House of Commons - Defence

Select Committee on Defence Fourth Report

THE DRAFT DEFENCE AVIATION REPAIR AGENCY TRADING FUND ORDER 2001

Engine repair rationalisation

20. Engine repair and overhaul work is presently undertaken at both Fleetlands and St Athan. In considering the case for rationalising onto one site, there were for the MoD some compelling factors favouring Fleetlands, in particular the recently started construction there of a 'universal test rig', and efforts already being made to attract additional repair and overhaul work for rotary-wing aircraft at the site.[47] The business case assessment was that it would take 17 years to pay back the cost of transferring the work from Fleetlands to another site, but that moving the work from St Athan to Fleetlands would produce a payback within two years.[48] The proposed engine repair co-location will take between 18 months and two years to implement,[49] and the MoD estimate that it will cost £2.4 million and generate savings of £1.8 million from 2003-04 onwards.[50]

21. While the relocation of engine work from St Athan to Fleetlands apparently makes economic sense, it will affect 165 posts at St Athan (and create 100 additional jobs at Fleetlands).[51] We wanted to explore, therefore, the way the changes were determined and the way they will be implemented. We were able to establish that the DARA trade unions were involved in the planning and assessment of the proposed changes before the final results were presented to Ministers. As a result, they told us, they had had no need to contribute to the formal consultation. We were also assured that there will be no compulsory redundancies. DARA is encouraging staff to move to Fleetlands and is helping with costs and house-hunting trips (so far ten people have opted for relocation[52]) or, alternatively, offering staff a transfer to airframe work at St Athan where there is a shortage of aircraft fitters.[53] If staff do not take up these opportunities, the Chief Executive assured us that—

St Athan's future

22. The prospective move of the main business of St Athan to a new greenfield site (possibly Cardiff Airport) is likely to be the biggest element of DARA's rationalisation programme. This is being driven by the need to tackle the inefficiencies of working on a dispersed site of 900 buildings, and to reduce the high cost of maintaining and refurbishing infrastructure from the Second World War era (which we saw during our visit) now in poor condition.[55] The Chief Executive pointed out that the inability of DARA (and its predecessors) to secure funding for investment in infrastructure had been a particular problem over the years—"It is one of the reasons ... why St Athan has got into the dilapidated state that it has."[56] Recent surveys have shown that the site's sewerage and water systems need considerable investment.[57] The main runway, which also needs repair, is not wide or long enough to take all aircraft types, whereas the one at Cardiff Airport is.[58]

23. DARA currently shares the costs of maintaining and running St Athan. It is the largest 'lodger unit' at the site, which is 'owned' within the MoD by RAF Personnel & Training Command. Other MoD users on the site include a School of Technical Training, the DLO's Technical Director (Air), the Repair and Salvage Squadron, Aircraft Recovery and Transportation flights, a Hawk detachment from RAF Valley and the University of Wales' Air Squadron.[59] We were told that the possible relocation of these other users of the site was not a factor influencing DARA's assessment of its future at St Athan. Nevertheless, DARA could indeed become the only user of the airfield, in which case it would have to bear the full cost.[60] If DARA's St Athan work were moved elsewhere it would be able to share the running costs with other users.[61]

24. The four options being considered by DARA for St Athan's future are: the status quo, a new-build at St Athan, refurbishment of some buildings at St Athan, and a new-build at Cardiff Airport.[62] The national trade unions, Welsh Development Agency and the National Assembly for Wales, we were told during our visit, have all been involved in the appraisals. Although the assessments of the options available were still under way, our impression was that a move to new purpose-built facilities at Cardiff Airport was the option favoured within the organisation.[63] Indeed, DARA is already doing the necessary preliminaries for getting planning permission.[64] Having a single very large modern hangar at Cardiff Airport would bring advantages both in terms of operational efficiencies and lower running costs, with site infrastructure costs shared more widely with other users. The WDA have plans to develop Cardiff Airport as a regional hub for aircraft repair, and that might open up new third-party work for DARA if it were also located there.[65] Staff relocation is not a significant issue—Cardiff Airport is only 5 miles away.

25. We were able to obtain clear commitments from the Agency's Chief Executive that, whatever changes are made in DARA's Aircraft Business Unit, it will remain an important part of the Agency's work and that DARA will continue to be a significant presence in the area in the long term—

26. There are proposals for moving DARA's HQ—currently 79 staff[67]—to the Bath/Bristol area.[68] The Chief Executive explained that St Athan had been an interim base for the Agency's headquarters.[69] There had been problems in recruiting specialists, in particular qualified accountants and IT experts. Competitions had been held, but had not been able to attract the quality of personnel required. Mr Hill hoped that siting the head office in a larger conurbation would allow DARA to trawl in a wider area.[70]

PARTNERING

27. The aviation repair market is increasingly moving towards providing 'total package' maintenance services. In its more commercial guise as a trading fund, DARA has also been looking at the scope for a more flexible approach to undertaking repair work for its MoD customers at first and second lines as well as its traditional third line work (paragraph 9). To take this forward, it is becoming much more involved in partnerships with industry. The ownership of intellectual property rights plays an important part in driving these partnerships—DARA would benefit from Boeing being on board, for example, if it were to repair Boeing aircraft, using Boeing's design data.

