Cathay Pacific’s engineering director Derek Cridland admits that the issue of spare parts price escalation is a “hobby-horse” of his, but in the battle to reduce maintenance costs he is adamant that the automatic annual increases must go. “It is an extreme irritant,” he says.
Airlines have long complained of the practice of the original equipment manufacturers (OEM), and particularly the engine makers, to hike the price of spare parts regardless of market conditions or the value of the parts. Increases of 5% on catalogue prices are typical, with commonly used parts often rising more. In their defence, the manufacturers argue that engines are sold at such a tight margin that they have to make their profits over the lifetime of the unit through the sale of these parts.
“We definitely need our OEMs to really look at who they are and try to be part of the solution for us rather than putting another nail in our coffin,” says Tony Charaf, who heads Delta’s Technical Operation. However, the time to really put pressure on suppliers is when a new aircraft deal is being negotiated, and to build something on escalation, if possible, into the contract. For example, Cargolux has a hedging element built into its contract with Rolls-Royce on engine spares, says the cargo carrier’s engineering chief Jean-Claude Schmitz, with the cost of materials capped. “At least that gives us a buffer,” he says.
The engine manufacturers are fighting any changes to the model “tooth and nail”, says Cridland at Cathay, but there are inroads being made. Whether it is through the airline associations or global alliances, it is a topic higher than ever on the agenda. “We’re trying to address it all the time,” he says. Cathay, for instance, has escalation on the table in its current negotiations to buy either Airbus A340-600s or Boeing 777-300ERs.
GE Aircraft Engines is escalating its spare part prices, which it knows will trigger a lot of discussions with carriers. “From a business perspective we need to have that escalation, it’s a model used by all our competitors,” says Jacques Chausse, general manager engine services marketing at GE. The company will talk about the issue, but it argues that a wider discussion about the value it brings to operators in terms of time on wing benefits is more useful.
“These engines behave two, three or four times better than the original estimates in the cost of ownership,” he says. “This doesn’t come at no cost. The gain carriers are getting, if they look at time on wing compared with spare parts escalation, is that they are way better off. We recognise that airlines are not happy with escalation, but we say let’s talk about it. We’ve got different solutions in our locker, so let’s have a discussion about OnPoint Solutions (GE’s fly-by-the hour range) and see how we can add value. What we cannot have is a discussion just on spares escalation.”
Source: Airline Business
