IDEAS home Printed from https://ideas.repec.org/a/sae/risrel/v238y2024i5p972-982.html
   My bibliography  Save this article

Performance-based contracting in the airline industry from the standpoint of risk-averse maintenance providers

Author

Listed:
  • Canek Jackson
  • Rodrigo Pascual
  • Fredy Kristjanpoller

Abstract

Airline industry is a business characterized by its low profit and high operational risk. Sometimes contracting out aircraft maintenance is mandatory due to the lack of labor capacity or shortage of staff with specialized capabilities. It raises the challenge of negotiating an agreement through performance-based contracting (PBC) as an alternative to traditional on-call maintenance services, or time and material contracts (T & MC), where no risk is transferred to the service provider. Due to the importance of risk transfer to contractors under PBC, the authors propose a model to determine the optimal contract price and the number of customers to serve when aircraft maintenance is outsourced to a risk-averse service provider offering two PBC options. To the best of the author’s knowledge, no quantitative studies for pricing contracts optimally when taking into account maintenance provider’s risk-aversion have been presented in the existing literature. For that purpose, the authors combine queuing, game, and modern portfolio theories in the proposed formulation.

Suggested Citation

  • Canek Jackson & Rodrigo Pascual & Fredy Kristjanpoller, 2024. "Performance-based contracting in the airline industry from the standpoint of risk-averse maintenance providers," Journal of Risk and Reliability, , vol. 238(5), pages 972-982, October.
  • Handle: RePEc:sae:risrel:v:238:y:2024:i:5:p:972-982
    DOI: 10.1177/1748006X231195398
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/1748006X231195398
    Download Restriction: no

