When an aircraft gets a major engine overhaul, the disassembly, inspection, testing and other manufacturer-approved services and regulatory mandates typically result in invoices topping seven figures. Engines drive more than 50% of maintenance material spending for aircraft and about 60% of the cost to revamp them is for parts. Given the financial pressures airlines face today, the cost of those parts is becoming a huge issue, pushing many toward sources other than the original equipment manufacturers. Thus we have the PMA proposition.
Manufactured and approved under US FAA regulations, a Parts Manufacturer Approval part is developed as an alternative to an OEM part and is required to be of equal or better quality than the part it is replacing. There are two types of PMA parts suppliers: Those that are licensed and those that are competitive. Licensed suppliers produce parts in collaboration with OEMs to help meet demand and reduce the cost of production. Competitive suppliersmajor companies such as HEICO, Wencor, Chromalloy and BELACchallenge OEMs for market share.
PMA parts have been around since 1955 when FAA, in an effort to help civilian owners keep out-of-production surplus military aircraft operational, deemed it acceptable for companies that weren't OEMs to design and make spare aircraft parts. Yet only in the last half-dozen or so years have PMA parts gained persuasive momentum in the MRO market, and even now they represent only about 2%-3% of total parts consumption. But increases in MRO spending, the number of suppliers and the level of customer acceptance indicate significant growth on the horizon.
"Let's assume you're saving an airline 30% on a PMA part versus an OEM part," Wencor President Russ Adamson explains. "And let's say you're selling $5 million in PMA parts a year to that airline. You're then saving that airline over $1.5 million a year. That's real money for those folks." According to AeroStrategy Management Consulting, PMA parts sales are projected to reach nearly $800 million by 2011, penetrating the parts market by 3.9%.
Kevin Michaels, a principal with AeroStrategy, cites three drivers. "The first is immediate savings on material," he says. "The second motivation is oriented towards the future. Airlines want to increase the bargaining leverage they have with OEMs. They want to limit future price increases in spare parts by introducing competition." The third reason customers opt for PMA parts, he observes, is based on availability. "Often operators go to PMA suppliers because they have the part on hand and can deliver it sooner than the OEM." Engine OEMs continue to oppose the use of PMA parts in their engines and have been known to state that use of a non-OEM part will void a warranty.
PRATT & WHITNEY'S BET
One of the biggest reasons to bet on an upsurge in the PMA parts market follows Pratt & Whitney's decision in February 2006 to manufacture replacement parts for CFM56-3 engines under its new Global Material Solutions division. Pratt already was active in MRO for the engine that powers the 737 Classic series, so moving into the parts side of the business was not as large a leap as it might have seemed.
Pratt originally announced that it would develop 55 PMA parts for that engine but now is committed to 48, 29 of which are along the gas path and 19 of which are life-limited parts. "As an OEM, we know how to do this," says Global Material Solutions VP and GM Matthew Bromberg. "We know how to design, manufacture and ensure the quality of life-limited parts, but we had to determine with the regulators what validation, tests and analyses were necessary."
The company is the first to try to certify an LLP for someone else's engine, and as a result of its experience since it launched the program it actually has decided to go beyond the PMA process, Bromberg explains. "We've embarked upon supplemental type certificate approval for these parts, which requires a higher degree of validation than a PMA. It requires you to go into Chapter 33 of the federal regulations. We've had to work with regulators on mapping those requirements to this program based on the hardware that we're actually engineering."
Although the LLP validation process is rigorous, he adds that Pratt "does this as an OEM all the time." From material characterization to cyclic life substantiation, "we're executing the process in the exact same fashion we would execute a class one engineering upgrade on one of our own engines." The validation process for the 29 gas path parts also has been challenging. "The learning curve . . . has been very steep," Bromberg admits. "To create identical, fully interchangeable parts, you really have to know the PMA methodology and execute a robust validation approach with stringent demands."
