The airline industry just wrapped up its eighth straight year of aggregate profitability, thanks in part to a relentless focus on cost reduction. This is both good news and bad news for used serviceable materials (USM) providers.
Demand for their product—airworthy spare parts at below-OEM-new prices—has never been greater. But such demand signals opportunity, and USM specialists increasingly find themselves competing against traditional parts suppliers, MRO providers and even OEMs eyeing bigger slices of the aftermarket pie. Savvy used-parts specialists are responding in kind, broadening their services to avoid being muscled out as airlines—focused on more efficient operations—seek leaner supply chains.
“With OEMs playing a bigger role, it’s going to get more difficult for smaller companies to make it,” says Abdol Moabery, CEO of GA Telesis (GAT) “It’s a tough and competitive business. The differentiator for a large company is the breadth of services that you offer, rather than just selling parts.”
Once known as a USM specialist, GAT has worked to expand its services. The company still dismantles aircraft and engines, Moabery notes. But the harvested parts now mostly support the company’s own engine and component MRO shops or long-term service agreements. GAT also has expanded into leasing, inventory management, and even financing large spares pools.
“USM is a smaller part of our overall business than it has ever been,” he says. “At this point, it’s just under one-third.”
Magellan Aviation Group, launched in 2000 as a USM provider and engine lessor, has developed a similar balance, with its business roughly equally divided between parts sales, engine leasing and engine sales. It also takes inventories on consignment, offering customers a low-risk way to dispose of surplus material.
“Our consignment model ensures that the customer does not have to become expert in the USM market,” explains Rob Fessler, Magellan’s executive vice president. Magellan “manages the asset throughout the process, from exiting the fleet, physical teardown on through the parts selection, repair management, marketing, sales and accounting and reporting,” he says. “Magellan becomes a risk-share partner; no further expense is borne by the consignor once the asset is removed from operations.”
The appeal of such options will only grow as demand for USM increases. ICF International sees the USM market growing at 5.2% annually through 2026, outpacing MRO as a whole. In dollar terms, USM will generate $7.7 billion in 2026 sales, up from $4.5 billion in 2016, ICF calculates.
USM’s value proposition is simple: It is cheaper to use than new parts. But the market has steadily become more sophisticated. What used to be a direct sale to an operator evolved to include maintenance providers, which quickly saw value in sourcing USM to lower their costs in servicing long-term support agreements (LTA).
Engine OEMs—led by GE Aviation and Pratt & Whitney—blazed the trail, snapping up used material and feeding it back through their shops into their LTA customers’ engines. More than 60% of today’s USM market is driven by engine parts; this figure will rise to 65% in 2026, ICF projects.
Shifting airline strategies are helping boost demand as well.
“Airlines are embracing the cannibalization of their own aircraft, then using the rotables to reduce the cost of future maintenance, or the engine parts to lower overhaul costs,” says Richard Brown, ICF principal.
Add in broader acceptance in regions like Asia—and China in particular—that have been long resistant to non-OEM parts, and USM still has tremendous growth potential.
“It’s a slower boil, but there is greater acceptance in China for used material,” Brown says.
Regardless of the region, the shift is linked to airlines pushing the cost-reduction envelope. This is prompting aftermarket providers to find cheaper ways to deliver equivalent, or better, levels of service. Engine OEMs have mastered this, and others are following their lead.
Boeing’s much-publicized push into the aftermarket has focused on in-sourcing spares sales and developing its digital analytics offerings. Both offer long-term promise, but Canaccord Genuity analyst Ken Herbert sees more near-term potential in the parts business.
“The focus for Boeing will be on material,” Herbert wrote in a recent research note. “We believe [Boeing] will get much more involved in the used serviceable material market and will benefit as the company vertically integrates, adding to the Boeing proprietary parts opportunity.”
Boeing is not alone among upper-tier manufacturers. UTC Aerospace Systems (UTAS), part of the United Technologies Corp. (UTC) conglomerate, has been working on building a USM strategy for about 18 months, UTAS VP & GM of Strategy & Asset Management Ajay Mahajan tells Inside MRO.
Among its first major steps was aligning with a legacy aftermarket parts specialist, VAS Aero Services, in early 2017. “They are our eyes and ears for the market because that’s what they do,” Mahajan says.
UTAS’ approach to the USM market is a mix of defensive and offensive strategies. “Used materials are a reality for legacy platforms,” says Mahajan. “Our strategy is to be able to play in that market, get intelligence and build capabilities to offer comprehensive material solutions for our customers.”
On the offensive side, UTAS is selling more used parts, both as part of long-term support packages and directly to end users. The company’s 2017 USM sales had a “double-digit” increase over 2016, Mahajan, says, adding, “We have made significant gains.”
The effort will only grow stronger as UTC integrates Rockwell Collins into the fold. Rockwell’s Intertrade division has long been a USM leader, starting with legacy Rockwell equipment and branching out into parts from some of the most sought-after engine platforms. It comes as little surprise, then, that UTC sees access to Intertrade as one of the major ancillary benefits of its pending acquisition of Rockwell Collins.
“They have a great surplus capability, which we don’t have,” says Akhil Johri, UTC chief financial officer. “We are trying to build that in UTAS. We have opportunities to take advantage of that.”
Many observers see component support as the next big USM frontier—in part because of the high cost of the newest aircraft and their parts. A Canaccord Geunity survey of MRO providers during the 2017 fourth quarter projected somewhat sluggish growth—about 4%—in new-component sales in the year ahead.
“While the USM market is the largest in the engine market, we believe it is seeing some of the fastest growth now in the component market, which could contribute to this slightly reduced full-year outlook,” Canaccord’s report states.
Another positive trend for USM players: airlines’ continued drive to consolidate suppliers.
The quest for lower operating costs goes beyond getting the best price for parts and services. It also means streamlining internal processes, and parts provision is a prime candidate.
“On a fundamental level, we believe airlines will look to use distributors more as they continue to look for cost savings and outsource opportunities,” Canaccord’s Herbert wrote. “We estimate that airlines currently purchase about 40% of their material through distributors, which should continue to grow.”
This creates opportunities for suppliers that offer both parts-sourcing and distribution. The extension of service lives for some older assets, caused by a mix of factors—including low fuel prices driving demand for lift and challenges on newer programs causing delivery delays—is boosting demand for parts on older platforms, such as the GE CF6 and Pratt & Whitney PW4000.
Herbert pointed to demand for older-engine material as “one of the key themes” at a recent engine MRO-themed industry conference. “We repeatedly heard that lead times for parts were growing, pricing was very good and demand for the engine material was not expected to slow anytime soon,” he said.