    File URL: https://libkey.io/10.1177/1748006X231195398?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Jin, Tongdan & Tian, Zhigang & Xie, Min, 2015. "A game-theoretical approach for optimizing maintenance, spares and service capacity in performance contracting," International Journal of Production Economics, Elsevier, vol. 161(C), pages 31-43.
    2. Hamidi, Maryam & Liao, Haitao & Szidarovszky, Ferenc, 2016. "Non-cooperative and cooperative game-theoretic models for usage-based lease contracts," European Journal of Operational Research, Elsevier, vol. 255(1), pages 163-174.
    3. Jose A. Guajardo & Morris A. Cohen & Sang-Hyun Kim & Serguei Netessine, 2012. "Impact of Performance-Based Contracting on Product Reliability: An Empirical Analysis," Management Science, INFORMS, vol. 58(5), pages 961-979, May.
    4. Mirzahosseinian, H. & Piplani, R., 2011. "A study of repairable parts inventory system operating under performance-based contract," European Journal of Operational Research, Elsevier, vol. 214(2), pages 256-261, October.
    5. Jackson, Canek & Pascual, Rodrigo & Mac Cawley, Alejandro & Godoy, Sergio, 2023. "Product–service system negotiation in aircraft lease contracts with option of disagreement," Journal of Air Transport Management, Elsevier, vol. 107(C).
    6. Patriarca, Riccardo & Costantino, Francesco & Di Gravio, Giulio & Tronci, Massimo, 2016. "Inventory optimization for a customer airline in a Performance Based Contract," Journal of Air Transport Management, Elsevier, vol. 57(C), pages 206-216.
    7. Rodrigo Pascual & Matías Siña & Gabriel Santelices & Milton Román & Enrique López Droguett, 2017. "Optimal channel coordination in use-based product-service system contracts," International Journal of Production Research, Taylor & Francis Journals, vol. 55(23), pages 6946-6956, December.
    8. T Jin & P Wang, 2012. "Planning performance based contracts considering reliability and uncertain system usage," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 63(10), pages 1467-1478, October.
    9. Wenfang Shang & Lei Yang, 2015. "Contract negotiation and risk preferences in dual-channel supply chain coordination," International Journal of Production Research, Taylor & Francis Journals, vol. 53(16), pages 4837-4856, August.
    10. Zhang, Yunzheng & Zhang, Xiaohong & Zeng, Jianchao & Wang, Jinhe & Xue, Songdong, 2019. "Lessees’ satisfaction and optimal condition-based maintenance policy for leased system," Reliability Engineering and System Safety, Elsevier, vol. 191(C).
    11. Xiaolin Wang & Lishuai Li & Min Xie, 2019. "Optimal preventive maintenance strategy for leased equipment under successive usage-based contracts," International Journal of Production Research, Taylor & Francis Journals, vol. 57(18), pages 5705-5724, September.
    12. Jingchen Hou & Andy Neely, 2018. "Investigating risks of outcome-based service contracts from a provider’s perspective," International Journal of Production Research, Taylor & Francis Journals, vol. 56(6), pages 2103-2115, March.
    13. Tsan-Ming Choi & Stein W Wallace & Yulan Wang, 2016. "Risk management and coordination in service supply chains: information, logistics and outsourcing," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 67(2), pages 159-164, February.
    14. D Nowicki & U D Kumar & H J Steudel & D Verma, 2008. "Spares provisioning under performance-based logistics contract: profit-centric approach," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 59(3), pages 342-352, March.
    15. Kostas Selviaridis & Finn Wynstra, 2015. "Performance-based contracting: a literature review and future research directions," International Journal of Production Research, Taylor & Francis Journals, vol. 53(12), pages 3505-3540, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Korkeamäki, Lauri & Kohtamäki, Marko & Parida, Vinit, 2021. "Worth the risk? The profit impact of outcome-based service offerings for manufacturing firms," Journal of Business Research, Elsevier, vol. 131(C), pages 92-102.
    2. Jackson, Canek & Pascual, Rodrigo & Mac Cawley, Alejandro & Godoy, Sergio, 2023. "Product–service system negotiation in aircraft lease contracts with option of disagreement," Journal of Air Transport Management, Elsevier, vol. 107(C).
    3. Yujie Zhang & Yukun Wang & Xiaopeng Li & Yiliu Liu & Weizheng Gao, 2024. "Condition-based maintenance optimization for deteriorating systems considering performance-based contracting and destructive inspections," Journal of Risk and Reliability, , vol. 238(2), pages 247-259, April.
    4. Jackson, Canek & Pascual, Rodrigo, 2021. "Joint pricing and maintenance strategies in availability-based product-service systems under different overhaul conditions," Reliability Engineering and System Safety, Elsevier, vol. 216(C).
    5. Qin, Xuwei & Shao, Lusheng & Jiang, Zhong-Zhong, 2020. "Contract design for equipment after-sales service with business interruption insurance," European Journal of Operational Research, Elsevier, vol. 284(1), pages 176-187.
    6. Rahimi-Ghahroodi, S. & Al Hanbali, A. & Zijm, W.H.M. & Timmer, J.B., 2019. "Emergency supply contracts for a service provider with limited local resources," Reliability Engineering and System Safety, Elsevier, vol. 189(C), pages 445-460.
    7. Ge, Qianru & Peng, Hao & van Houtum, Geert-Jan & Adan, Ivo, 2018. "Reliability optimization for series systems under uncertain component failure rates in the design phase," International Journal of Production Economics, Elsevier, vol. 196(C), pages 163-175.
    8. Patra, Pradipta & Kumar, U. Dinesh & Nowicki, David R. & Randall, Wesley S., 2019. "Effective management of performance-based contracts for sustainment dominant systems," International Journal of Production Economics, Elsevier, vol. 208(C), pages 369-382.
    9. Qin, Xuwei & Jiang, Zhong-Zhong & Sun, Minghe & Tang, Liang & Liu, Xiaoran, 2021. "Repairable spare parts provisioning for multiregional expanding fleets of equipment under performance-based contracting," Omega, Elsevier, vol. 102(C).
    10. Pliego Marugán, Alberto & García Márquez, Fausto Pedro & Pinar Pérez, Jesús María, 2022. "A techno-economic model for avoiding conflicts of interest between owners of offshore wind farms and maintenance suppliers," Renewable and Sustainable Energy Reviews, Elsevier, vol. 168(C).
    11. Wang, Yukun & Gao, Weizheng & Li, Xiaopeng & Liu, Yiliu, 2024. "Joint optimization of performance-based contracting, condition-based maintenance and spare parts inventory for degrading production systems," Reliability Engineering and System Safety, Elsevier, vol. 243(C).
    12. Grubic, Tonci & Jennions, Ian, 2018. "Do outcome-based contracts exist? The investigation of power-by-the-hour and similar result-oriented cases," International Journal of Production Economics, Elsevier, vol. 206(C), pages 209-219.
    13. Pradipta Patra & U. Dinesh Kumar, 2024. "Availability contracts under hierarchical maintenance," Annals of Operations Research, Springer, vol. 340(1), pages 389-423, September.
    14. Jin, Tongdan & Tian, Zhigang & Xie, Min, 2015. "A game-theoretical approach for optimizing maintenance, spares and service capacity in performance contracting," International Journal of Production Economics, Elsevier, vol. 161(C), pages 31-43.
    15. Xian Zhao & Jing Zhang & Xiaoyue Wang, 2019. "Joint optimization of components redundancy, spares inventory and repairmen allocation for a standby series system," Journal of Risk and Reliability, , vol. 233(4), pages 623-638, August.
    16. Wang, Yulan & Wallace, Stein W. & Shen, Bin & Choi, Tsan-Ming, 2015. "Service supply chain management: A review of operational models," European Journal of Operational Research, Elsevier, vol. 247(3), pages 685-698.
    17. Nullmeier, Fabian & Wynstra, Finn & van der Valk, Wendy, 2019. "Mitigating shirking: Contracting performance in buyer-initiated service triads," Other publications TiSEM cebcb590-5a85-4906-b8ec-1, Tilburg University, School of Economics and Management.
    18. Liu, Biyu & Pang, Jie & Yang, Haidong & Zhao, Yilin, 2024. "Optimal condition-based maintenance policy for leased equipment considering hybrid preventive maintenance and periodic inspection," Reliability Engineering and System Safety, Elsevier, vol. 242(C).
    19. Wang, Jingjing & Zhao, Xian & Guo, Xiaoxin, 2019. "Optimizing wind turbine's maintenance policies under performance-based contract," Renewable Energy, Elsevier, vol. 135(C), pages 626-634.
    20. Kanatlı, Mehmet Ali & Karaer, Özgen, 2022. "Servitization as an alternative business model and its implications on product durability, profitability & environmental impact," European Journal of Operational Research, Elsevier, vol. 301(2), pages 546-560.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:risrel:v:238:y:2024:i:5:p:972-982. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.