While the CFM56-3 has approximately 3,000 unique parts, the 48 parts that Pratt is developing make up about 90% of what an airline has to spend money on every time it brings an aircraft into the shop. CFM56-3-powered aircraft need engine overhauls roughly once every five years, an event that costs operators about $1.5 million. "They'll spend roughly $200,000 on the labor and another $300,000 on repairing parts," estimates Bromberg. "But new parts will cost them $1 million and $900,000 of that amount is in the 48 parts that we're focused on."
Last July the company won US FAA certification for its first CFM56-3 part, the high pressure turbine shroud. Currently at least five other CFM56-3 parts are awaiting validation. "We think the packages are complete, but every part has unique elements to it and generates a unique set of questions," Bromberg points out. "We plan to continue to submit these parts for validation at an accelerated pace and meet our initial commitment to have them ready in 2008."
Positioning itself strategically in North America, Europe and Asia, Pratt already has secured agreements with United Airlines, Jet2.com and an unannounced airline in China. These three continents represent 70% of the installed base for CFM56-3s and allow the company to work with FAA, EASA and CAAC. "Each airline has a different maintenance strategy," says Bromberg. "United has a materials agreement because they have their own overhaul center in San Francisco. Jet2.com is a low-cost carrier with no overhaul capability so they've signed up for a power-by-the-hour agreement, and the Chinese customer has opted for a long-term agreement with a time-and-materials structure."
DELTA'S BIG DEAL
On Nov. 7, Delta Air Lines' maintenance arm Delta TechOps announced it had signed "the largest and most significant [PMA] agreement in the airline industry." It reached a 10-year, $1 billion-plus deal with Chromalloy Gas Turbine Corp. aimed at developing PMA gas path and LLP parts for CFM56-5 and -7 engines for the A320 and 737NG families respectively. Under the agreement, Chromalloy (the primary subsidiary of Sequa Corp. boasting revenue last year in excess of $373 million) will work with DTO and FAA to win PMA authority on flight-critical parts to be launched on Delta's 737NGs as well as Airbus aircraft. The contract also calls for DTO to perform 250 engine overhauls over the 10-year term.
"Would they have gone after life-limited parts had Pratt & Whitney not embarked on this initiative previously?" ponders Michaels. "One could certainly argue that [Pratt] set the stage for what Delta TechOps and Chromalloy announced." But unlike P&W, Chromalloy has never built an engine. "I'm not saying it's impossible," he adds. "But I do think that this will be the biggest challenge that they facebigger than produceability, bigger than distribution channels, maybe even bigger than customer acceptance."
According to DTO Supply Chain Management Director Bob Currey, the deal evolved over the past several years through Delta's increased confidence in PMA parts and their savings potential. "We have steadily progressed in our usage of PMA parts as we've grown comfortable with their reliability and the technical capability within the supply base to deliver a safe, quality product," he says. "So the Chromalloy deal not only sends a strong message to the industry about how aggressive we're going to be as a competitor on CFM engine products, it also sends a very strong signal about our willingness and ability to make decisions to control costs for Delta."
Currey also acknowledges the impact the deal is likely to have on DTO's MRO activities. "We have aspirations of taking our MRO business to a billion dollars a year," he says, also noting that DTO's aggressive posture toward PMA parts is purely a matter of dollars and cents. "It's not as though we're turning a blind eye toward OEMs," he points out. "We stand at the fork in the road with them. But when they continue to hit airlines with cost increases in the neighborhood of 5%-10% per year just on core catalog items and ask us to make decisions that don't meet the financial realities of the marketplace, they in effect help make it easier for us to say no."
Delta is by no means alone in its PMA trajectory. American, United, Air Canada and Lufthansa, for instance, have PMA agreements with HEICO Corp. of Hollywood, Fla., which is widely regarded as the industry's largest supplier. The fact that Lufthansa Group owns 20% of HEICO means that its airline and third-party shop can benefit from direct sourcing and savings while the supplier is well-positioned in the MRO aftermarket.
Adamson, who notes that Wencor also has PMA deals with Delta, United and American as well as Japan Airlines and Cathay Pacific, puts it this way: "A lot of these independent, third-party shops are having a hard time with OEMs because they want to retain the aftermarket overhaul business. So if you can help them be competitive on replacement parts, they're happy to partner because they see this as an opportunity for a much more level playing field."