Aircraft Maintenance in Australia: Issues and Prospects

Aircraft Maintenance in Australia: Issues and Prospects

Ian Hampson[1], Doug Fraser, Anne Junor, Michael Quinlan,

and Sarah Gregson

Industrial Relations Research Centre, and

Australian School of Business,

University of New South Wales,

International Labour Process Conference, London, 7-9 April, 2014.

ABSTRACT

This paper reports some preliminary results of an Australian Research Council funded Linkage project into the Future of Aircraft Maintenance in Australia. Offshoring by the main carrier, Qantas, from 2006, raised questions about safety and the future of the industry, a future which will be shaped by political, industrial and ideological struggles, and to which the development of workforce capability and the organisation of the labour process is central. There are two sets of concerns our research has highlighted that we will discuss here.

First, in a Senate inquiry in 2007, the Australian Licensed Aircraft Maintenance Engineers Association (ALAEA) argued that offshoring raises concerns about the safety of maintenance performed in overseas Maintenance and Repair Organisations (MROs). Australian airlines have been slow by international standards to go down the offshoring route. The US is a good comparator, because of the availability of information and because there has been a robust debate about offshoring – in contrast to Australia. Also in the US the regulator (FAA) is exposed to much greater scrutiny by other public agencies than is CASA in Australia. In the US, until 2012, the regulator was effectively able to ‘wash its hands’ of accountability for the quality of maintenance in ‘uncertificated’ (that is, unapproved and obviously uninspected) shops. Recent regulatory changes have closed off this loophole, and offshored shops will be required to be certificated, and inspected annually. As well as improving safety and compliance, this measure could potentially remove some of the cost advantages that offshoring enjoys – particularly if, as proposed by some activists, the costs of inspection are forced on the airlines, rather than externalized to the taxpayer. We explore the question of whether there is scope in Australia for learning from the US experience, and whether tightening regulatory oversight of offshore MROs, and sheeting the cost to the airlines, may be part of the solution to bringing some maintenance back to the country. That is, regulatory insistence on ‘safety’ can be a kind of industry policy – and one that sidesteps the usual ideological constraints on the latter.

Second, industry policy and the development of workforce capability are linked. In both spheres, the trend has been towards more market-based policies. We document the collapse in the training of L/AMEs. This is serious because of a looming global shortfall of licensed personnel and skills, which is projected by the International Air Transport Association (IATA), and the International Civil Aviation Organisation (ICAO). How national training systems meet this shortfall will be a major determinant of the future of the industry. We touch on the debate over industry policy, where although there is a strong ideological preference for market-based ‘solutions’, there are exceptions made for certain industries, and certain State governments have endeavoured to support the MRO industry. Federal government leadership could help preserve and develop the industry.

This paper is a sequel to one delivered by Sarah Gregson to last year’s ILPC on our current research project on the labour market for aircraft maintenance engineers (AMEs) in Australia. While it still has the status of preliminary results, it presents an update on the findings that are emerging as we approach our final reporting date in July.

The earlier paper centred on the important but technical issues that came out of reforms to the licensing system for aircraft maintenance. This onecovers the broader set of issues created by the offshoring of a growing part of this work, and in particular the looming global shortage of skilled personnel which threatens not only the offshoring model, but the safety of air travel throughout the world for the next 20 years. We also look at the way these issues – always inherently political – have become intensely politicised, even incendiary, in the period since last year's change of national government, and how that has affected our research task.

1.Background and history

There are two key players in this drama: Qantas, the "national" airline, and the Australian Licensed Aircraft Engineers Association or ALAEA, the union which represents licensed aircraft maintenance engineers (hereafter referred to as LAMEs). It should be noted that these two do not account for the full story by themselves: Qantas now has one securely established competitor in the domestic market, Virgin Australia, which is majority-owned by Etihad, Singapore Airlines and Air New Zealand with only a residual holding from the Virgin group, and runs a horizontally integrated operation of roughly equal proportions, with each major airline owning a full-service, a budget and a regional brand, while Qantas has at least half a dozen other unions, of which three are also our partners in this project. However, these two organisations have emerged as the clear protagonists in the public debate over the last two years on the future of the Australian industry.

