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Military Outsourcing: How Far to Go?

By Giovanni de Briganti | January 1, 2008

PARIS — In their never-ending search for the next big idea to boost growth and profits, helicopter manufacturers on both sides of the Atlantic increasingly dream of shifting their business model from the simple supply of hardware to the provision of turnkey helicopter services. Is this a good idea?

Acquisition is only a small part of a helicopter’s life-cycle cost, typically one-third to one-half, so most of the cost — and the largest potential for profit — comes from operating, supporting, and maintaining it through its service life.

Military customers traditionally buy equipment outright and operate and maintain it themselves, on their own bases using their own equipment and personnel. But in recent years some European support has been contracted out, allowing the military to concentrate on operations.

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In Britain, a leading outsourcing proponent, this led to industry providing helicopters, instructors, and other personnel and maintaining aircraft for the Defence Helicopter Flying School. This was then extended to operational helicopters.

The U.K. Defence Ministry has awarded AgustaWestland, its strategic partner, several "integrated operational support" contracts to keep helicopters flying, most recently a £470 million ($950 million), five-year Phase 2 extension to a deal for its fleet of 100 Sea Kings. This introduces payment by the flight hour and includes minimum availability targets for search and rescue (SAR)-tasked aircraft, but still would generate £90 million in savings over the next 12 years, the ministry claims. That is over 10 percent of the total, £800 million value of the entire 10-year Sea King contract.

In the past three years, AgustaWestland has won more than £1.6 billion in U.K. helicopter support business: £450 million to support Merlins, £400 million for the Merlin Capability Sustainment Plus upgrade, and the funds for the Sea King work. And that’s just a start, as most contracts have options that could treble or quadruple their value. This is serious business by any measure.

This kind of cash is giving ideas to the entire industry. "We need to move to sell a mission capability," Eurocopter CEO Lutz Bertling says. "We want to offer customers a global package, where they pull out the helicopter in the morning, push it back in at night, and we do all the rest. The idea is that they fly, we care." He says such deals often are cheaper for a customer because the contractor can work to civil rules and swap assets between civil and military customers in a country to benefit from economies of scale. "It’s a question of how efficiently you can organize things."

The other side of the coin is that civilian contractors — as seen daily in Iraq — are far more expensive than military personnel and, a key issue for military operations, they cannot be forced to deploy if they do not want to go.

Bertling believes turnkey services will attract new customers and forecasts that in five years such activity will generate millions from civil and military customers.

There are similar views in the United States, which has taken a considerable lead in outsourcing military support. "We have the right formula and new technologies for product support and fleet management," says Steve Estill, Sikorsky’s vice president and chief marketing officer. "The future is selling availability, not simply helicopters."

There can be too much of a good thing. After 18 months of toying with the idea, Britain’s MoD in November dropped a tentative plan to contract out provision of battlefield transport helicopters. It had envisioned a fleet of civil- owned, military-registered medium helicopters, with training and support services, provided under a 10-year operating lease.

But plans are still in hand for industry to take over the U.K. SAR helicopter network in 2012, with the goal to provide services at least equal to today’s, "whilst providing value for money for the taxpayer," says the U.K. Coastguard.

The four consortia bidding for the business probably see it, first and foremost, as value for money to themselves, and this is the crux of the problem. Introducing a profit motive replaces an ethic based on saving lives with an ethic based on making money, and opens a real Pandora’s box. But it doesn’t really matter to governments because by signing an operational lease they win on two scores: they move the entire project out of their investment budgets, and they can get industry to modernize assets at no visible cost to government.

For example, when it won the initial Coastguard contract, CHC Scotia bought four new Sikorsky Aircraft S-92s. The government could not have afforded that. This, to a large extent, is why the cash-strapped MoD wanted to outsource battlefield helicopters — a loony idea, but one that keeps the procurement budget intact.

Government accountants will go weak-kneed thinking they can replace swaths of military equipment without incurring any capital expenditure. The challenge will be to keep them in check because, in the final analysis, military operations are not a private-sector activity.

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