Select Committee on Defence Minutes of Evidence


Further Memorandum from the Ministry of Defence (19 February 2001)

ASSESSMENT ON THE FUTURE SIZE OF MARKETS AND LIKELY COMPETITORS

AUDIT OF CURRENT POSITION

  DARA's markets are currently split into Aircraft, Engines and Components and Electronics segments. 49% of our current business is Aircraft, 22% Engines and Components and 29% Electronics.

KEY MARKET CHANGES

  The following key market changes have been identified:

    —  Reduction in MoD revenue (DLO 20% savings).
    —  Significant over-capacity in the repair and maintenance industry.
    —  Competition is increasing significantly.
    —  Aircraft and related components are becoming more reliable.
    —  SMART procurement is leading to the acquisition of incremental upgrades during total life cycle.
    —  Integrated Project Teams (IPTs) are increasingly requiring service-based contracts, ie `power-by-the-hour', based on longer periods of time.
    —  Turn round times will be reduced to cut the number of assets in the repair loop.
    —  Spares inclusive contracts will increase.
    —  2nd, 3rd and 4th line logistics are converging with opportunities to re-define boundaries.

WINNING NEW BUSINESS

  This will include:

    —  Extending arrangements with OEMs to cover new product ranges.
    —  Generating long-term customer commitment through Prime Contractor status.
    —  Increasing the focus on Integrated Product Teams.

  Partnering is essential if the Defence Logistics Organisation (DLO) is to access the benefits of integrating spares and technical support into the repair and overhaul capabilities of DARA. The planned introduction by DLO of long-term gain sharing arrangements with prime contractors and OEMs is expected to incentivise contractors to invest in design and reliability improvements. This promises to deliver substantial benefit. The new aircraft that are being introduced over the next 10 years, such as Eurofighter, Apache and Merlin, will require different approaches to supply and whole-of-life support from both OEMs and maintenance organisations. DARA recognises that partnering can offer considerable scope for optimising overall service delivery to its customers. It has established partnering agreements that are now delivering improved performance at reduced cost levels, and which provide the basis for DARA to secure access to these future markets.

  Agreements have been developed with BAE Systems, Rolls Royce, Honeywell and Agusta Westland, and expressions of intent have been signed with Boeing, and Eurocopter. The establishment of such partnering relationships will continue. By fully integrating itself in to these arrangements (in particular, through benchmarking and cementing fair and open commercial relationships), DARA will secure longer-term order book commitments from its customers.

  To meet these challenges, DARA must:

    —  Provide value for money and competitive prices for components.
    —  Secure New-to-Service Front Line Aircraft programmes.
    —  Improve our relationships with our MoD customers to ensure our strategic capability for Front Line Aircraft is maintained.
    —  Increase our market share of total non-deployable maintenance, upgrade/modification programmes.
    —  Develop our supply chain logistics operations to `state-of-the-art' standards.
    —  Improve turn round times for On-aircraft and Off-aircraft work.

COMPETITORS

  DARA's competitors can be broken down as follows:

Aircraft

    BAE Systems
    Agusta/Westlands
    Boeing
    Eurocopter
    SERCO
    Alan Mann
    Marshalls
    F R Aviation
    Engines
    Rolls Royce
    Honeywell
    H&S
    Wood Group

Avionics

    RACAL
    Raytheon
    Honeywell
    SERCO

Mechanical Components

    Large Numbers — too large to list

DARA/BAE SYSTEMS — PROJECT WHIRLWIND

KEY PRINCIPLES, FEATURES AND AIMS

  DARA has been working closely with BAE Systems over the past year to establish potential projects for integrating the air environment's Logistic Support Chain in order to reduce the MoD's costs of ownership.

  The parties have signed a Memorandum of Intent and have requested Min (AF) approval to publicise the project.

  DARA and BAE Systems propose the creation of an equity based Joint Venture Company (JVC) in which DARA will have the majority of the issued share capital. The JVC will manage its owners' current and planned interests in the repair of defence aviation repairable spares, adding value by improving efficiency in the management of existing support chain logistics. Its objectives are to reduce the turn round time of unserviceable assets through the repair loop from Operating Base, maximising value and minimising cost.

  The JVC will have no repair capabilities of its own, but will focus on the deployment of new, more effective distribution and information systems. It plans to transact most of its business using `e-commerce' and progressively track assets on a dedicated secure web-site. It will develop its own contracting processes using competition and benchmarking techniques to buy the most rapid and cost effective repair and overhaul services available on the open market. The JVC will offer new standards of service to all contractors and MoD customers seeking to improve repair logistics as part of their own programmes.

  The JVC will have the critical mass, competencies and commercial focus to rapidly join up, streamline and modernise existing 3rd and 4th line off-aircraft repair and overhaul processes. It aims to deliver significant improvements in logistic process velocities, thus facilitating major reductions in spare parts inventories with no loss in the delivery of defence outputs. The JVC will also drive down repair costs and provide a significant impetus for the rationalisation of excess capacity.

POTENTIAL IMPLICATIONS FOR COMPETITION IN THE AIRCRAFT REPAIR MARKET

  The JVC will be majority owned by Secretary of State for Defence and will apply best practice acquisition principles to foster competition. Indeed it will be obliged to seek the most competitive repair/supply source.


 
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Prepared 13 March 2001