16-Year-Old Planes, Good Business Sense for Delta

One of the greatest movies of the 1980s was a John Hughes classic called Sixteen Candles. It’s a coming of age story, featuring Molly Ringwald as a high school sophomore struggling through her 16th birthday – which her entire family has forgotten.

Sixteen can be such an awkward age. But not for Delta Airlines.

According to a recent Wall Street Journal story, that’s the average age of its fleet of 700-plus aircraft. And it’s one of the reasons why the company is in its third consecutive year of profitability.

Does that make you squeamish about flying? It shouldn’t. Intelligently maintaining aircraft makes them safe and extends their life. In fact, says the Journal, “though some safety experts once fretted about them, most now say that, with careful maintenance, older jets can fly safely.”

For many companies, extending the life of a product that helps drive the business makes good sense—particularly in this time of economic uncertainty, and especially when it comes to complex, big-ticket items like aircraft. Manufacturers are tuning in to this trend and, as a result, some are starting to rethink their entire service strategies.

An industry think tank called The Service Council recently found that 63 percent of its members expect the contribution of service revenue to their company to increase over the next 12 months. The Service Council’s survey also reveals that companies are diversifying their service offerings to capture more revenue and profit from the product long after it has left the showroom floor.

“Once you have the customer in your grasp, you can depend on [his/her loyalty] over the long haul to contribute additional and sustainable revenues through add-on offerings, including extended warranty contracts, contract renewals and parts sales,” blogged Bill Pollock, The Service Council’s president and chief research officer.

One company that has caught the “service advantage” fever is the global aerospace and defense conglomerate EADS, makers of Airbus and Eurocopter. In its Vision 2020, the company has outlined an aggressive strategy for increasing its service revenue—from 10 percent of total revenue today to as much as 25 percent by 2020.

The company plans to drive that growth by offering a deeper portfolio of service offerings to its customers. In addition to driving revenue growth, this strategy is likely to also transform the very nature of the relationship EADS has with its customers.

By focusing on service, product companies will dramatically increase the number of times they interact with their customers—from once (the point of sale) to many (as the product is maintained throughout its service lifecycle).

In the future, companies are likely to evolve the service value proposition even further, focusing less on fixing what’s broken and more on how to maintain a predetermined level of performance over time.

Wharton business school professor Morris Cohen has studied this concept—often referred to as performance-based logistics—extensively. In 2007, Cohen co-published a research paper on the topic in which he credited Rolls-Royce with coining the term “power by the hour” more than 20 years ago to describe their performance-based contracts for engines and other avionics products that were sold to commercial airlines.

Under such contracts, Rolls-Royce agreed to guarantee some amount of aircraft “up time” (pun intended) for a set fee in return for regular access to the equipment for pre-emptive service operations.

So, when you board your next plane, don’t sweat it if it looks a little old. As long as the engine is from a company with an advanced service strategy, you’ll get to your destination. And who knows, maybe the in-flight movie will be Sixteen Candles.

Please share: Have you bought something recently that had a performance-based service contract attached?

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