Audits in MRO-Organizations

Thomas Sommer, Lufthansa AGIAAIA Conference Istanbul September 12, 2010

Auditing MRO-OrganizationsThomas Sommer, Lufthansa AGIAAIA Conference Istanbusl 12th October, 2010Page 1

The Lufthansa Group: Facts & Figures

Deutsche Lufthansa AG is an aviation company with operations worldwide. It comprises more than 400 subsidiaries and associated companies.

The Group is active in five business segments:− Passenger Airline Group (strategic core segment)− Logistics− Maintenance, Repair and Overhaul (MRO)− IT Services− Catering

Lufthansa-Hubs: Frankfurt/Main, Munich, Zurich, Vienna

Number of employees: more than 117,000and 149 nationalities

Passengers carried in 2009: more than 76 million,

Group revenue 2009 more than 22 billion EUR

Auditing MRO-OrganizationsThomas Sommer, Lufthansa AGIAAIA Conference Istanbusl 12th October, 2010Page 2

The Lufthansa Group and its business segments

Passenger Airline Group

Logistics

MRO

Catering

The Group’s airlines rank amongthe world’s leading carriers.

Lufthansa Cargo –One of the world's leading cargo carrierin international air traffic.

Lufthansa Technik –Leading supplier of engineering servicesin the world's airline business.

LSG Sky Chefs –World's largest provider of airline cateringand integrated in-flight solutions.

IT Services Lufthansa Systems –One of the world’s leading IT service providers for the airline and aviation industry.

Auditing MRO-OrganizationsThomas Sommer, Lufthansa AGIAAIA Conference Istanbusl 12th October, 2010Page 3

Business Segment Passenger Airlines Group

Passenger Transportation is the core activity of the Lufthansa Group.

The airlines of the Lufthansa Group position themselves as quality carriers and occupy top positions in their respective segments.

This business segment includes:

− Lufthansa Passenger Airlines(incl. Lufthansa Regional and Lufthansa Italia)

− SWISS− Austrian Airlines− bmi− Germanwings− as well as the equity investments in

Brussels Airlines, JetBlue and SunExpress.

Auditing MRO-OrganizationsThomas Sommer, Lufthansa AGIAAIA Conference Istanbusl 12th October, 2010Page 4

Business Segment MRO

With a market share of 15 percent, Lufthansa Technik AG is the world’s leading provider of maintenance, repair and overhaul (MRO) services for civil aircraft.

The Hamburg based wholly owned Lufthansa subsidiary offers a broad service portfolio to more than 600 customers worldwide.

Lufthansa Technik is the world’s first company in the MRO industry to hold an integrated certification in accordance with ISO 14001 (quality), EMAS (environment) and OHSAS 18001 (job safety).

To take specific advantage of the growth potential in emerging countries in Asia, the company has operated the joint-venture Ameco Beijing in cooperation with Air China for more than 20 years.

Auditing MRO-OrganizationsThomas Sommer, Lufthansa AGIAAIA Conference Istanbusl 12th October, 2010Page 5

Business segment MRO – Lufthansa Technik Group

690 customers worldwide

2.000 aircraft under exclusive contracts

500 jetliners under Total Technical Support TTS®

1.700 aircraft inspections per day

31 subsidiaries and affiliates worldwide

60 line maintenance stations with Lufthansa Technik staff worldwide

5.9 billion Euros in revenue (2009)

26.000 employees worldwide

Auditing MRO-OrganizationsThomas Sommer, Lufthansa AGIAAIA Conference Istanbusl 12th October, 2010Page 6

Lufthansa Technik Group – 31 Subsidiaries and Joint Ventures

Lufthansa Technik AG Headquarters

Germany

Lufthansa Technical Training

Lufthansa Technik Intercoat

Lufthansa Technik Logistik

Lufthansa Technik Maintenance Intl.

Lufthansa Technik AERO Alzey

Lufthansa LEOS

Lufthansa Bombardier Aviation Services

N3 Engine Overhaul Services

Europe (excl. Germany)

Lufthansa Technik Budapest

Lufthansa Technik Brussels

Lufthansa Technik Airmotive Ireland

Lufthansa Technik Malta

Lufthansa Technik Switzerland

Lufthansa Technik Sofia

Lufthansa Technik Turbine Shannon

Lufthansa Technik Vostok

Shannon Aerospace

Spairliners (Germany/France)

Lufthansa Technik Milan

Lufthansa Technik Component Services

Lufthansa Technik Tulsa

HEICO Aerospace

Hawker Pacific Aerospace

BizJet International

North America

AirLiance Materials

Asia

Lufthansa Technik Shenzhen

Lufthansa Technik Philippines

Ameco Beijing

Airfoil Services

Lufthansa Technik Services India

AustraliaLTQ Engineering

Auditing MRO-OrganizationsThomas Sommer, Lufthansa AGIAAIA Conference Istanbusl 12th October, 2010Page 7

Lufthansa Corporate Audit

CEO

Administration (2)

Head of Corporate AuditTotal headcount = 22 FTE

GMLSG/Finance/Subsidiaries

GMPassenger Airline

Steering/Sales

GMLH Cargo/Operations

GMLH Technik/

Revenue Accounting

GMLH Systems/

IT

15 Auditors

Auditing MRO-OrganizationsThomas Sommer, Lufthansa AGIAAIA Conference Istanbusl 12th October, 2010Page 8

1. Subsidiaries and Joint VenturesFocus on the company (full audit of all corporate functions and processes, i.e. Sales, HR, IT, Material

Management…)

Risk assessment

Joint Audits with shareholders if applicable

Duration 2-3 weeks

Audit frequency every 5 years

technical / quality audits by dedicated unit

2. Audits of MRO-Organisations of LH-Group AirlinesFocus on the MRO-related functions (i.e. Material Management, Qualification of personnel)

