Among airlines, manufacturers and the finance community, news of yet another mid-life aircraft being harvested for parts will rekindle the debate about adjusting the useful life of an airframe. In the aftermarket world, however, word of a part-out brings near-universal agreement on a different industry trend: the growing influence of surplus parts on MRO strategies.
As recently as a decade or so ago, sourcing serviceable parts was neither complicated nor efficient. It did not have to be. Top-tier airlines had larger spares pools and met much of their muted used-parts demand from within, selling off what they did not need. Original equipment manufacturers (OEM) were just starting to see the valuable roles that secondhand parts could play in their aftermarket portfolios.
As a result, part-out specialists could focus on their core competency—ripping planes apart—and earn an extra buck or two selling usable parts to brokers with their own end-user customer base.
“Twenty years ago, we were just supplying parts on an ad-hoc basis,” says GA Telesis President and CEO Abdol Moabery. “That has changed drastically.”
The numbers hammer home Moabery's point. In 2001, the air transport serviceable parts market was worth about $11 billion, with just 10% claimed by surplus parts, according to ICF SH&E data. A decade later, the market was close to $15 billion, while the surplus share had climbed to 18%. By 2015, ICF SH&E projects surplus parts could have 20% of the $17 billion-plus market for serviceable airframe, engine and component spares.
Several factors are playing major roles in this market shift. First and foremost, operators are changing their strategies. “Airlines realize that the increased availability of good-quality, used, serviceable material has allowed them to control costs by avoiding the need to put brand-new material into their engines or airframes,” says Steve Williams, director of aircraft engine services at A J Walter Aviation.
While many MRO-related changes stem from within the hangar, some take place on the flight line. An increase in leased versus owned aircraft also is boosting surplus-parts demand. In 2000, about 25% of the world's fleet was leased,data show. Last year, the figure was about 38% and by 2020, it will be above 50%.
Because surplus parts offer comparable reliability to new parts at a fraction of the cost, they are often tapped to keep leased aircraft flying or prepare them for an end-of-lease return. “It doesn't make sense to gold-plate a lessor's aircraft,” Moabery says.
Among owned fleets, deciding to prolong the service life of an older fleet type may have its drawbacks, but surplus-parts availability is not one of them.
Take' continued use of nearly 120 MD-88s. Instead of overhauling engines and sourcing new components, the carrier can harvest what it needs from aircraft being phased out elsewhere, such as Scandinavian Airlines' (SAS) MD-82s and MD-87s, which Delta started strategically snapping up last year.
“These are aircraft that are typically purchased by part suppliers who will chop that airplane up and sell it for parts,” explains Delta CFO Paul Jacobsen. “[O]pportunities to acquire older airplanes and harvest them for parts has provided significant savings for us going forward in terms of a lower-cost basis for the overhauls that we have.”
Some of the ex-SAS aircraft may pay for themselves in “less than one year,” Jacobsen says.
Delta's strategy is more nuanced than simply keeping its old metal flying. In addition to parking regional jets, it planned to retire 14 mainline aircraft, including DC-9s, in the second half of this year. The moves will come as new aircraft‚ and new-old aircraft—such as ex-AirTran 717s—enter the fleet. The carrier is upgrading its MD-88s and MD-90s with glass cockpits, which both add capability and save weight, not to mention justify the stockpiling of used serviceable spares.
“Delta does have one of the older fleets in the system,” acknowledges Ed Bastian, the carrier's president. “As a result, we have considerable opportunities to use older equipment to, in effect, improve the overall performance of our maintenance programs.”
Cost-saving opportunities abound throughout an aircraft's service life but are particularly ripe in the engine world. The bulk of engine-maintenance costs come from shop visits, of which 60-70% is in materials.
While performance-based contracts such as power-by-the-hour eliminate the shop-visit cost spike for many operators, some party—an OEM or independent engine shop—is performing, and paying for overhaul work. Independent providers have always sought cost-saving opportunities such as surplus parts or repairs that they can leverage for customers, but OEMs were slow to embrace such tactics.