Qantas is the last survivor of the three airlines which effectively monopolised Australian aviation from the immediate post-World War 2 period through to the 1990s. From around 1950 onwards, passenger services on the main air routes between Australian capitals were run as a regulated duopoly involving a government-owned airline (TAA, later Australian Airlines) and a private one, Ansett. This was essentially a politically convenient compromise, rather than the result of any objective analysis of the most appropriate industry structure to serve the market as it then was. In hindsight, it is perfectly clear that the size of the market in that period could never have supported more than two competitors; in many nations with much larger populations, the sector remained a monopoly until well into the 60s. Even the survival of two competitors was precarious, so the duopoly needed to be heavily regulated to ensure that neither player competed sufficiently hard to pose a serious threat to the other.

At the same time, a single airline, the original Qantas, which had started out in private ownership before the war but was now government-owned, held a monopoly of flights in and out of Australia, originally in close cooperation with BOAC (later British Airways) with whom it had shared the Imperial air service to London since the days of the Empire flying boats in the 1930s. This too was rational in the economic circumstances of the time, since the 50s were a period when virtually every country felt the need for its own flag-carrier airline as the only reliable means of ensuring that it got the level of international services it required, and the size of the world market at the time meant that only the biggest and richest nations could hope to survive in that market with more than a single national airline.

While far from efficient by today's standards, and arguably not even the most efficient arrangement that could have been followed at the time, this framework provided the important advantage of stability and long planning horizons. This made it possible for the three major airlines to build up state-of-the-art fleets and a structure of maintenance shops at or close to best world standards. Being at ‘the end of the line’ geographically meant that Qantas engineering ‘had to fix things itself’, and developed a very high level of technical excellence, evident for example when industry leaders like Rolls-Royce drew on innovations generated on the engine repair line in Sydney (eventually closed down in 2006). In the process they became major contributors to the development of apprenticeship in aircraft engineering, especially once the occupation had emerged as an independent trade towards the end of the 1950s. Increasingly as time went on, this meant that most people who worked as maintenance engineers in Australia had done their training either in the defence services or in the shops of one of the three major airlines.

As might be expected, the regulated system on both the domestic and international fronts came under growing pressure as air travel drew closer to becoming a mass-market commodity. The international segment was progressively opened up to foreign competition from the 60s onwards, though still under legislation which strictly controlled access, and which remains in force today much as it was then. The domestic duopoly, though coming under increasing criticism (especially over the practice of both airlines running their services between each destination pair at exactly the same time), generally continued to provide a level of service that satisfied the needs of the travelling public. It was only towards the end of the 80s that the regulation which supported it began to be broken up, and only in the mid-90s that it finally became effectively possible for new entrants to come into the market on the major intercapital routes. Meanwhile Qantas and TAA were amalgamated in the late 80s, and the combined entity was privatised in stages from 1992 onwards.

Despite this nominal freeing-up, the market appeared to preserve the characteristics of a natural duopoly, with the result that it became next to impossible for a third player to establish itself for longer than a couple of years at a time in the face of predatory behaviour, and ultimately takeover, by one or anotherof the two incumbents. This was effectively the situation up to the start of this century, when the industry moved abruptly into a new phase.

At the end of 2001, Ansett went out of business. This development was unexpected and came at the end of a succession of unwise commercial decisions coinciding withthe collapse in demand for air travel that followed the 9/11 disaster. One of the immediate casualties was its apprentice program, leaving Qantas as virtually the only large civilian training provider. The other was Ansett's maintenance workshops. Some of these facilities were taken up by Qantas, but the demand was never fully restored, since the new competitors who came into the market over the next few years to fill the gap (including one created by Qantas outside its articles of association) were built on the budget or low-cost carrier (LCC) model, which normally does not involve the carrier owning its own workshops.

The outcome was that Qantas, or at least that part of it which continued to trade under its original business identity, became for some years both the only customer and the only provider in key areas of Australian MRO. To a large extent this remains the situation today, leaving Australia highly dependent on Qantas both for its high-end civilian MRO infrastructure, and for its supply of AMEs with the skills required to service current-generation large passenger aircraft. This largely explains why its activities in this field are considered a matter of public concern rather than a purely internal affair of the company.

It will be apparent to anyone with even a slight knowledge of economics that it is undesirable for an entire industry segment to depend to this extent on the strategies and success of a single company, since even a business strategy which effectively maximises the utility of the dominant company does not necessarily work to the benefit of the industry as a whole. If this is true even when that strategy is effective, it is all the more so when the dominant company fails to maximise its own utility.

