Parts Landscape Sees More Leasing
Whether managing steady annual-growth rates or working to rebuild businesses decimated by a demand downturn, airlines and aftermarket providers always share one common trait—uniqueness.
“There are some patterns and similarities,” says AvAir CEO Mike Bianco. “But no two operators [and] no two MRO providers are the same.”
Such variation within a service provider’s customer base fosters opportunity. One ramification from the recent downturn is customers looking at more ways to lighten their balance sheets. For well-capitalized parts suppliers such as AvAir, parts leasing is increasingly another intriguing option.
Leasing is hardly new to aviation. Growth among lessors means aircraft and engines will soon be more likely to be leased than not. Leasing has played a role in the parts world as well, typically with larger components such as landing gear and auxiliary power units (APU). But the trend is spreading, as customers seek ways to both take pressure off balance sheets and inject cash.
AvAir, which completed a private equity-backed management buyout in 2019 in part to have funds available to spend on attractive deals, is among those reaping the benefits.
“We’re seeing it pretty heavily on the component side,” Bianco says. “Not quite into the engine internal [areas], but line-replaceable units and some other external parts like fan blades and other [non-engine] components.”
The reasons are straightforward, he says. “You lease landing gear and APUs because they are big and expensive and cumbersome on a balance sheet. Well, so is an entire inventory of avionics.”
Bianco sees several factors driving the shift. The largest is a desire to use surplus assets to generate much-needed cash. While some carriers have used their inventories as loan collateral, that only shifts the problem to a different part of the balance sheet.
“You can’t get true liquidity with the help of a bank,” Bianco says. “A bank is not going to buy material from you. The only people who are going to invest in that type of inventory to free up working capital for some of these larger operations is a company like AvAir.”
Another factor that could have staying power is a shift away from power-by-the-hour and similar long-term agreements. A sudden dip in flying hours that comes with a demand slump can leave suppliers with cash-flow issues and operators paying a stipulated minimum fee for parts they are not using. During the most recent crisis, both sides began to seek alternatives. Suppliers sought to offload unneeded parts in exchange for cash, while operators wanted less financial risk tied to their inventory.
Although parts suppliers will still tailor their offerings to customer needs and set up as many long-term agreements as they can sell, Bianco sees end-users driving change.
“Power-by-the-hour was the mainstay if you didn’t want to own the parts,” Bianco says. “I think that it’s going to be less common. People will still do it, for sure. There’s no doubt in my mind it works for certain folks. But there’s a pretty deep list of operators who are looking for alternatives that are less risky.”