‘Vertical’ Contracts: The New Silver Bullet for Military MRO?
(Source: special to Defense-Aerospace.com; posted May 11, 2022)

By Tim Maxwell
(Graphic by author)
PARIS --- On April 25, Safran Helicopter Engines and the French Military Aerospace Maintenance Agency (DMAé for Direction de la Maintenance Aéronautique) renewed a 10-years contract to maintain the French government's helicopter engines. The contract covers MRO (maintenance, repair and overhaul) services and the availability of no less than 1,500 engines.

It is consistent with the current strategy to ‘verticalize’ contracts, i.e. making one contractor responsible for different systems or subsystems, as Safran increases its responsibility. Under the new contract, the scope of services will be expanded to include the use of engine data and digital services to simplify day-to-day maintenance operations.

This is just the latest example of a trending management approach in France (and in other countries), with at least 19 similar contracts signed since 2019: Fennec helicopters, Rafale airframe, A400M transport aircraft, Tiger helicopters, Maritime Patrol aircraft, NH-90 optronics equipment, Rafale engines… And other contracts expected for Gazelle helicopters fleet as well as Alphajet advanced training aircraft…

The aim is to have a unique manager for each fleet or system, with a single point of contact for logistics. In addition, the average duration of contracts has been extended (up to 14 years for the French Air Force Mirage 2000 fleet). "The manufacturer has all the levers in hand. It has the visibility, the duration, it has the whole chain under its responsibility. It can plan, recruit, invest, innovate, and anticipate technical obsolescence. He has an incentive remuneration which is mainly based on the number of flying hours available”, according to a French DMAé official in charge.

Those contracts make generally the manufacturer responsible for the entire fleet and versions, including mid-life updates, and the objective is to reduce costs over the entire life cycle, by transferring performance responsibility to the contractor. A contractual strategy that was beginning to bear fruit with a small increase of the operational readiness.

In France the “verticalization” process was progressively implemented, starting in 2018 which explains budgetary peaks for MRO in 2019 and 2020, culminating in 2021, up to a total of €16.4bn over 3 years - due to the extended contracts period up to 10 to 15 years.

Everyone is “very confident” that this contracting formula will bring benefits for the taxpayer, but it is still difficult to have a clear view of the actual savings. It terms of combat readiness, most figures are classified, but officials say that “the trend is encouraging”… In 2020, one figure was given: A400M availability was higher by 50% between 2019 and 2020. Rafale availability is also going in the same direction (previously, Rafale MCO was managed by no less than 22 separate contracts!).

Government and military officials say they are “satisfied”, but remain very cautious when it comes to giving actual figures, and say it is too early to tell. Average availability gain targets are between 5% and 10%, sometimes more depending on the platform, but a first global assessment is not expected before 2023. Private sector share of MCO contracts for land systems hiked from 27 % in 2017 to 38.8 % in 2020 with the aim to reach 40 % in 2024.

For helicopters, Armed Forces Minister Florence Parly said that for the Tiger helicopter, for example, France gained 9 availability points compared to 2020, which means we have three more helicopters available, and 15 points for the NH90, so we have nine helicopters available. For the Dauphin, the Navy’s target is to gain 20% in availability, and the Army’s target for the Fennec is close to 50%...

However, such contracts, presented as the ultimate answer to limit costs and improve equipment availability, also raise many questions.

1. Such a move radically transforms the relationship between end-users and maintainers, the work sharing for each level of responsibility between private actors or public ones. With an optimization path between maintenance, technical and logistical operations made by military maintainers or state actors (as, for French system, the SIAé - Aeronautical Industrial Service or Service Industriel de l'Aéronautique), and operations performed by private players. It includes a certain degree of dependence on manufacturers who set the pace.

The guarantee of the performance will be totally shifted to them, even though some of them were already struggling to meet their obligations. On the other hand, it seems essential that the armed forces continue to be able to carry out (at least basic) interventions, taking into account the security challenges linked to sending civilian personnel on operations, particularly near combat zones.

Such operations necessarily rely on a specialized, trained personnel, who offers incomparable advantages linked to military status: instant availability, employment flexibility, risk acceptance, as well adaptation skills acquired through instruction and training…

2. The management of such more and more complex contracts (with more and more data processed, management of Health and Usage Monitoring Systems, management of collection and analysis phases, transfer times between two contracts…) will lead to a reduction in the number of stakeholders able to respond to tenders, leading to rent or monopoly situations to be taken into account to avoid unchallenged (and unchallengeable) cost overruns (due to the increase of the complexity).

Especially if public players - having outsourced certain capacities and lost skills - are no longer able to challenge the commercial offers (with in-house skills). For military users, operational availability remains the number 1 parameter, and their bargaining power might be eroded.

The management of the end of life of the (sometimes aged) fleets, which are less profitable (with more and more operations), will also be a challenge if private players are no longer interested, or without sufficient stocks of spare parts, technical skills maintained or transferred to dedicated operators…

3. The resilience of the global service system is also a point of attention, as contracts will be captured by an ever-decreasing number of players (in particular aircraft / helicopters manufacturers, who have the global knowledge of the devices).

The difficulties experienced by a single actor could have significant repercussions on the whole, with increasingly limited competition. The Covid-19 crisis reminded us that the size of the market offered only limited margins for maneuver, with tensions on the availability of certain spare parts if production lines stopped. Even for first-rate maintenance companies, not always allured by a notoriously constrained military market, but more interested in fleets often derived from civilian sources: training platforms, strategic transport, government aircraft…

4. Any contractual relationship dominated by one single actor makes it more difficult for users to interact with the entire chain of suppliers (in particular Tier 2 or 3), who are the guarantors of product quality (including sub-systems and equipment).

With the necessity to share with all players (including risk and margins) and not a premium to the main prime contractors. The development of collaborative networks bringing together all the suppliers are still very important to ensure quality, perform equipment upgrades and anticipate innovation for future systems. Co-contracting can be a solution to mitigate such risks, as well as to avoid dependency on non-national industries.

5. Such outsourcing contracts should not overlook other levers for improvement: digital transformation and common data systems, airworthiness regulations, innovation with 3D printing, virtual reality and remote maintenance, consideration of support requirements at the design stage, predictive maintenance and digital twins, human resources skills, measures for retention and to limit HR shortages…

At the end of the day, the overall MRO performance depends on the good coordination among all parties involved. It could be possible to eventually calculate, on a case-by-case basis, the global efficiency (additional costs and complex negotiations versus HR gains and performance) and to control costs of such transformation plan, even if it may appear in contradiction with high-intensity operations.

With its high degree of uncertainty and its logic of means, such a context imposes a very high degree of risk on the contractor. In that sense, engaging industrial players in long-term initial support is also a solution to encourage them to design and deliver dependable systems with robust qualities in terms sustainability.

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