Qantas’s poor commercial performance over the last 2-3 years is a matter of considerable public controversy, which it is beyond the scope of this paper to cover in any detail. Regardless of the reasons, Qantas has gone in the space of a couple of years from reporting strong growth in a domestic market that ensured a high measure of de-facto protection from its natural duopoly characteristics, to a pre-tax loss of over $300 million for the first half of 2013-14, accompanied by the loss of its investment-grade credit rating at the start of this year. It responded with an immediate plan for $2 billion worth of cost reductions, including a reduction in employment of 5000 jobs, equivalent to about 15% of its workforce. While represented in public as an unexpected crisis, this cost reduction strategy is partly a continuation of a process which has been in progress, albeit on a lesser scale, since at least as far back as 2005.

Since its privatisation (and possibly for some time before), Qantas has followed the lead of other corporations in the 90s by running through the managerial fashions of the period, including the mantra of ‘shareholder value’ and the McKinsey model which involved restructuring large integrated enterprises for accountability purposes into quasi-independent profit (or cost) centres. This model provided the rationale for successive waves of outsourcing. In the case of aircraft maintenance, this meant moving an ever larger proportion of the work offshore.

All this happened against the background of a growing global industry of third-party MRO. This originated soon after airline deregulation in the US in the 90s, but has expanded spectacularly in this century with the worldwide success of the budget carrier model (Tang and Elias, 2012). The current value of this industry was estimated in 2013 at $US65 billion a year (ARSA, 2013:3). A significant part is located in low-wage countries, relying primarily on low prices to draw in the price-driven segment of the international market (though there has been a tendency in the last few years for the industry to become a lot more differentiated, with an increasing number of plants in the old industrialised countries taking in specialised work from Third World airlines). According to a survey undertaken at the start of 2013 by an American consultancy, only 16% of airlines in a global sample (22% of North American airlines) reported offshoring their maintenance for reasons other than cost (Spafford and Rose, 2013:9).

The mainstay of this industry up to now has been heavy airframe maintenance – major periodic checks and overhauls which at their most ambitious (the D checks) amount practically to a rebuild, as the aircraft is stripped back to the bare metal looking for cracks and corrosion. This process is very labour-intensive - labour makes up an estimated 70% of total costs across the whole segment (ARSA, 2013:7),making it easy for a competitor in a low-wage country to undercut Australian prices substantially, especially as some of the operations in the major checks (e.g. stripping out seats and interior fittings, washing parts, removing paint and sealant) do not require especially skilled labour. As maintenance is a part of the service package which is invisible to the traveller unless seriously neglected, this has been an obvious first-line option for airlines facing pressure to reduce their cost base ever since the 1990s.

In the last two years, Qantas has accelerated its maintenance offshoring program, with the closure of several facilities and the loss of over 1000 jobs. Of the 5,000 jobs to be cut in response to its latest trading result, it is generally believed that about 1500 will come from maintenance, but at the time of writing Qantas has yet to disclose the exact number – not even to the unions with whom it is obliged by its industrial agreement to negotiate such staff reductions.

Returning to the ALAEA, the union has traditionally had a particular strategic importance to Qantas because of the prominent role its members play in ensuring aircraft safety.LAMEs differ from other maintenance engineers in that their licence entitles them to sign off on the satisfactory completion of maintenance, and perhaps more importantly to release the aircraft back into service once maintenance has been done. In a different kind of quality assurance scheme, this role might belong either to a government-appointed inspector, or to a quality controller employed by and accountable to the enterprise concerned. In the case of aircraft maintenance, the LAME, while employed by the airline or maintenance provider, effectively exercises a devolved role of inspector on behalf of the state. This has been the accepted way of assuring the safety of aircraft maintenance ever since the Chicago convention was signed in 1946 – in other words, the arrangement is grounded in international law, enforced by each state through what is in effect delegated legislation.

Thus LAMEs, besides exercising one of the highest levels of specialist skill in the blue-collar workforce, enjoy additional delegated state authority which in the letter of the law at least, can override the authority of their employer in the event of conflict. In both senses, they represent the kind of "labour aristocracy" described by Lazonick and O'Sullivan (1994:16), in effect exercising a kind of managerial prerogative which management is unable, or in this case legally unqualified, to exercise in its own right. The ALAEA thus represents a classic craft union (Haas, 2008: 605), and at times in the past has been resented by the other unions for its perceived closeness to management.