When the primary OEM aftermarket strategy focused on hawking new spares, such resistance made sense. But in a world where OEMs increasingly see broad aftermarket support as a lucrative revenue stream, meeting customer demand is taking precedence over moving new product.
An MRO market assessment released by the Aeronautical Repair Station Association (ARSA) showed that OEMs captured 44% of the $26 billion air transport engine overhaul market in 2012. That percentage should only grow.
A TeamSAI analysis shows an across-the-board increase in the percentage of new-generation engines in long-term OEM support contracts compared to their predecessors., for example, grabbed less than 20% of the -3 overhaul market but has about 40% of -5B/-7B work, and could end up with 80% for the Leap engine.
As expected, the OEM aftermarket ramp-up has been matched by increased participation in the surplus-parts game. The evidence—both at the macro and micro levels—is everywhere.
Last year, the air transport engine services market generated $1.35 billion in surplus-parts business, an ICF SH&E analysis shows. The biggest slices of the pie belong to a pair of OEM subsidiaries,Engine Services and Pratt & Whitney Services, at 17% and 10%, respectively. Not surprisingly, they are their own biggest surplus-parts customers.
GE's Engine Services' foray is just part of the company's used, serviceable parts activity. In 2006, the company bought aircraft part-out and surplus-parts specialist The Memphis Group, and tucked it into its Asset Management Services (AMS) business within its GE Capital Aviation Services leasing arm. Last month, AMS unveiled its newest product line: still-flyable-200 parts, courtesy of an in-progress teardown.
“OEMs have adopted what we do as acceptable practice,” says Moabery. “They are very much entrenched in the used, serviceable parts market.”
GA Telesis and its competitors leverage OEMs for more than their massive parts needs. Moabery says his company sends 70% of its repair jobs to OEMs, too, which results in a higher confidence level among GA Telesis customers.
“If you're concerned about my quality, then you're concerned about the OEM's quality,” he says. “There is no call to question [us] about the quality of the parts.”
Two-way partnerships with OEMs exemplify one way in which surplus parts specialists have changed to meet growing demand. Moabery suggests the increased capabilities of companies like his has as much to do with an increase in mid-life aircraft part-outs as any macro decrease in the traditional 25-year useful life. “It's not the availability of those aircraft at a younger age that we should be focusing on,” he notes. “It's really the capability of companies like us and others that have developed sophisticated business models.”
Some of the sophistication has come via organic growth. Two former Collins Avionics employees founded Cedar Rapids, Iowa-based Intertrade in 1969. For a quarter of a century, the family-run business specialized in secondhand avionics made by cross-town neighbor. In the mid-1990s, Intertrade expanded, adding warehouse space and parting out a -300 to help fill it. In 1999, Rockwell Collins bought Intertrade. Today, the company's inventory is just as likely to feature harvested parts from a 15-year-old 737-700 (MSN 28437, purchased a year ago) as it is refurbished components made by its parent.
Diversification also gives companies more options as markets shift. At conglomerates such as GE and Rockwell Collins, the synergies of an OEM unit, a large aftermarket services network, surplus-parts specialist and (in GE's case) leasing arm are self-evident. Smaller companies such as GA Telesis are playing the diversification game, too. The company leases out about 120 aircraft and engines, giving it perspective into the aircraft-demand market.
When the company evaluated the prospects of a recently purchased 12-year-old 737-300 (MSN 30723) and a 1999-vintage 777-200ER (MSN 28418), it saw more value in parting them out to support the existing fleet than keeping them in the fleet. Put simply, the present value of the part-out's revenue potential over, say three years, was greater than the potential lease returns plus the residual value.
“We could've put them back in service,” Moabery says. “But economically, it makes more sense for us to part out the aircraft and put those parts into the aftermarket today.”
Ten years ago, few surplus-parts dealers could extract enough value from a middle-aged, in-demand airliner to make such a call. Five years ago, 54% of surplus-dealer stock came directly from part-outs, ICF SH&E calculates. Last year, the figure was 82%.
“The suppliers are becoming more sophisticated, both technically and financially,” Moabery says.