A version of this article appears in the July 7 edition of Aviation Week & Space Technology.

The spare parts business, once a mundanely straightforward enterprise of new material flowing from manufacturers to operators, has evolved into one of commercial aviation’s most dynamic—and paradoxical—sectors.  

Incorporation of cost-saving used parts is on the rise, yet the leading consumers of them are original equipment manufacturers (OEM). Some image-conscious airlines embrace used material but draw the line at taking components refurbished by independent shops, insisting instead on parts repaired by the OEMs that made them. And despite projections that show the global airline fleet doubling by 2033, many aftermarket suppliers are
focused just as much on diversification and consolidation as on growth.

Each of these seemingly complex trends is explained by a simple and enduring precept: Cost-conscious operators are driving innovation throughout the aftermarket supply chain, urging everyone in it—from the largest OEMs to the dedicated used-parts broker—to deliver more value.

For many operators, value means flexibility.

When Moog set out to develop its aftermarket support for the flight controls it exclusively supplies for the Boeing 787 and Airbus A350 programs, the company sketched out a straightforward power-by-the-hour (PBH) offering. One of the main goals was tighter alignment with customers, explains Kate Schaefer, Moog’s general manager-Commercial Aircraft. 

In the past, Moog found that reliability data on its products was hard to gather, in part because so many different shops were overhauling its components. A PBH deal would shift cost-containment risk to Moog, incentivizing it to maximize reliability and, by putting itself in the repair pipeline, providing the insight needed to measure its progress.

As Schaefer and her colleagues visited 787 operators and outlined Moog’s plans, they quickly learned they needed a broader set of services. Some airlines said they prefer to buy spares, for instance, and some want to lease them. Moog also found that its forward-stocking program—set up both to offset customers’ dedicated inventory needs and to tackle emergencies such as an aircraft-on-ground (AOG) scenario—appealed to a much broader set of customers than expected. 

“We always thought it was the smaller airlines that were looking for this, but that is definitely changing,” she says. “Even larger, more traditional airlines are using a forward-stocking option to top up” their dedicated spares pools.

Moog developed options to cover the variety that airlines asked for, from basic time-and-materials repair service to PBH. It also sought deals with more comprehensive maintenance providers, such as Lufthansa Technik, to satisfy operators that prioritize a streamlined supply chain.

“We set about coming up with options for all of those airlines,” she explains. “But we also understood clearly that there are airlines that have a buying behavior that we can’t support—the ones that want nose-to-tail support.”

Moog’s new aftermarket program—specifically, the forward-stocking initiative—presented a non-traditional opportunity for growing supplier AeroTurbine. Moog set up spares centers in Beijing, Dubai, London, Los Angeles, Melbourne, Miami, Singapore, and Sydney, and needed an experienced logistics provider to keep parts moving. A parts supplier at heart, AeroTurbine offered Moog elements that traditional logistics providers cannot. Chief among them: firsthand understanding of what Moog’s customers face when a part is needed.

“I know what an AOG is,” says Josh Abelson, AeroTurbine’s senior vice president-Supply Chain Solutions. “We can speak their language.”

AeroTurbine’s evolution underscores the types of shifts that many suppliers are making to meet customer demand. Launched as a used engine parts supplier in 1997, the Florida-based company now provides services ranging from boutique airframe maintenance—it runs four heavy check lines for Frontier Airlines A319s and A320s at its Goodyear, Arizona, repair station—to technical assistance on lease returns. Forced to start buying entire aircraft just to get the engine material it wanted—a move that prompted an expansion into airframe parts—the company soon developed a short-term lease business. This allows AeroTurbine to buy engines and aircraft, place them with operators on short-term deals to run off green time, and then part them out.

While other parts suppliers and even independent MRO providers have lease pools that feed used parts stocks, few have a direct pipeline into a fleet of 1,300 aircraft. AeroTurbine’s 2011 purchase by International Lease Finance Corp.—now part of AerCap—means the parts specialist has a dedicated feed of aircraft transitioning between operators and, eventually, out of the fleet. AeroTurbine tears down up to 30 aircraft per year, sourcing 30% of them from its parent. This helps ensure AeroTurbine, which generates about 60% of its $500 million in annual revenue from parts, a steady and predictable component supply. The latter is key to providing services like pooling and the Frontier work, which require having specific material at the right time.

