Aer Lingus supply base assessment and chain management

Aer Lingus

Assess Supply Base

The supply base is a function of the airport capacity, specifically the terminal and lanes leased specifically for the use of Aer Lingus jet and air plane usage in addition to the actual supply of jets/planes and the parts used to effectively repair and operate each unit. The supply base is assessed by assessing the supply chain for the airline. The supply chain is a function of all vendors that provide supply to Aer Lingus to maintain operational performance.

Functional capacity is the ability of the supply base to utilize full operating capacity to maximize profit through the efficient use of supply to drive performance. However, the supply base assessment can also be a method to pass-through costs. According to Chandler (2009), "Renaud recognizes that it's sometimes a matter of "sanding our folks out to suppliers to help them [avoid] costs." Mike Madsen couldn't agree more. "We're focused on reducing spend [and] reducing costs within our supply base" says Honeywell Aerospace's VP-Global Airlines Business. That means "partnering with our supply base to share some of the techniques we've developed, such as the Honeywell Operating System, so that they can become more efficient." (Chandler, 2009)

The Honeywell example of a complex supply base management system that contains more suppliers in earnest than does the supply base of Aer Lingus. The assessment of the supply base reveals Honeywell will experience more supply base risk than Aer Lingus due to the integrated nature of Honeywell's business and the multiple vendor supply chain the company relies. According to Aircraft Economics (2003), "Aer Lingus has concluded a deal with Airbus to supply a new European fleet. The refleeting exercise will mean the airline will operate a single fleet type for its European operation by the end of 2005 and add 15 new routes to its network by Summer 2005. The deal will also assist in the transformation of Aer Lingus to a low-fares airline. (Aircraft Economics, 2003)

The supply base assessment involves the inventory management and supply count in terms of units of supply, including aircraft and aircraft parts, such as engines and wings, etc. The cost per unit and the variable cost of operating the supply base per day as a function of monthly operating costs is the process of assessing the supply base. An additional example is provided by Aircraft Economics (2003), "Under the deal, Aer Lingus will acquire 17 A320 aircraft of which seven will be purchased outright and 10 will be leased from ILFC. The engine supplier for the new Airbus fleet is CFM." (Aircraft Economics, 2003)

Challenges of Supply Chain Management

As mentioned in the previous section, supply chain management is a vast and complex framework linking parts and necessary supplies to value proponents throughout the value chain. Value is created at every point along the supply chain to yield the final product, which is the supply modus required to generate income. According to Aircraft Economics, (2003), "Together with the six A321s and four A320s already in the fleet this will mean a total short-haul fleet of 27 Airbus aircraft. Options for a further 10 A320 aircraft are included in the deal. The move to a single aircraft type has been a key element in Aer Lingus's business strategy. It is hoped that it will bring significant cost-savings increased capacity and improved flexibility." (Aircraft Economics, 2003)

The management supply chain practices of Just in Time (JIT) and Total Quality Management (TQM) have been critical to firms that manage the supply chain through the manufacturing process. Firms either manage this process by directly managing the process of their suppliers or by administering these management techniques in their own manufacturing plants and factories to increase supply chain management accountability.

The challenges of managing the supply chain include ensuring that cost deviation is within a given variance. If variable costs have been controlled over the past 4 operating quarters to within 2 standard deviations of the mean, then the variance going forward will produce revenue estimates in-line with the operating standard deviation. Any increase in the variance will hurt operating profits as a function of supply chain mismanagement.

Managing multiple vendors is a cost prohibitive process when considering the cost to the managing firm for using in-house resources to track an operation that is not proprietary to the firm. Revenue is an outflow to ensure that the vendor is providing the necessary services to correlate with the necessary revenue numbers assigned to that particular supply chain process. According to Mangan & Martin (2005), "A key feature of the current business environment is the idea that supply chains compete, not companies (Christopher, 1992). Managing supply chains effectively is a complex and challenging task, as a result of the continuing trends of expanding product variety, short product life cycles, increased outsourcing, globalization of businesses, and continuous advances in information technology (Lee, 2002). In recent years supply chain management (SCM) has grown in acceptance." (Mangan, Martin, 2005)

Additionally, according to Mangan & Martin (2005), "... The area that was once considered to be only of minor concern to managers is now at the forefront of business planning. The discipline that had a difficult time getting the attention of senior managers in firms now has representatives in the top echelons of most organisations (Lancioni, 2000)." (Mangan & Martin, 2005) The importance of managing the supply chain is of increasing importance in times of rising inflation and lowered GDP forecasts. The PPI is a supply side indicator of rising prices, should the indicator continue to rise faster and at greater percentages than the CPI, the value derived from the complex challenge of managing the supply chain is expected to be exponential.

Environmental, Ethical, Corporate, & Social Responsibility in Assessment Process

The roles of these aforementioned ostensibly, "Goodwill" related organizational activities represent value delivered through a non-value facilitated organizational responsibility. Some may ask how is that so? Recently, the relative importance of these business responsibilities have pervaded into society as perception of corporate image is not perceived by financial managers as major drivers of sales in today's more liberal global consumer market.

Consumers are now more knowledgeable of the inherent risk to indigenous cultures and developing world societies that are subjected to corporate development initiatives to mine and develop natural resources needed in the delivery process in supply chain management. Activities where supply chain vendors are supporting gangs or militia's or poisoning the water supply due to manufacturing supply chain parts are no longer esoteric knowledge reserved solely to the educated.

Aer Lingus is subject to these responsibilities as a function of operating within the social parameters of a global environment. Boycott is a term that is not used often, but is still in practice when consumers deem practices to be disingenuous or of moral and ethical concern. The manner of voicing dissatisfaction at the companies purporting atrocities of varies degrees and varieties is to refuse doing business with the organization and voicing their opinion to others via blogs and word-of-mouth.

According to Siobhan (2003), "An interesting example of a cluster-like structure can be found in Ireland in TEAM, the maintenance and overhaul subsidiary of Aer Lingus. TEAM was officially launched as a separate company in 1991, having previously been the Maintenance and Engineering Department of the national airline. TEAM has moved towards structuring tasks on a workgroup/team basis as well. The approach has been to place emphasis on focused responsibility at all levels, and to foster team spirit within each business and sport unit. For example, in the Aircraft Overhaul business unit, four teams have been created: 'widebody overhaul', 'narrow body new technology overhaul', 'narrow body mature overhaul' and 'cabin interiors'. TEAM Aer Lingus is, therefore, a prime example of an organisation which has moved from a bureaucratic hierarchical form of structure to one which is more cluster-like in nature." (Brown, 2011)

These cluster-like units are also better able to manage responsibility of managing supply chain practices and are increasingly likely to generate positive Goodwill in the form of generative positive Public Relations for Corporate and Social Responsibility. Mergers and Acquisition activity also falls into this genre.

According to A Change of Direction (2011), "Notwithstanding the arguably increased procedural burden for parties, it remains the case that the majority of merger cases are cleared unconditionally and it is extremely rare for the Commission to block a merger outright. The last such case was Ryanair's proposed acquisition of Aer Lingus, prohibited by the Commission in 2007. The airline sector is, however, one which has been profoundly affected by the financial crisis." (A Change of Direction, 2011)

The social responsibility with regard to environmental stewardship from companies that deliver travelling services is facing increasing consumer and activist concern. According to Gray (2011), "Ryanair (airline)... was typically blunt last week when dismissing calls for environmental taxes on the aviation industry as the 'usual horseshit', lambasting British Airways over the fuel efficiency of its fleet and asserting that he was far too busy building his business to join a carbon emissions trading scheme. O'Leary's forthright comments might lead one to believe that the only green concern he has is the livery of Aer Lingus, against which Ryanair recently launched a hostile takeover bid. But the climate change debate is gathering momentum and the impact of air travel on the planet is increasingly coming under the spotlight. (Gray, 2006)

Risks Arising from Procurement

In the case of Aer Lingus, the risk is ostensibly in the regulations that prevent procurement. The airline Ryanair did seek to purchase Aer Lingus in a hostile takeover bid for the competing Irish airline. The procurement of Aer Lingus by Ryanair is a method to consolidate the industry and obtain new routes and increase market share. However, the merger was blocked by a convening commission.