28. A further impetus for the change of approach appears to be the Agency's difficulty in meeting the required repair turnround times. This is highlighted in DARA's Annual Report & Accounts for 1999-2000, the most recent available. That Report sets out DARA's half-dozen key targets, and its performance against them in that year,[71] and shows DARA's particular difficulty in meeting its 'timeliness' target[72] (see box opposite).

35. DARA's Chief Executive recognised the fundamental importance of meeting the Agency's 'timeliness' targets—

The MoD's figures for ten aircraft types show that, in October 1999, there were 423 aircraft at the front-line but another 151 (26%) tied up in third and fourth line maintenance, including 38% (66 aircraft) of the RAF's ground-attack Tornadoes.[74] Of the aircraft at the front-line, only 59% were fully serviceable (49% of ground attack Tornadoes),[75] compared with the 70% that the MoD generally strived for.[76]

36. The Agency's Chief Executive told us that DARA has been tackling turnround times by critically examining the processes involved, and as a result has reduced elapsed times by a quarter through better planning and removing "nonvalue added activity and diversions that people were facing on the shop floor."[77] DARA has also been piloting 24-hour/ seven-day operation, "so that for crucial frontline weapon platforms like the Tornado we have fewer aircraft in the Agency." [78] In terms of its timeliness targets, DARA was now meeting the required time scales for about 93% of tasks, against the 95% target[79] (see box on the previous page). However, DARA's ability to undertake repair and overhaul work in a timely way has, Mr Hill told us, depended on particular constraints—the availability of skilled manpower, the extent of 'emergent work' arising during the repair programme and sometimes a lack of discipline in the contracting process—but the main problem has usually been the unavailability of spares.[80] DARA was frequently in competition for available spares with frontline units, which would always get priority.[81] It's focus was therefore now on getting advance technical advice from the private sector 'design authorities' and managing the supply chain with the MoD's integrated project teams.[82] As Mr Hill explained—

37. DARA hopes in this way to be able to plan spares requirements well ahead, and offer a 'spares inclusive' maintenance service to its customers, in partnership with private sector repair firms or the equipment's original manufacturers.[85] In involving original manufacturers, the MoD hopes to encourage a 'through-life' approach to managing equipment—with an incentive for firms to seek ways of designing-in improvements in equipment reliability.[86] DARA has long had a maintenance partnership with Hamilton Sundstrand who provide it with spares and technical support for some Tornado components, and they collectively guarantee to deliver replacement taileron actuators, for example, within 24 hours to any RAF Tornado unit.[87] The Agency is now working with that firm on further partnering arrangements for other hydraulic components and for other aircraft types including the Jaguar and Harrier. [88] Other arrangements have been made with RollsRoyce, BAE Systems and AgustaWestland. The arrangement with Rolls-Royce may ultimately provide a support package defined in terms of the time that equipment is kept serviceable ('power by the hour'). It is planned that the AgustaWestland deal will cover the entire transmission system of Sea King and Lynx helicopters, and which will involve DARA—

38. DARA is also negotiating with BAE Systems a potentially much more significant and wide-ranging joint venture to provide an integrated aviation repair and overhaul service based on these new principles, entitled Project Whirlwind.[90] It would involve moving away from programmed repair work at specific (usually third line) locations. Instead, the partnership could provide a maintenance service providing guaranteed turn-round times for repairing items off-aircraft, or guaranteed availability of items at operating bases, and perhaps ultimately might entail being paid by-the-hour that the serviced equipment is actually used. The aim is to integrate on-aircraft and off-aircraft maintenance (tasks currently undertaken by DARA at third line, but in isolation) to provide repair and servicing 'packages' structured in terms of keeping aircraft serviceable for a particular proportion of the time. The Chief Executive explained the potential benefits in the following terms—

Project Whirlwind

Whirlwind

REFORMING PAY AND GRADING STRUCTURES

39. Part of DARA's preparation for trading fund operation has involved rationalising pay and grading structures across DARA sites, within the flexibility it has already been given by the Treasury. The pay and grading reforms already negotiated with the trade unions have reduced industrial/non-industrial distinctions, and reduced demarcations and restrictive practices. Old supervisory grades have been stripped out, and DARA is seeking greater flexibility with the introduction of selfsupervision and selfdirected teams.[92] These reforms were only possible, we were told, within a 'Trade Union Partnership' negotiated in April 2000. The unions are represented in DARA's management board committees,[93] and are embedded in the Agency's rationalisation study teams.

