This is a paper I submitted for one of the classes I took at ERAU

1. OUTSOURCING: AN AIR CARRIER’S PERSPECTIVE ON ITS’ PROS AND
CONS
by
Mersie Amha Melke
An Aircraft Maintenance Management Research Paper
Submitted to the Extended Campus
in Partial Fulfillment of the Requirements of
Master of Aeronautical Science
ASCI 609
Embry-Riddle Aeronautical University
Worldwide Online
March 2010

2. ABSTRACT
Researcher: Mersie Amha Melke
Title: Outsourcing: An Air Carrier’s Perspective on
its’ Pros and Cons
Institution: Embry-Riddle Aeronautical University
Degree: Master of Aeronautical Science
Year: 2010
Outsourcing is one of many business strategies used by
industries to save cost, focus on business functions and
increase productivity amongst several other business-
oriented targets. Commercial aviation is one of the
industries using this business strategy. However, the
unique regulatory and operating environment effective on
the air carrier industry makes it susceptible to challenges
not common to other industries. Thus, outsourcing is not
necessarily efficient for air carriers’ goals such as cost
cutting. In this paper, the author will analyze the
advantages and disadvantages of outsourcing from an air
carrier’s perspective.
ii

3. Table of Contents
Page
INTRODUCTION 1
REASONS FOR OUTSOURCING IN THE AIRLINE INDUSTRY 2
DETERMINATION OF THE PROS AND CONS OF OUTSOURCING 5
CONCLUSION 9
iii

4. INTRODUCTION
The word outsource is a merger between two words, out
and source. This word refers to the activity of obtaining
services, goods, consulting etc or a combination of these
from organizations that are not under the managerial
hierarchy of the obtaining company. Several authors have
defined outsourcing in various ways. One example could be
the definition given by Varadarajan (2009, p.1) which
states, “Outsourcing refers to the practice of a firm
entrusting to an external entity the performance of an
activity that was performed erstwhile in-house.”
In today’s competitive business world, all industries
function to minimize costs and maximize profit. In the
process of doing so, these industries come up with a
variety of potential proposals that might achieve this. One
of these proposed solutions is outsourcing. The outsourcing
of jobs to call center workers in India and other countries
with cheaper work force is a real world example. However, a
detailed study is necessary before branding outsourcing as
a true solution for any kind of business.
Consequently, one of the industries that could
potentially benefit from this type of business strategy is
the airline industry. This industry is cyclical in nature
(Wells & Wensveen, 2005). However, the equipment necessary
1

5. 2
for the functioning of the industry like airplanes is
uniquely regulated and expensive. Therefore, outsourcing
activities should accommodate such kinds of uniqueness.
Thus, this paper will analyze a customized version of
outsourcing to the airline industry, in order to get the
air carrier’s perspective of this business strategy. The
analysis shall focus on the pros and cons of outsourcing on
the industry.
REASONS FOR OUTSOURCING IN THE AIRLINE INDUSTRY
Perhaps the foremost reason for outsourcing is cost
reduction. Cost saving is the main advantage of outsourcing
because most repetitive jobs can be performed by
specialized providers. Consequently, companies can save on
salaries and other benefits and enjoy the economies of
scale that can be achieved by the contracting company,
which does one kind of work for many airlines (Ghobrial,
2005).
Here, the term economies of scale refer to the
decrease in a firm’s long run average cost as the size of
its operations increases (Wells & Wensveen, 2004).
Subcontractors that get the outsourced jobs usually have
advantages like greater specialization of resources, more
efficient utilization of equipment, reduced unit cost
inputs, opportunities of utilization of by-products and

6. 3
growth of auxiliary facilities as compared to the
outsourcing air carrier (Wells & Wensveen, 2004).
Legacy carriers(those air carriers that have endured
through the 1979 deregulation age until now) have found
their markets increasingly open to both international
rivals and new entrants such as low-cost operators
(Morrell, 2005). Industry liberalization as well as growing
competition that has accompanied a world-wide lowering of
economic and trade barriers has impacted airline business
as well (Rieple & Helm, 2008). However, as Pilling (2002)
has pointed out, this process seems to be happening rather
later in the airline industry probably because airline
operations are still influenced by government intervention.
Commercial aircraft need to undergo a series of
maintenance checks to remain airworthy. These maintenance
activities are on either the aircraft or the component of
the aircraft. In addition, these activities call for air
carrier proficiency in maintenance capacity and capability.
For many years, airlines have retained maintenance, repair
and overhaul (MRO) capabilities as a core activity that is
best managed and controlled by the airline itself. In many
cases, there has been over-capacity and excessive inventory
(Al-Kaabi, Potter & Naim, 2007). Outsourcing may give
access to the best available service in terms of capacity