“The parts business is going to become commoditized,” Abelson says. “The traditional surplus parts market will be under pressure. We need to evolve our services business.”

The demand for used parts may wane as inventories are stocked and new-generation equipment like the 737 MAX and A320neo displace today’s workhorses, or if a spike in fuel prices renders older, less-efficient aircraft too expensive to operate. For now, however, operators’ thirst for used serviceable material (USM) remains seemingly unquenchable. ICF International sees the USM market rising at a 5.5% compound annual growth rate through 2022, climbing from $3.5 billion in 2013 to $6.2 billion in a decade, excluding transactions between dealers. Richard Brown, an ICF analyst, calls this the “medium growth” scenario. Its assumptions include a slight uptick in interest rates, a slight dip in fuel prices, run-of-the-mill delays in new aircraft programs (the 787 program delays gave some older widebodies new life) and no major disruptive tactics from original equipment manufacturers. 

Repairs and used parts demand are driving strategic shifts throughout the supply chain. USM suppliers increasingly are branching out into related areas like parting out and repairs, or finding partners that provide such services. This pleases airlines, many of which are looking for stronger partnerships, more cost-savings opportunities and in some cases, fewer purchase orders. 

Republic Airways Holdings contracts out 80% of the maintenance for its Chautauqua Airlines, Republic Airlines and Shuttle America subsidiaries. The airline monitors myriad data points that help it identify factors such as parts consumption and other cost drivers throughout its fleet, says Andrew Skaff, vice president-Supply Chain. It shares the information, as well as the company’s big-picture goals—including a cost-per-available seat-mile of 8.85 cents or less and a 99.1% controllable completion factor—with suppliers. They are expected to use the data to improve key drivers like their forecasting, and by extension, their services.

“I think it’s very important from a supplier perspective that you are aligned with the customers you support,” Skaff says. “If there is a [part] stock-out on a situation that created an AOG at the airline, did you support the completion factor or inhibit it?”

Shifting airline strategies have OEMs re-shaping their service approaches as well. The USM trend is one example, particularly on the engine side, where material costs account for 70% of a shop visit. General Electric, which has 33,000 engines in airline service (counting models from joint ventures CFM and Engine Alliance), generates an industry-leading $7.9 billion annually from its services business. It also sells more USM—about $700 million per year, or one-third of a $2.2 billion annual used engine parts market—than anybody else.

Most of these parts go into GE’s own shops, supporting customers it has under contract. GE does not disclose the number of engines under long-term deals, but consultancy TeamSAI estimates the percentage ranges from 40% on the current-generation CFM56s to 60% for the GE90 and as high as 80% for yet-to-enter-service Leap. Counting these contracts and factoring in joint venture revenues, GE’s services backlog is $96 billion. Much of it—$43 billion—is for CFM engines, while the GE90 accounts for $27 billion, and the GEnx, $13 billion. 

Such figures spotlight cost-savings opportunities stemming from incorporating used parts. GE has in recent years revamped its support offerings, incorporating more USM into overhauls where it makes sense, says Nathan Hoening, general manager and business leader of GE’s Aviation Materials business. In some cases, the goal is meeting a specified build standard designed to minimize overhaul costs on an engine headed for retirement. In others, it is about leveraging USM to get the most out of dollars spent throughout an engine’s lifecycle—an approach that GE has increasingly embraced as more of its engines reach maturity and customers seek more creative options.

“We’ve changed in terms of how we approach the market from a mature fleet standpoint,” Hoening says. “We’ve done a lot of work internally that has increased the amount of surplus material that we’ve provided through our own contracts and into our own overhaul shops.”

While the OEM shift into USM markets rattles many an independent supplier’s nerves, it also creates opportunities. GE and its competitors source many of their parts via teardowns, but also acquire a fair amount on the open market. They also make USM available to other end-users.

“Some of these third-party parts suppliers stretch out into other areas, such as overhaul shops,” Hoening notes. “In a lot of cases we can become a supplier to them.”

