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.
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.
Rolls-Royce
RR’s RPFH offering is termed TotalCare and is split into three different products:
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:
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:
Comparison
The table below summarises the various OEM offerings:
|
Full Engine Lifecycle |
Fixed Term |
Flexible/End of Life |
Rolls-Royce
|
TotalCare Life |
TotalCare Term |
TotalCare Flex/SelectCare |
General Electric
|
TrueChoice Flight Hour Plus |
TrueChoice Flight Hour |
TrueChoice Transitions/TrueChoice Overhaul |
CFM
|
Flight Hour Agreement |
Flight Hour Agreement |
Overhaul Programmes |
Pratt & Whitney
|
EngineWise Comprehensive |
EngineWise Comprehensive |
EngineWise Fixed/Primary |
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.
If you have any questions or would like more information on the issues discussed in this Insight, please contact any of the following: