“Power by the hour” deals have long been used in aviation, due to their perceived financial attractiveness.
Unlike traditional time and material-based models, these long term service agreements (LTSAs) rid transport owners of weighty overheads, by linking engineering and maintenance costs to required activity.
Fixed hourly rates mean that transport businesses no loner need to assume maintenance risk and volatility of cash flow; but can still benefit from highly specialized technical capability to maintain their fleet.
Recently the model has gained traction within the rail sector. But to what extent is it viable in servicing rolling stock?
Ahead of his presentation at the RISSB Rail Safety Conference in Sydney this May, Qantas’ former A380 Fleet Manager, and current Asset Management Council Body of Knowledge Commissioner, Michael Killeen, spoke to Informa about some of the benefits and risks of using LTSAs.
Killeen’s longevity within the aviation sector has given him extensive first-hand insight into LTSA usage. He warns of a number of key risks, which may jeopardize their long term financial appeal.
“Asset leasing leads firms to give up their own technical capability”, says Killeen. “Without an engineering function, accurately calculating costs and project horizons can be challenging; and I’ve seen cases of companies who have insufficient technical capability to underpin the commercial risks associated with LTSAs”. Ultimately this can lead to significant financial wastage or budgeting issues.
Supply market consolidation also presents a significant challenge, according to Killeen. “When agreements expire, lessees are entirely at the mercy of lessors”, he says.
He cites an example in which one opportunist lesser doubled its fees at the end of an LTSA. Since the lessee no longer had the technical strength to reassume those capabilities, it was forced to renew the contract.
“On top of that there is no commercial regulation available to thwart this exploitation”, he adds.
Killeen will reveal further challenges of asset leasing at the RISSB Rail Safety Conference – due to take place 9-10 May 2018 at the Rydges World Square Sydney.
Presenting cases and lessons learned from the aviation sector, Killeen will advise how rail companies wanting to employ this model can and should maintain their technical strength, to mitigate financial risk and vulnerability.
Learn more and book your place here.