Risk assessment

Joint Audits with IA of Group Airline if applicable

Duration 2-4 weeks

technical / quality audits by dedicated unit

Different Scopes of Audits

Auditing MRO-OrganizationsThomas Sommer, Lufthansa AGIAAIA Conference Istanbusl 12th October, 2010Page 9

Audits in Subsidiaries

Self Audit QuestionnaireDistribution 1-2 months ahead of on-site audit

collection of data and relevant documents

(e.g. Board minutes, reporting…)

augmenting efficiency of on-site audit

enabling the company to address weaknesses

before the audit

guideline for audit activities

issues can be focused/analyzed off-site

test-run of “continuous self audits” ongoing

Audit Guideline / ChecklistSame structure like Self Audit

Updated after each Audit

Facilitates standardization and completeness of audit activities

Auditing MRO-OrganizationsThomas Sommer, Lufthansa AGIAAIA Conference Istanbusl 12th October, 2010Page 10

Audits in Group Airlines

Self Audit Questionnairepartly applicable

Audit Guideline / ChecklistSame structure like Self Audit

Updated after each Audit

Facilitates standardization and completeness of audit activities

Main TopicsOrganisationFleet StructureHR (adequate qualification) Controlling, FinancePurchasingMaterial ManagementAsset ManagementQuality

Auditing MRO-OrganizationsThomas Sommer, Lufthansa AGIAAIA Conference Istanbusl 12th October, 2010Page 11

Adequate Organisation Structure established?

Clear Structure of responsibilities (i.e. Maintenance Organisation, Engineering, Purchasíng, Material,

Quality)?

Quality a high level task?

Level of Integration of services/products

Share of internally produced services vs. services purchased externally

Variety of services provided (Line Maintenance, Heavy/Base Maintenance, Component-Pooling and

Repair, Engines, Landing Gears, ARC)?

Effectiveness of in house services / reasons for in house production

Organization

Auditing MRO-OrganizationsThomas Sommer, Lufthansa AGIAAIA Conference Istanbusl 12th October, 2010Page 12

Fleet Structure

Level of Fleet Commonality (one or few A/C types vs. inhomogeneous fleet)

Oganisation‘s capabilities: 100% in-house service for whole fleet?

„Critical mass“ achieved on all aircraft types (in-house production might be uneconomical for small

fleets)?

Resulting inefficiencies: e.g. special tooling, A/C-specific material, special qualification of staff (licences,

type ratings)

Planned fleet campaigns with new A/C-types? Possibly resulting in surplus material (re-assessment of

material values)

Fleet

Auditing MRO-OrganizationsThomas Sommer, Lufthansa AGIAAIA Conference Istanbusl 12th October, 2010Page 13

Material Planning

Used Material Management System – planning functionality integrated?

Established Material planning procedures (event-driven vs. integrated planning)

Assessment of minimum stock levels adequate?

Group aspects considered (exchange of material)

Prevention of overstocking and surplus material (identification of slow / non-moving material, allocation

of material to A/C-types possible)

Processes established to avoid „AOG-procurement“

Interchangeability of material considered / tracked?

Use of PMA and Surplus Material in the planning process

KPI: Inventory of material in relation to revenue over time

Huge problem: OEM-pricing

Material Management (I)

Auditing MRO-OrganizationsThomas Sommer, Lufthansa AGIAAIA Conference Istanbusl 12th October, 2010Page 14

Non-moving Material

Depending on business area. Roughly: Material not moved for more than 2 years!

Slow Moving Material

Roughly: material with an annual turnover of below 2!

Formula: Annual material consumption / average inventory value

Material Management (II)

Auditing MRO-OrganizationsThomas Sommer, Lufthansa AGIAAIA Conference Istanbusl 12th October, 2010Page 15

Material Management and -accounting

Warehousing and stock-taking procedures (annually, permanently, tracking of positive and negative

deviations)

Integration / Interfaces between Material Management System and Accounting System (quality,

reconciliation of inventory)

Assessment of material values (established procedures, reassessment of material values, procedures

ccordinated with external auditors?)

Established processes for scrapping material (shelf life exceeded, A/C-type out of operation, life-cycle

orientation)

Material Management (III)

Auditing MRO-OrganizationsThomas Sommer, Lufthansa AGIAAIA Conference Istanbusl 12th October, 2010Page 16

Life Cycle status of current A/C types

Source: Aero Strategy, 2009

Auditing MRO-OrganizationsThomas Sommer, Lufthansa AGIAAIA Conference Istanbusl 12th October, 2010Page 17

Existence of high-value assets

Spare Engines

ARC Components

Spare Landing Gears

Assessment of asset values

According to life cycle model

according to fleet structure / fleet planning

Local GAAP / IFRS relevant?

Depreciation methods

Purchasing / sales procedures

Finding the „right time for sale“

Adequate purchasing pocedures established?

Asset Management

Auditing MRO-OrganizationsThomas Sommer, Lufthansa AGIAAIA Conference Istanbusl 12th October, 2010Page 18

Official Audits by Authorities

Number and severeness of findings

Processes to address / close the findings

Existence of internal Quality Management

„Quality Handbook“

Processes documented?

Adherence to export regulations

Adequate processes established

At LH dedicated center of knowledge established

Quality

Auditing MRO-OrganizationsThomas Sommer, Lufthansa AGIAAIA Conference Istanbusl 12th October, 2010Page 19

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Auditing MRO-OrganizationsThomas Sommer, Lufthansa AGIAAIA Conference Istanbusl 12th October, 2010Page 20

Quality

Thank you for your attention!