Components Move Upstream

MOST AIRLINES EXPECT their inventories of components to decline in 2010 and to make more use of vendor-owned inventories and pools, according to preliminary results of an Aerostrategy-IATA survey. Few doubt the current shift in part stocks upstream in the supply chain, but major questions remain. Is this a long-term trend or a short-term reaction to intense financial pressure? How widely will it affect airlines, especially major carriers? Will most stocks be held by airframe or component OEMs, maintenance shops or others?

Airframe manufacturers can offer broad coverage of components on their products. But component OEMs that supply substantial counts of part numbers also can deal directly with airlines. Asset management and ownership by component providers "has been happening and it is accelerating," Hamilton Sundstrand VP and GM-Customer Services Matthew Bromberg says. Fully 40% of H-S's aftermarket business is under long-term contracts.

Comprehensive Accessory Repair and Exchange offers repairs, pooled parts and other services on a cost-per-hr. basis. The program covers about a thousand aircraft and engines, a market of $500 million, and the company owns $100 million in C.A.R.E. parts. No-go items are on airline shelves and it guarantees shipment of backfills within 8 hr. 98% of the time. Parts are generally stored at one of its 22 global distribution centers but carriers can pay a premium to have stocks at maintenance bases.

H-S also offers on-site support, assigning staff to airline shops to manage parts and advise on repairs, workscope and service bulletins. It owns $100 million of on-site parts. Nine of the top 20 airlines have signed up to support 3,000 aircraft under CPH charges with reliability guarantees. Bromberg attributes growth of management programs to the rise of low-cost carriers, which lack infrastructure; more mixed fleets at major carriers and heavy costs of holding rotables, including interest expense; and managing obsolescence. And H-S has reduced turn-time on repairs from 30-60 days 15 years ago to 15 days today, making exchanges more attractive to airlines.

Almost all the top 30 airlines get some long-term support from the company and interest has increased. But developing countries like China and India are encouraging domestic repair facilities, which may limit growth in those markets. Messier Services President Joel Berkoukchi sees a trend for airlines to outsource maintenance of major rotables to minimize costs, especially small and medium-sized carriers. He believes some major airlines will join them as they confront heavy investment for new models. "With new types, innovative solutions for initial stocks and warranty management, plus asset management later, will answer some expectations. Especially if you warrant dispatch and promise fast turn-times you will capture more interest." But asset management requires financial strength, maintenance capability and punctual logistics.

Messier can work directly with carriers or partner with full-service maintenance providers to offer complete coverage. It can own or simply manage airline stocks. One key requirement is maintaining quality of components. "It is like leasing aircraft, the leasing firm wants to ensure it gets the same quality back as it leased," Berkoukchi says.

Room To Grow

Only 5% of Parker Aerospace's commercial aftermarket sales are under asset management. Senior Director-Customer Support Alex Guruprasad expects this share to grow as new aircraft come into service with major airlines and startups increase. Parker works through airframe OEMs, shops or directly with carriers, partly depending on which firm has the strongest relationship with the airline and partly on how much Parker content is on the aircraft. For example, significant content on E-170/190s makes managing these pools more feasible but it also can manage other OEM components. Beyond rotables, Guruprasad sees more interest in management of piece parts for airline maintenance departments.

"The aftermarket is certainly a dynamic environment. Airlines are looking for better solutions [while] minimizing investments and getting the best service," Goodrich Segment President-Nacelle and Interior Systems Cindy Egnotovich told ATW at the Singapore Airshow. Aftermarket Business Development Director Bob Corbeil sees airline interest in management of spare landing gear. The firm's nacelle support program, Prime Solutions, is expected to grow as 787s and A350s are delivered, and it recently opened a supply-chain management office in Xi'an. Currently, around 30% of Goodrich's annual turnover comes from aftermarket support. Egnotovich says that over the past 12-18 months it is seeing more interest in these types of solutions for nacelle systems and "it is our intention to drive for more." She notes the company has been "doing it in wheels and brakes for a long time."

Avionics are especially suited to OEM management. Test equipment is expensive and components fail randomly unlike mechanical parts, which usually are removed predictably with use. Large component pools are more efficient than small stocks at handling random failures.

Rockwell Collins expects spare avionic components on new aircraft will be managed increasingly in pools by OEMs, according to Senior Director-Material Program Services Kurt Weber. Air China recently selected Collins Aviation Maintenance Services Shanghai to service all R-C equipment on its fleet.

Thales does a quarter of its support business under long-term contracts that include owning and managing stocks. Daniel Malka, head of worldwide aerospace services, believes this share can grow to 40%-50% in the next five years. The company's Avionics-by-the-Hour guarantees availability of parts and repairs when needed under CPH. Thales has partnered with OEMs Diehl, Liebherr and Zodiac Aerospace in OEMServices to support up to 60% of components on Airbus models. It recently introduced another program to add 20 part numbers beyond the OEMServices portfolio. The logistic network has been used by 40 other OEMs to support their customers. Traditionally an Airbus and Bombardier supplier, Thales has growing content on Boeing jets and is on the Sukhoi Superjet.

