Market for Performance-Based Logistics Grows
Since 2004, original equipment manufacturers Sikorsky and Lockheed Martin have been in charge of sustaining the fleet under a performance-based logistics contract with the Navy, and executives from the company expect a contract extension that will keep them in that role until 2020.
“We expect to have a contract in place by the end of this month,” Rod Skotty, president of the Lockheed-Sikorsky joint venture Maritime Helicopter Support Co., said in January. “Then we’ll definitize it over the next few months.”
MH-60 sustainment contracts have not only landed the companies about $2.6 billion in total awards, but they have also provided them experience in what they see as a growing market.
Over the last decade, performance-based logistics contracts have become more popular in the military aircraft sphere, and budget pressures mean they are here to stay, experts told National Defense.
“We’ve obviously gone through this major shift with how we spend money over the last six years with the Obama administration,” said Michael Howard, an aerospace maintenance, repair and overhaul market expert at ICF International, a management, technology and policy consulting firm based in Fairfax, Virginia. “I think one of the things that is evolving out of that is a much better discipline in terms of how we spend money,” he said. “PBL, because it gives you a predictable set of costs for a certain outcome ... [is] going to continue to be the way we do business.”
Unlike fee-for-service or time-and-performance contracts, vendors in a performance-based logistics contract are not paid for repairing something. Instead, they are paid for an outcome such as increased readiness or performance.
“If something breaks, like a gear box or radar or something like that, we don’t charge the Navy per transaction,” Skotty said. “We’re reimbursed for every flight hour that the aircraft flies. So it’s in our interest to make sure the aircraft is always ready for tasking, and that means we want to invest in reliability improvements to make sure that those rotary blades and gear boxes and radars are always working.”
Under its current contact, MHSCo must repair, overhaul, modify and procure more than 1,200 airframe and avionics components for the Navy’s MH-60B, F, H, R and S variants as well as Coast Guard HH-60Js, a news release said. That number will grow to about 1,700 parts per helicopter in the new contract, Skotty noted.
The companies will also be responsible for a greater number of helicopters, growing from about 400 in the original 2004 contract to 530 aircraft in the presumptive one, said MHSCo Vice President George Mitchell.
Seahawk readiness rates as well as the efficiency of the logistics enterprise have improved since Lockheed and Sikorsky took the reins in 2004, Skotty said. “We currently manage almost a billion dollars in inventory at 99.91 percent accuracy.”
Readiness has climbed to 92 percent, Mitchell said, and MHSCo calculates that reliability has improved by 26 percent.
The companies have invested $140 million to increase reliability of parts and components, and have reduced logistics response time by 45 days, according to information from MHSCo. The companies also share back profit to the government if there is reduced demand to repair or replace a part, Skotty said.
More than 800 parts were in backorder when responsibility for them was handed over to Lockheed and Sikorsky, but at the time of the briefing, no parts were backordered, he said.
Before PBL was implemented, only 62 percent of components were delivered on time — within 48 hours for high priority parts and 96 hours for low priorities, he said. “Now the metric is a bit different. We deliver within seven days … but we have increased the delivery performance from 62 percent to 98 percent.”
Performance-based logistics contract management has become more mature in recent years, said Wayne Plucker, an aircraft and engine maintenance, repair and overhaul expert at the Frost & Sullivan consulting group. “At one time they were poorly defined, and that led to a lot of add-on charges and et cetera, and we saw some of the PBL contracts balloon to many times the original size.”
Improved reliability data helped to spur that change, Howard said. The government has learned how to predict future needs and costs, allowing it to better negotiate these contracts.
MHSCo is marketing its PBL services both internationally and domestically, executives said. So far, it has one foreign customer: Australia, which signed onto a comprehensive logistics contract, Mitchell said. The companies in 2014 broke ground on maintenance and warehouse facilities in New South Wales. After the buildings are completed this year, as many as 120 people will be responsible for providing upkeep to the Royal Australian Navy’s fleet of 24 MH-60Rs.
