Dramatic Traffic Downturn Shakes Up Secondary Parts Market
Airlines seeking to keep maintenance costs in check as they manage their way through the novel coronavirus pandemic will have ample surplus material options. But the rise in available parts and components will not necessarily come from retired aircraft—especially in the near term.
Used serviceable material (USM)—typically parts harvested from retired aircraft—are the most common source of non-OEM parts. But surplus parts come from other sources, too—notably, excess stores that airlines no longer need. These, says Mike Stengel, AeroDynamic advisory senior associate, are expected to drive the initial surge in available material.
Recent deals announced by AvAir underscore the trend. The Chandler, Arizona-based parts distribution specialist bought 45,000 line items of rotable and consumable material from Aerolineas Argentinas, which has removed Airbus A340s and some Boeing 737 Next-Generation (737NG) aircraft from its fleet in recent years. AvAir also cut a deal with Icelandair to market excess material for Boeing 757s, 767s, 737NGs and even the 737 MAX—a result of fleet downsizing that many airlines are facing in light of significantly reduced traffic.
The excess material will help form a “first wave” of surplus parts, Stengel says, and will grow as airlines firm up fleet changes in the coming year or so. Excess inventory provides some opportunities that the part-out market does not, he adds. Chief among them: consumables and expendables.
The pandemic’s reach is creating another rarity in the secondary-parts market—availability of new-generation material. Icelandair put its first 737 MAX into service in March 2018. That it has excess inventory a little more than two years later underscores the extreme shock that the pandemic has brought to the industry.
Icelandair placed an order for 16 MAXs in 2013—all slated to be in service by 2022. But a combination of the pandemic and the model’s grounding forced the carrier to revise its fleet strategy. It now plans to have no more than nine MAXs in service as part of its peak summer 2021 schedule and canceled four orders.
Other carriers also are delaying deliveries of new-generation aircraft. Those with some already in service may find themselves with excess material obtained as part of initial provisioning packages bought to support the new fleets. Carriers that need cash more than expensive, spare components sitting on their shelves may turn to the USM and excess-parts market to offload some inventory, says Naveo Managing Director Richard Brown.
“There isn’t much of the latest-generation material on the market, and [most of the aircraft] are under warranty,” Brown says. “If you’re not going to take, say, your 737 MAXs or new widebodies for a while but you’ve invested in some provisioning, do you as an airline make that material available on the market? Especially among widebodies, if you have high-value, new-generation material, you could imagine some of that getting on the used market. This may impact profitable OEM provisioning sales.”
Airbus Senior Vice President for Customer Support Valerie Manning acknowledges this threat. “We could see some price reductions across parts catalogs,” she said during the recent Aviation Week MRO TransAtlantic virtual conference.
Naveo estimated the commercial air transport materials market at about $32 billion in 2019, including $5 billion for USM. The COVID-19 pandemic’s ramifications will likely lower these figures by 40% or so in 2020. Parts purchasing will rebound, but the USM segment’s climb will not be as linear as many believe, Brown says.
Removing hundreds of aircraft from fleets on the heels of USM shortages on many popular platforms led some to predict a rapid surge in available material. But the pandemic’s uncertainty means many airlines are simply idling aircraft until demand trends become clearer, rather than retiring them—particularly among increasingly useful narrowbodies and smaller widebodies.
“Teardowns will increase, but you only need to be breaking down airplanes when the airlines or MROs need the parts,” Brown says. “Right now, they don’t need the parts so urgently.”
The increase in available surplus parts is one reason. Another is that airlines parking only portions of sub-fleets can generate their own USM flow. While some operators such as Delta Air Lines and Southwest Airlines have long embraced the strategy, the pandemic—combined with a broader focus on cost-savings on controllable line items such as maintenance spending—is leading more carriers to explore the idea. Icelandair’s recent announcement that it would retire four of its 757s and part them out is the latest example.
“Icelandair will realize the part-out value both by selling parts to [third parties] as well as maintain parts for our own stock,” says the carrier, which plans to keep 17 757s flying as part of its summer 2021 schedule.
While such strategies could reduce USM demand and keep quality material off the market, new customers will emerge to help generate business for suppliers. While USM is an accepted part of keeping costs low for many operators, not all airlines have embraced it, opting instead for the security of new parts—even at higher cost.
While each carrier is different, USM has always been more established in North America and Europe, but it is increasingly being used in the Middle East and Asia, Brown says. The need to keep costs low as traffic slowly recovers will lead to even more converts.
“USM is an acceptable choice for an increasing number of global airlines looking to save money on new OEM parts,” Brown says.
Growing acceptance of USM and a slowdown in new-aircraft sales could generate interest from larger suppliers that currently do not play much in the space. Add in airlines’ desire to limit the number of vendors they have, and the idea of big players with parts-distribution businesses—including aircraft manufacturers—entering the USM market is easy to envision.
“Scale matters,” Brown says. “I would not be surprised if you see OEMs and larger suppliers investing in broader USM solutions such as guaranteeing part availability and quality. It’s about capitalizing on the opportunity to give their customers something they want.”
In the interim, airlines, lessors and parts traders will wait and see how global demand trends evolve. Airlines are loath to retire aircraft too quickly, lest they find themselves without enough capacity if demand comes back faster than projected. Storing aircraft for $10,000-20,000 per month is an “affordable insurance policy” against making too hasty a retirement decision or incurring a large impairment charge, Stengel says.
USM specialists are keeping an eye on trends as well, looking to avoid overpaying for assets the market does not need. “We do expect the availability of USM and excess new material to substantially increase,” Canaccord Genuity analyst Ken Herbert says. “However, it appears for now the industry is in a ‘wait and see’ mode while pricing and supply-demand settle with the new reality.”
Since hitting their one-year peak of 884 in 2012, retirements have been slow. A Naveo analysis of Aviation Week Fleet Discovery data shows that annual jet transport retirements have averaged 2.5% of the active fleet, with stored and parked aircraft—those most likely to be retired—at about 7%. As of mid-September, the 465 recorded 2020 retirements represented about 2.2% of the active fleet, but an eye-opening 62% of that fleet—about 13,000 aircraft—was idled.
As airlines make imminent retirement decisions, USM activity will increase. AeroDynamic projects the surplus parts market, excluding excess inventory, may not reach $1 billion in 2020. By 2025, however, it will be around $6.4 billion.
“The retirements and part-outs should start picking up next year,” Stengel says. “For the near term, it will be pretty tepid.”