40. Since April 2000, DARA has had authority from the Treasury for undertaking pay bargaining for its industrial staff. It is keen to also have this authority for nonindustrial staff, when it is given trading fund status—

41. The aim is to have the flexibilities that DARA will need to win work, and recruit and retain staff.[95] Some specialisms are very competitive, and DARA wants to be able to offer these staff more money to make the Agency less uncompetitive on pay compared with industry rates. The main recruitment problems are with IT staff and skilled electricians. DARA managers have had discussions with the Defence Evaluation and Research Agency about the latter's experiences on pay matters as a trading fund (they had apparently been able to offer more money to key 'industrial' staff). With similar pay delegations, DARA expects to be able stop the sort of anomaly where 'non-industrial' instructors are being paid only £17,000 when their industrial apprentices will get £18,000 six months after qualifying. More generally, DARA's Human Resources Director wanted—

If we are successful then as a trading fund we [will be] able to use some of the profits in terms of improved pay and remuneration. We can look at team-based pay, linking bonuses in terms of performance against [key performance indicators], and corporate bonuses.[97]

All these potential benefits of trading fund status appear to us positive aspects in support of the proposed change. We also applaud the positive relationship that seems to have been established, in potentially difficult circumstances, between the Agency's management and the trade unions.

DARA's early operation as a trading fund

42. In the future, DARA will no longer be involved in the overhaul of large aircraft—

... we have no plans to stay in the large aircraft market unless a business opportunity comes up, because obviously the costs of providing a large aircraft facility are very high indeed. Our core excellence is with fast jets and that is the lion's share of the aircraft business at St Athan.[

More fundamentally, however, as a trading fund DARA will have to compete for an increasing proportion of the work that might otherwise have been readily allocated to it in the past, to allow the Defence Logistics Organisation to reap the benefits of an increasingly competitive repair market. The MoD's third line aviation repair organisations traditionally shared the defence programme on a 50/50 basis with industry,[99] but now the MoD is considering new options—

100

... the support strategy that we have constructed, the hybrid strategy, is very much a departure from the conventional way in which we would have supported the aircraft.[101]

43. That 'hybrid' approach is exemplified in the MoD's planning for the in-service maintenance support for the RAF's Eurofighter. We understand that an MoD study has determined that only 6% of off-aircraft repair work for Eurofighter will be directly allocated to DARA — the rest will be open to competition (no decisions have apparently yet been taken on on-aircraft work).[102] The study apparently examined what Eurofighter work needed to be pre-allocated to DARA for reasons of 'mission criticality', ensuring an in-house capability as competition against industry, and—important for MoD equipment —ensuring that obsolescent items of equipment would still be able to be repaired (40% of existing work at DARA's Sealand site is on avionics no longer made by industry, and so involves some fabrication work as well as repair). The MoD should continue to monitor the level of Eurofighter repair work for signs of these important criteria not being fulfilled, and remain ready to make any necessary adjustments. The benefits for the MoD customer of the proposed more competitive approach for allocating repair work more generally were that—

103

44. DARA's Chief Executive told us that his aim was to shape the Agency as a trading fund to be truly competitive, and that he fully expected to secure a minimum of a quarter of the 94% of Eurofighter offaircraft work that would be competed.[104] The MoD customer would be looking to secure output cost savings "well into double figures" of a percentage, on a total support programme costing about £10 billion[105]—a saving therefore of at least £1 billion.

45. However, Eurofighter in-service maintenance work will not arise for some years yet, so the Agency will not be expected to run before it can walk. In the long term, DARA hopes "to target successfully" about half of the MoD aviation deep repair market which is worth about £600 million a year (or about £1.15 billion a year if spares are included).[106] Putting DARA into a position to win such work, however, "will take some years ... but we do expect to achieve that, as far as we can take it, by 2005."[107] DARA will therefore have a protected order book for the first three years of its life as a trading fund (90% of MoD work will be allocated to the Agency),[108] "to allow time to restructure the Agency ... so that after that period we will be ready to go into competition."[109]

46. As a trading fund, DARA will charge its customers—in the MoD and elsewhere— for its work. The prices charged to MoD's customers will be vetted by the MoD's Specialist Procurement Services to ensure that they are fair and follow Treasury guidelines.[110] Within these constraints, the Agency will have to make a return on its operating costs and pay dividends to its MoD 'owner'. However, to further help it get established on a sound financial footing, DARA will have a five-year 'dividend holiday'.[111]

47. These interim measures for DARA's early trading fund years reflected the MoD customer's aim of balancing the need to reap financial savings with ensuring the Agency's long term future. The Deputy Chief of Defence Logistics told us that—

112

... we could not see DARA fail independently. It still has to be seen as an integral part of the capability available to [the MoD]. We will be in a much better position to understand the true cost being charged to us for the work being done in DARA as a result of the trading fund status. That will allow us to take our decisions in a more informed way.[113]

NEW TARGETS

48. DARA's key targets are being revised to reflect its trading fund status. Targets for the current year (2000-01) are slightly different from those of last year.[114] Quantity, quality, timeliness and cost targets (see box on page xiii) are essentially the same. An increase of 15% is now required for repayment work (against a new baseline of 1999-2000). And instead of the efficiency-index ('Efficiency1') target, DARA is now charged this year with developing 'an appropriate basis and measurement system for reporting efficiency as a trading fund'.[115] However, the Agency's targets will be further amended for next year. Mr Hill listed the four new targets—'quality'; 'financial return on capital employed'; 'efficiency' (a measure of the reduction in the unit price of production, for a basket of products agreed with the DLO); and 'increases in commercial revenue'.[116]