Delta Maintenance is Actually Growing and Profitable

Many of you know that I’ll be going on vacation next week, but I thought I would squeeze in one more Delta post today. Next Tuesday through Friday, I’ll have guests posts ready for you and then we’ll get back to Delta again the following week.

Today, let’s start with the mammoth Delta TechOps maintenance facility. With 63 acres, this place now serves 150 airlines worldwide. My question was simple. How could an airline which outsources some maintenance to other countries create a growing, profitable maintenance business inside the US as well? The answer actually makes a lot of sense.

I first met with Tony Charaf, President of Delta TechOps. Tony told me how the Northwest merger had brought the airline the capability to work on Airbus aircraft, and that meant Delta could now service most of the world’s fleet. While Northwest had worked to outsource nearly all its maintenance, Delta has gone the other way and has built a strong business. But how does that work when it’s generally so much cheaper for other airlines to outsource to  countries with lower labor costs? This requires a deeper view of what is actually involved in maintenance. Delta has decided to build a highly-skilled technical workforce that focuses on the more complex and niche-market tasks.

I was taken through the maze that makes up the airline’s engine shop. Delta mechanics overhaul around 600 engines per year. I saw a very active shop working on all kinds of different engines from airlines around the world. For this kind of maintenance, Delta does nearly all of the work on its own fleet in-house. What doesn’t it do? Some engines are on such a small fleet that it makes little sense to do it themselves. For example, Delta doesn’t do the engines that power its small 767-400 fleet.

Why not just do the work on a small fleet as well? It’s incredibly expensive. And that’s one reason Delta’s in this business at all. Starting an engine shop requires a very serious amount of capital, a high barrier-to-entry that makes the business even more attractive for existing organizations. But even some engines don’t make sense.

On my tour, I was handed a small piece of metal to review. It looked like junk, but it alone was worth about $20,000. Like I said, a lot of money is required and a very skilled workforce is as well. Because of these things, the engine business actually has a much larger margin than the airframe business. It’s some of that airframe business that Delta does outsource for its own fleet.

Maybe I should back up and explain what an airframe business is. Airplanes are required to go through certain checks during their lives. You check for problems that might be lurking under the surface, like corrosion. The heavier checks can take a couple weeks, but these are not nearly as skilled as the engine work, so Tony explained that Delta outsources some of that to make room for additional high-margin engine work.

I asked why Tony wouldn’t just do it all in-house. Why not grow the business further? The airframe margins are apparently razor-thin and it’s too hard for Delta to compete with places that have lower labor costs. The lower barriers to entry mean it’s just not a great business for Delta.

But Delta does do some airframe work, and it focuses on specialized work there as well. For example, while I was there I saw a LAN 767 getting retro-fitted with winglets. Delta has so much experience doing that work that it can do it very quickly compared to others who haven’t done as many. And while the airplane is there, Delta can do regular airframe checks as well. You’ll also see Delta doing specialized work on things like the landing gear and auxiliary power units.

Delta even has some reciprocal agreements. Aeromexico, for instance, will do some airframe work on Delta’s fleet while Delta does the engine work for Aeromexico. It’s a strategy that has been working.

The result is, as mentioned, 150 customers around the world. And that’s just the beginning. Tony said that beyond Atlanta, Delta expects its maintenance facility in Minneapolis to get governmental approval to do work for other carriers by the end of the this year. Detroit will follow in 2011.

This strategy, now working, has taken some time to refine. The IT integration was critical and took up a great deal of time. Now that the dust has settled and the business is growing and profitable, things are humming along.

Tony explained that success can be described this way.

We have succeeded in this organization by taking our strategy on the second floor [the offices] and building buy-in on the first floor [the shop floor].

It sounds like management fluff, right? But it is true. And it’s also pretty easy to achieve when you have a growing, profitable business that pays good wages. Then everyone’s happy. So for now, things are working out quite nicely.