7. 4
and cost. It also provides the flexibility of avoiding the
air carrier’s problems of capacity or capability (Al-Kaabi,
Potter, Naim, 2007).
Another relevant reason for outsourcing in the airline
industry is the drive to focus on core functions of the
business thus increasing productivity. Outsourcing is a
management approach by which an organization delegates some
non-core functions to specialized service providers
(Franceschini, Galetto, Pignatelli & Varetto, 2003). By
outsourcing, companies can focus their efforts on core
businesses, medium or long-term targets and diversification
opportunities (Franceschini et al., 2003).
The core function of airlines is to make profit by
selling airline seats in their various routes of flight.
Theoretically, all the accompanying work of airline seat
sales like, maintenance of the aircraft, advertising of the
seats, market research for new routes etc are non-core
activities. Before its bankruptcy, Pan Am was on the verge
of outsourcing its global network, applications
development, data center operations, personal computer
support, and maintenance of all equipment worldwide in
order to achieve the concept of focusing on core business
functions (Ghobrial, 2005).

8. 5
A third reason could be to realize an air carrier’s
goals to break in to a market. When air carriers set up
ticket offices or regional offices, the presence of locals
in the payroll will help in understanding and fine-tuning
the air carriers’ working procedure. This way the air
carrier will make positive advances in its business, which
may be impossible with out a local presence.
DETERMINATION OF THE PROS AND CONS OF OUTSOURCING
A number of theoretical frameworks are available to
examine the benefits of outsourcing. One model is
Transaction Cost Economics (TCE). Another term for TCE is
new institutional economics (Rieple & Helm, 2008). TCE,
which bases on five principles is fundamentally concerned
with the question of whether it is advantageous, in terms
of cost, for transactions to occur within the hierarchy of
an organization or externally in the open market (Rieple &
Helm, 2008).
Rieple & Helm (2008) assert that the picture that
emerges from using the five principles of the TCE theory
show the true nature of advantages and disadvantages of an
outsourcing decision. A concise definition of these
principles follows. One principle is the concept of
opportunism, which is the potential risk of seizure of key
assets by outside suppliers. Another relevant concept is

9. 6
that of asset-specificity which refers to the degree to
which an asset is valuable in the context of a specific
transaction; this is relevant because of its interplay with
opportunism.
Frequency of use, the third principle, implies that an
organization’s hierarchy should only accommodate
transactions that are in frequent use. Examples could be
heavy maintenance activity of aircraft components rarely
done. Another principle is that of bounded rationality
which refers to the degree of difficulty in forming
transactional contracts because of the limitations of
managers’ knowledge and perceptions. This might lead to
signing of a deal, which is to the disadvantage of the air
carrier.
Environmental uncertainty is the fifth principle of
the TCE theory. Environmental uncertainty increases the
problems arising from bounded rationality. Contemporary
business environment has proved to be highly uncertain. For
instance banks, the foundation of other businesses,
declared bankruptcy, which depicts a volatile environment.
Consequently, this principle also plays a role in the
determination of the pros and cons of outsourcing. In
addition, these five dimensions interact to predict whether

10. 7
in-house or outsourced business strategies would better
address the air carrier’s activities.
Although the TCE model examines the decision of
outsourcing from cost efficiency perspective, additional
analysis is necessary to determine its advantage or
disadvantage. In making outsourcing decisions, airlines
ought to consider such factors as the quality assurance of
the work, from a regulatory standpoint, the turn-time, and
the reliability together with cost (Ghobrial, 2005).
From a regulatory point of view, air carrier’s are
responsible for the oversight of maintenance of their
aircraft, even if they have given the job to a third party
maintenance organization that is FAA certified. A potential
source of this mandate could be the recommendations of the
national transportation safety board (NTSB) accident report
regarding the ValuJet airlines DC-9 crash in May of 1996.
The NTSB had stated the following regarding maintenance
outsourcing in its report for this accident,
The safety board recognizes that air carriers can
successfully subcontract many of the functional areas
of their operations; however, it is the safety board’s
position that air carriers engaging in subcontracting
remain responsible for the safety of their operations
and the airworthiness of their airplanes, and

