repair, and Operations (MROs) that offer RPFH agreements, particularly for popular mature engine types such as the CFM56 and V2500 engine families.

The RPFH structure has been used by OEMs and MROs in recent years to develop similar agreements that cover auxiliary power units (APUs), landing gear, airframes, and spare parts.

OEM OFFERINGS: THE DETAILS

Rolls-Royce

RR’s RPFH offering is termed TotalCare and is split into three different products:

• TotalCare Life: A defined RPFH is paid by the airline and covers the engine for shop visits (repair or overhaul) during the time the engine is operated by the airline (e.g., for 12 years from the entry into service of the first engine) with no fixed expiry date. This product is portable to the next airline operator if the engine is sold (resulting in higher engine value) and can also be of benefit to a lessor (see Lessor Considerations below).
• TotalCare Term: Payments are made for a fixed term at a lower RPFH which only funds the expected shop visits during that defined term. TotalCare Term is not portable to future airline operators and is not compatible with full LessorCare.
• TotalCare Flex: Here, the airline specifies a set period and flying hours which it expects the engine to operate for, and flexible services are utilised to meet that goal. Full overhauls can be offered to maximise the engine time-on-wing or a partial overhaul to allow the engine to operate until the retirement date, or the engine can be exchanged for another engine with adequate life remaining, known as a ‘green time’ engine. TotalCare Flex is portable between both airlines and owners.

RR also offers SelectCare as an alternative to TotalCare, which combines fixed-price engine refurbishments with an RPFH agreement covering unexpected repair shop visits.

General Electric

General Electric’s (GE’s) offering TrueChoice is marketed as a service that is unique and tailored specifically to each airline’s requirements with flexible risk transfer and payment options. TrueChoice broadly segments into similar offerings as RR TotalCare provides:

• TrueChoice Flight Hour Plus: A full-service RPFH to cover the full lifetime of the engine, which provides lessor benefits including cash access.
• TrueChoice Flight Hour: A term-based product with reduced lessor benefits available.
• TrueChoice Transitions: A highly tailored product for shorter-term ownership, which includes engine exchanges, module exchanges, and green time engine leasing.

GE also offers TrueChoice Overhaul which offers customised fixed-price agreements tailored to individual engine and airline requirements.

CFM

CFM (having GE as a parent company) typically follows the GE offering in respect of RPFH agreements and provides similar exclusive, comprehensive service and support agreements with flexible term, coverage, and payment options, termed ‘Flight Hour Agreements.’

More basic agreements are offered under ‘Overhaul Programmes,’ which are event-based overhaul services covering an entire engine fleet or a single event, with various pricing options and allowing customer control of materials and workscopes.

Pratt & Whitney

Pratt & Whitney’s (P&W’s) RPFH offering is termed EngineWise and is again segmented into different offerings:

• EngineWise Comprehensive: A customized, comprehensive RPFH, also termed ‘Fleet Management Program’ by P&W, with additional tailored services to optimize cost of ownership over the lifecycle of an engine, which can be based on the full engine lifetime or a fixed term.
• EngineWise Fixed: A fixed-price service allowing predictability and flexibility of costs.
• EngineWise Primary: A highly flexible product that can be tailored to specific airline customer needs.

Comparison

The table below summarises the various OEM offerings:

LESSOR CONSIDERATIONS

As a significant share of the worldwide aircraft fleet is leased, various structures have been developed to allow lessors to benefit from RPFH engine shop visit services or access RPFH cash balances following certain events. Additionally, depending on the particular lease provisions and the RPFH structure in place, an airline lessee may be able to avoid paying engine maintenance reserves to the lessor if lessor access to RPFH credits or funds is available.

LessorCare is the RR framework agreement for lessors that enables access to various RR services including ‘off-wing’ engine overhaul shop visits, ‘on-wing’ repairs and technical support, aircraft transition support, and access to spare engines.

LessorCare can include LifeKey agreements (replacing RR’s previous OPERA offering), which gives the lessor access to RPFH credits or payments. Following a trigger event (e.g., lease expiry or termination, aircraft repossession, TotalCare expiry or termination) and depending on the next use of the engine, the LifeKey agreement provides a credit towards the next shop visit or pays cash to the lessor, both based upon the amount of TotalCare payments made by the lessee.

In addition, the Engine Life Limited Parts Replacement Agreement (ELLPRA) performs similarly to the LifeKey agreement but provides a credit towards necessary replacement life-limited parts following a trigger event.

The other engine OEMs offer similar structures and coverage, such as GE’s offering for lessors TrueChoice Lessor Contract and CFM’s offering Portable Maintenance for Lessors.