TRENDS

Dealing with Parts Price Inflationby Alex Derber

Prices for new engine parts can rise by 10% per year.

New aerospace parts become more expensive every year, but airlines can adopt several strategies to mitigate the above-inflation rises.

Stepping off the parts price escalator

Annual price rises for spare parts are an unfortunate fact of life for airlines. One leading maintenance provider puts the average yearly increase at 4-6% for airplane parts and at 7-11% for engine components.

The latter range is of prime concern because engines are the most valuable part of an aircraft and incur the most significant maintenance and overhaul costs. Indeed, as an aircraft approaches full maturity, its engines will constitute almost all its residual value.

Spare part sales have long been among the highest-margin business of engine OEMs, which typically sell their equipment at or below cost and then seek to recoup their engine program investments in the aftermarket. Engine lessor ELFC reports that average annual price inflation over the past five years for life-limited parts (LLPs) on some of its most popular models range from 6% for the GE90-115 to 6.9% for the CFM56-7B.

“LLP price increases from a lessor’s perspective are relatively easy to defend since we simply pass through the escalation to the operator,” says Justin Phelan, VP marketing for ELFC.

“With the numbers available to all concerned this is a transparent process and we don’t generally have operators beating us up; rather, they take it up directly with the OEMs,” he adds.

Mitigation Strategies

Although aerospace parts price inflation is a longstanding bone of contention between OEMs and airlines, the latter and their maintenance providers have developed several alternatives to buying new spares.

The most obvious is to repair rather than replace. Different MRO companies have different capabilities in this regard, with some repairs now relatively common and some unique to certain organizations. Lufthansa Technik, for instance, has made significant progress towards automating inspections and repairs of certain combustor components by using specially designed robots.

One of the fastest-growing alternatives, meanwhile, is the used serviceable material (USM) market, where parts are stripped from engines and aircraft and then sold for their remaining cycles, or are restored and then sold. Canaccord Genuity has labelled the growth of USM a “structural shift in the commercial aftermarket”, while ICF International forecasts that the value of the USM market will rise from $4.5 billion in 2016 to $7.7 billion by 2026.

There are questions about whether the USM market can sustain its growth as newer aircraft and engines enter the global fleet, the argument being that there is less feedstock for teardown. For while there is still plenty of commonality between some of the most popular new airframes, notably the 737 Max and A320neo, and their predecessors, new engines like the CFM LEAP and PW1000G share little with previous technology. That said, current-generation 737s and A320s still dominate the global fleet and have been operated longer than ever thanks to low fuel prices over much of the past decade – and their high reliability.

Another way to keep parts costs in check is to use PMA – reverse-engineered parts that are cheaper than their OEM equivalents, while offering equal or better performance, their manufacturers claim. Despite their savings, however, many operators are unwilling to use PMA, either because their leasing contracts preclude them from doing so, or because of technical agreements with manufacturers. Many engine OEMs, for example, will insist on replacing any PMA they find during an overhaul with their own equipment.

Which of the above strategies an airlines chooses – and many will opt for a combination of all three – depends on a multitude of factors. Equipment age, maintenance cost, time on wing, turnaround time and residual value all factor into the equation, with any short-term savings having to be balanced against long-term lifecycle costs.

Set against those variables is the constant of new parts price rises, which OEMs appear in no mood to change. Yet, while there is little attempt to justify the above-inflation hikes, some OEMs do point to savings they offer in other areas, such as improved reliability and their own USM programs. CFM, for instance, has pledged to keep LEAP maintenance lifecycle costs at the same level as the CFM56, with reliability a key driver of this.

In any case, of greater concern for airlines and maintenance providers right now is the limited supply of new aerospace parts. This is especially acute in the engine market, where manufacturers have been focused on resolving in-service engine issues and on meeting aircraft production ramp-ups. So acute has the shortage become that overhaul turnaround times for the most popular engines are drifting well beyond deadline and there have even been reports of suppliers buying new engines for part-out!

Such investments may well be unwise, but nonetheless underline the feverish prices in today’s plane parts market.

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