MHSCo continues to court other customers, such as Denmark, which decided to acquire the MH-60R in 2012. Executives also want to expand its services to other versions of the H-60 as well as various aviation platforms, Skotty said. “We believe we can apply our model to any ... complex, large platform where sustainment challenges exist.”
An example would be the Army’s fleet of Sikorsky-manufactured UH-60 Black Hawks, Mitchell said. The joint venture has been in discussions with the service for years, pitching different performance-based logistics concepts that executives believe could save money.
“The U.S. Army model is a little bit different than the Navy. There’s a lot of organic capability through the Corpus Christi Army depot, a lot of [information technology] management,” which is done by the service itself, he said. “It would be a radical change to the way the Army sustains aircraft, so part of it is explaining and sharing how the program could work … [and] how we would partner with the depot.”
The Army has awarded a PBL contract to General Electric for spare parts management of the Black Hawk’s T700 engine, so it’s not unthinkable that the service could partner with Sikorsky for targeted avionics system sustainment, Howard said. But it’s unlikely the Army will give up its organic capabilities.
The depot “employs a lot of people. … It’s generally considered a best in class type of depot in terms of operational capabilities,” he said. “The truth is, the system really isn’t broken for the Army.”
The companies could also pursue sustainment of the VXX presidential helicopter replacement in the future, Mitchell said. Sikorsky in 2014 won the $1.2 billion award by default after other competitors dropped out. Under the contract, Sikorsky will provide six S-92 test aircraft as well as the associated spare parts and logistics support.
But “once those aircraft get fielded, there’s no reason why a PBL program would not work for VXX” as well as the Air Force’s combat rescue helicopter, he said. In “both of those platforms, we’re partnered with Lockheed in the design of the product anyway. It would be a perfect fit for MHSCo. … Hopefully over time we’ll be able to prove to the government customer that the way to go is not organic maintenance but more of a PBL partnership.”
MHSCo is also interested in providing support for the P-3 Orion anti-submarine and maritime surveillance aircraft, Skotty said. The Navy is replacing the Orion with the Boeing-manufactured P-8 Poseidon, but the companies believe there is sufficient international interest in sustainment services from the aircraft’s many foreign military customers.
Growth in the international sustainment industry will likely be dependent on the region and its history of organic sustainment capabilities. “European countries have traditionally had contractors involved to a greater degree than North America has,” Plucker said. In the Middle East, “you almost have to push your way through contractors to get near the airplane, there’s just so many of them.”
Countries in the Asia-Pacific, however, are less likely to rely on U.S. contractors for sustainment and logistics support. The trick is for OEMs to partner and share work with local defense companies like Mitsubishi Heavy Industries in Japan or Taiwan’s Aerospace Industrial Development Corp., he said.
However, it remains difficult to gauge how effective PBL contracts are, Plucker said. Cost and reliability cannot always be compared against former data because oftentimes the standards are changed when moving from one type of contract to another, he said.
“My sense is yes, properly administered, PBL saves us from doing a bunch of wasted effort,” he said. “Having said that, unless the PBL contract is well written, the contractor can certainly come up with extra money. And trust me, they’ve got people on their staff” looking for ways to do that.
Sometimes the stability that a performance-based logistics contract offers is even more important than decreasing costs, Howard said.
The military services “obviously want to pay the least amount of money that they can to get the support they require, but being able to predict those costs out five years, 10 years, whatever the contract is, is almost more beneficial because they can then plan around those costs,” he said. Other expenses associated with aircraft, such as the price of fuel, are not as easy to foresee.
“The biggest issue that you see is the government goes into these things and sets it up, and almost immediately the [original equipment manufacturer] — who is typically the contract awardee — figures out ways to reduce cost out of the system and improve reliability on certain high-churn components ... that have been causing problems in the program,” he said.
That can create a tug of war between government and industry, he said. Once the vendor figures out how to increase its own earnings by reducing cost, the government may later push to renegotiate the contact to make it more favorable to itself.