One example is GE’s deal to supply used CF6-80C2 parts to GA Telesis, which overhauls the engine type in its Helsinki shop.

Independent suppliers also turn to OEMs to return their harvested parts to airworthy condition. While the repairs pipeline also includes independent MRO shops, some airlines like the combination of a used part with an OEM repair tag, while repair shops can use them as differentiators.

Airframe and component OEMs dabble less in the USM market than their engine counterparts. This is partly due to demand, as 62% of the $3.5 billion annual USM market is for engine parts, ICF calculates, while most of the rest is for components and just a sliver—less than 5%—is for airframe material. 

Market dynamics also play a role.

“We have a good understanding of fair market value because we trade parts every day and our business model is predicated on customer service and logistics,” AJW Aviation CEO Boris Wolstenholme explains. 

Add in that even the most savvy OEMs must focus first on new products—and even then only for the aircraft or engine programs they are involved in—and large independent suppliers can leverage their day-to-day experience to gain the upper hand.

“AJW provides [product type] integration seamlessly, utilizing a mixture of tear-down aircraft, large tailored inventories, and OEM support programs,” says Gavin Simmonds, general manager of AJW Technique, the group’s Montreal-based component service center.

Technique, formed when AJW Group bought the component business of the insolvent Aveos and opened last year, broadened the group’s offerings and gave it a significant presence in North America. Simmonds contends the expansion also also boosted its ties with OEMs, which—as Moog does with AeroTurbine—recognize the strengths that independent, service-focused businesses can provide as partners. 

“The two complement each other,” Simmonds says of OEMs and his group. “AJW has a route to market and tailored solutions. OEMs have the intellectual property and software rights.”

Joe Dunne, Boeing’s director of
Material Management Services, agrees with the general premise.
Boeing, which puts itself as the number three commercial aftermarket services provider by revenue after GE and Lufthansa Technik, has made bolstering its commercial services business a priority.

“Does that mean we have to do everything ourselves? Not necessarily,” Dunne says. “We have no desire to control the market. We have a strong desire to participate in the market. If there are things within the services required by our customers that are better done by somebody else, then we will entertain relationships with those providers.” One example is Boeing’s 777 component service program with Air France Industries KLM Engineering & Maintenance—a deal that started in 2003 and was renewed earlier this year.  It serves 18 airlines and 177 aircraft.

Dunne, speaking to airline maintenance executives at April’s Aviation Week MRO Americas event in Phoenix, was adamant about one aspect of the aftermarket: Nobody has better tools to keep a fleet stocked with the right spares at the right time than the airframe manufacturers. From reliability data to a global network of engineers and parts warehouses, the airframe OEMs are ideally positioned to take advantage of operators’ desire to have spares at arm’s length—but not in their own stock bins.

“When you think about investing in a pool of inventory, it has to be dynamic,” Dunne says. “The market says, ‘I want [to ensure] that material [availability] never becomes a driving disruption to my fleet.’ The OEM, given its size, its knowledge, and its infrastructure, is in the best position to do that.” 

 

Airbus A320 and Boeing 737 Shares in Global Fleet

 

Aircraft Installed Base

Aircraft Deliveries

Aircraft Retirements

MRO Spending

 

A320

737

A320

737

A320

737

A320

737

2014

20%

22%

31%

28%

11%

14%

18%

17%

2015

21

23

31

27

6

14

19

17

2016

22

23

29

27

8

10

20

17

2017

23

24

30

27

7

14

21

19

2018

24

24

27

29

5

14

23

19

2019

24

25

29

28

7

16

24

19

2020

25

25

28

28

10

16

24

19

2021

25

25

28

29

13

16

24

20

2022

26

26

28

30

14

23

25

20

2023

26

26

28

30

14

31

25

21

A320 family is A318, A318CJ, A319, A319CJ, A319neo, A320, A320CJ, A320neo, A321, A321CJ and A321neo. 737 family is 737BBJ, 737 MAX, 737-200, -300, -400, -500, -600, -700, -800 and -900.

Source: Aviation Week Fleet and MRO Forecast 2014-2023