Surplus parts, already well-established in the engine aftermarket, are becoming more prominent in the components world and may be responsible for smaller across-the-board OEM spare parts price increases, a Canaccord Genuity survey of maintenance, repair, and overhaul (MRO) service providers reveals.
Canaccord’s latest MRO trends survey, covering the fourth quarter of 2013, included a query on the breakdown of new parts versus used serviceable material (USM) surplus parts purchased by MRO shops. While the engine shops predictably bought the highest percentage of surplus parts, increasing use by component repair shops helped lift the total level to 15%.
“We were surprised at the absolute level of USM procured,” Canaccord analyst Ken Herbert writes in his report on the survey.
Meanwhile, established used engine-parts suppliers like AeroTurbine and AerSale are facing a “challenged market,” as demand rises and manufacturers seek to expand their turf. Data from consultancy SH&E show that engine makers and maintainersand Pratt & Whitney are believed to be the biggest consumers of used parts, which Canaccord chalks up to meeting customer demand.
“We believe that GE decided that as long as the industry was going to continue to accept USM as a viable alternative to new OE parts, it should at least control as much of the trade as possible in GE USM,” the Canaccord report notes.
Herbert says the uptick in USM in the components arena, combined with an increase in activity among key OEMs, signals a changing landscape.
“We see a considerable shift taking place in the component USM market,” Herbert writes. “Some of the leading OEMs, such asand (InterTrade) are putting substantial capital into their own USM efforts. Many other component OEMs are either not yet sure of the right strategy, or have decided to not make a dedicated USM push.”
In the bigger picture, USM’s prevalence appears to be affecting OEM spares pricing strategies. The Canaccord survey found that new spare parts prices were about about 3% higher last quarter than the same period a year ago. While Canaccord notes that this is “in line with historical averages,” there is evidence that some OEMs are throttling back due to USM pricing pressure.
“Some OEMs indicated to us that their annual price increases were less than in prior years, largely due to the competitive threat from USM,” Herbert explains.
While smaller price increases may help keep OEM parts moving, such moves are not expected to slow the USM growth trend.
“We do not believe that a slight reduction in the price of new material will have any long-term impact on new part sales relative to used material, but it has been one competitive response pushed by the OEMs,” Herbert says.