According to Onno, Goyder, Mes (2008), "To defend the merger, Ryanair had calculated that the efficiencies from combining the operations would amount to more than EUR 200 million per year, to be achieved by reducing the staff, reduce aircraft operational cost through its enhanced bargaining position, reducing maintenance costs by negotiating better contracts, obtaining better airport charges through negotiations, reducing ground operational cost and reducing distribution and advertising costs by shifting the sales model to a near 100% online sales model. In relation to the transfer of the aircraft delivery options to Aer Lingus the Commission also found that this is only the transfer of rent between the shareholders of Airbus or Boeing and the merged entity." (Onno, Goyder, Mes, 2008)

The risk of government intervention is inherent in the operations of oligopoly markets. Airlines and Telecommunications are prime examples of procurement risk to supply chain management. Such risk prevents companies that operate at the margin from potentially increasing revenue by increasing economies of scale and scope by procurement.

According to Doherty (1997), "Typical of AlliedSignal's niche deals is the rumoured $36 million purchase of an aircraft-maintenance company, Team Aer Lingus, a unit of Ireland's state-owned airline Aer Lingus Group. AlliedSignal's reliance on growth through acquisitions poses some risks" (Doherty, 1997) Risks associated with risk management and growth through acquisition is corollary to supply chain management risk as the acquisition assumes the inherent risk associated with the current supply chain of the acquired company.

The additional risk is to assume that the acquisition company is able to increase the units produced by its current supply chain partners, should the acquisition company decide to no longer conduct business with the old supply chain vendors of the acquired airline. Other risks include speculating that oil prices will ride and thus purchasing contracts to take delivery of petrol at a given price, risk is seen should the market turn the other way, prices go down and prevailing market prices trend below the delivery price.

Further examples include innovation in aircraft engines or other mechanical parts that shift the technology curve to the right, effectively lowering the demand and market price for existing aircraft technology and parts. Inventory supplies of such parts may become obsolete and valued at or below cost, making sales to 3rd parties impossible and rendering use in current planes under operation as a facilitator of obsolescence. This is viewed as extremely negative by consumers and shareholders whom ostensibly pay competitive rates or even a premium to travel.

Commodity Hedge for Aer Lingus

The company can seek to hedge its commodity costs by tracking commodity prices against company forecasts and against global GDP forecasts, which provide an indication of consumption in the future. As of August 29th 2006, Oil futures priced at $70.61/barrel and gold at $615 per troy ounce. Additionally, the S&P index at 1301.78, the NASDAQ Composite at 2160.70, and the Dow Industrials at 11352.01 (Business and Finance, 2006)

When commodities hedging is either neglected or inappropriately applied, labour reductions and staff shortages are often the next step in supply chain management of commodities. According to Europe Report (2011), "Aer Lingus pilots represented by the Irish Airline Pilots Association accepted annual pay cuts of EUR 30 million that were recommended by an Irish Labour Relations Commission arbitrator." (Europe Report, 2011) Airlines are subject to tight margins and volatile commodities pricing. By tracking historical commodities pricing and engaging in strategies that reduce commodities pricing risk, the cost of inherent risk is reduced.

Higher commodity prices yield higher energy costs, which reduce profits. The appropriate hedging strategy for energy is to buy gold, whether it is the actual bullion or using the equity and commodities exchanges to buy the exchange traded fund, the derivative that trades the underlying value of gold, or equities that represent gold throughout the supply chain.

According to Phillips (2008), "Commodity and energy cost increases were higher than originally anticipated. Diesel fuel, phosphates and resins, just to name a few, increased significantly during the quarter. To offset this significant commodity and energy cost pressure, we have announced a number of price increases, which go into effect during the January-March quarter. On January 31, 2008, The Dow Jones Industrial Average rose to 12650.36, the S&P to 13780.50, and the NASDAQ to 2389.86, Oil futures receded on recession worries reversing five days of gains. The dollar strengthened against the yen and euro." (Phillips, 2008) Options contract and futures trading along with currency hedging provides a method to offset the risk of rising energy and materials prices.