Carriers do not want to stock increasingly complex and integrated avionics and entertainment systems, in Malka's view. "New technology is very difficult to support." Indeed, Panasonic Avionics, which repairs and supplies inflight entertainment systems at line stations around the world, recently selected MCA Solutions, a high-end application for sizing and locating part stocks, to help do this very complex job.

Full-service MROs can bundle asset management, repair and logistics for the entire aircraft, a very attractive option, especially for small or low-cost-carrier fleets. About 80% of external maintenance provided by Air France Industries-KLM Engineering is under global support programs. Senior VP-Component Services Robert Anton says these programs vary widely.

"We can do perimeter support of 600 components, partial support of 400 or 500 and in some cases just 100 or 200. Some airlines want door-to-door logistics while others prefer to pick parts up at our logistic centers."

Into The Pool

Pools can cover major rotables and consumables. AFI-KLM owns pooled parts but airlines traditionally owned delivered parts. However, "there are more requirements now for us to co-invest in home-base kits or buy their stocks," Anton says. "In some cases we do co-invest." Participants in pools are asked to adopt modifications proposed by OEMs to keep the pool homogeneous.

AFI-KLM supports almost all Airbus, Boeing, Embraer, Bombardier and ATR aircraft. A joint venture with Lufthansa Technik supports the A380. Anton notes that more reliable components on new models mean less-frequent repairs, in turn requiring bigger fleets to justify airline stocks and infrastructure. In partnership with Sanad Aero Solutions, a component-financing company launched by Mubadala Development Co. in February, SR Technics plans to offer additional financing solutions, including sale/leaseback options for components. "We are talking to various airlines and believe the opportunity is there," says Felix Amman, senior VP-procurement and material services.

SRT's strength has been managing component pools. "We do not have to own them; we can manage the pool, add parts and get service levels up," he says. For example, easyJet still owns components under an 11-year integrated component services contract in which SRT does management, repair and logistics. The MRO now is working on improving performance under this contract. A healthy carrier of easyJet's size can own stocks, but Amman argues that even for fleets of 150-200 aircraft there are benefits to combining assets in pools, and this is an option in the future.

Lufthansa Technik has 1,850 aircraft on Total Component Support, backed by 120,000 components valued at €1 billion. Stocks include "whatever they want," says Component Supply Chain Manager Fabricio La Banca. He expects TCS to expand and LHT has launched Total Material Operation, adding consumable parts and logistics. TCS guarantees agreed stocks at airline home bases and timely delivery of LHT stocks when needed. TMO delivers all materials to both home and line stations.

The International Airline Technical Pool allows 111 airlines to pool about 5,000 major rotables worth $300 million at 200 airports worldwide. La Banca says IATP helps carriers that need a particular component at these airports but does not guarantee availability and is a supplement to normal component provision.

LHT offers additional efficiency by working closely with customers. For example, its configuration manager helps clients keep aircraft operating by replacing only inexpensive subsystems rather than very expensive systems.

Airlines are definitely interested in these upstream management programs, but there are hurdles to widespread adoption. Legacy carriers parting with current inventories generally take hits on income statements. They usually want access to parts with uniform characteristics, not always easy for multi-airline pools to provide. PMA policies differ by carrier and part number, a challenge for part pools. Major airlines want guaranteed availability at line stations and may change some stations as networks adapt to market opportunities. Maintenance programs and schedules can change as well. Internal stocks can accommodate such shifts more readily than long-term contracts that specify delivery points. And management expertise, once lost, is not easily recovered if vendor terms turn tougher.

Even LCC policies may set limits on pools. For example, JetBlue Airways, although outsourcing heavy maintenance extensively, owns substantial part stocks because it seeks to minimize even noncritical deferred maintenance items and its schedule does not leave much time for delay.

Finally, there are price and terms. OEMs and MRO shops must pay interest on pooled stocks, maintain elaborate logistics networks and handle repairs of used parts. Other things being equal, efficient markets would place ownership in the hands of firms with the lowest cost of capital--generally OEMs, major shops and airlines in that order. But only effective competition can ensure that carriers receive the benefits of these lower capital costs. Few airlines have several bidders for asset management that meets all needs at every point.

That is changing. As asset management by vendors grows, pools expand and become more efficient. Both OEMs and MROs can build and efficiently utilize wider logistic networks that offer even far-flung airlines several choices. Scale and effective competition matter, and over the long term these factors favor much more asset management and ownership by smart suppliers.