11. 8
therefore must properly oversee their outside
contractors ………… An air carrier cannot delegate its
responsibility for safety of its operations and
maintenance to its subcontractors (NTSB, 1997; pp.
122-123).
In addition, despite the apparent economic advantages
of outsourcing, there appears to be some concerns about the
impacts of outsourcing on airline employees’ loyalty and
pride; and sometimes, safety of operations. Outsourcing has
complicated the situation even further by eliminating
functions previously performed by airline employees
(Ghobrial, 2005). Although many airlines attempted to re-
locate their employees within the organization or to be re-
hired by the outsourcing company, many employees have
indeed lost their jobs or accepted jobs with the
outsourcing companies at lower salaries (Ghobrial, 2005).
Ghobrial (2005) also asserts the following about
employee satisfaction and consequent disadvantage of
outsourcing.
Airline employees understand the value of their jobs
for their airlines’ image and competition with other
carriers. This attitude might be different for
employees of outsourcing company. Because most
outsourced functions are performed by the contracting

12. 9
company for many airlines with employees being paid
relatively low salaries, one would not expect them to
value their services to the airlines nor would they
demonstrate loyalty and pride.
Apparently, this is a non-quantifiable area of the possible
disadvantages of outsourcing. However, the fact that it is
not measurable does not hinder it from affecting the
outcome of an air carrier’s decision to outsource its work.
CONCLUSION
Commercial aviation is an increasingly competitive
industry. In addition, it is subject to regulations that
impose constraints on its business strategies. Outsourcing
is a potential business strategy used in other industries
for cost efficiency amongst other advantages. This paper
had tried to analyze, the advantages and disadvantages from
an air carrier’s perspective.
On a positive note, outsourcing cuts costs, increases
productivity by letting the air carrier focus its resources
on its core business. In addition, strategic plans of air
carriers’ to expand in to new markets can be realized by
outsourcing activities that would give them access to the
local market from the perspective of the locals themselves.
On the contrary, outsourcing can also erode the
loyalty, pride and other immeasurable assets an air carrier

13. 10
gets from its employees. Despite their unique character,
these qualities of an employee can affect the productivity
of an air carrier and indirectly affect its cost
efficiency. In addition, outsourcing exposes an air carrier
to business agreements that could potentially damage it
from the perspective of product delivery, product quality
and product or service monopoly. Consequently, the dynamic
nature of the industry makes it vulnerable to business
dealings that may change with time.
Evaluating the above summarized pros and cons of
outsourcing; one may assert that outsourcing is a business
decision that is necessary to excel at the demanding
requirements of commercial aviation. However, concurrent
with this assertion, checking this business decision from
different angles mentioned in this paper is necessary. In
addition, recurrent review of the business decision to
gather the continuous advantages is important. With out
these checks, one can be sure that the decision to
outsource is lacking in details, and this poverty of detail
could potentially reverse the desired advantages and end up
damaging the air carrier.

14. 11
REFERENCES
Al-kaabi, H., Potter, A. & Naim, M., (2007). An outsourcing
decision model for airlines' MRO activities. Journal
of Quality in Maintenance Engineering, 13(3), 217-227.
Franceschini, F., Galetto, M., Pignatelli, A. & Varetto,
M., (2003). Outsourcing: Guidelines for a structured
approach. Benchmarking, 10(3), 246.
Ghobrial, A., (2005). Outsourcing in the airline industry:
Policy implications. Journal of Transportation Law,
Logistics, and Policy, 72(4), 457-473.
Morrell, P., (2005). Airlines within airlines: an analysis
of US network airline responses to low cost carriers.
Journal of Air Transport Management 11(5), 303–312.
National Transportation Safety Board (1997, August 19).
Aircraft accident report in-flight fire and impact
with terrain ValuJet airlines, flight 592 DC-9-32,
N904VJ Everglades, near Miami, Florida May 11, 1996.
(AAR 97-06). Washington, DC: Author
Pilling, M., (2002). Drive to outsource. Airline Business
18, 38–43.
Rieple, A. & Helm, C., (2008). Outsourcing for competitive
advantage: An examination of seven legacy airlines.
Journal of Air Transport Management 14(5), 280-285.

15. 12
Wells, A.T. & Wensveen, J.G., (2004). Air transportation: A
management perspective. Belmont, CA: Brookes/Cole –
Thomson Learning.