Paul Seidenman/SAN FRANCISCO
Fewer air carriers want to be in the business of stocking and maintaining huge inventories of parts, so they are looking to shift the burden to those companies which supply everything from bearings and seals to engines and airframes.
"Until the early 1990s, the industry was more concerned with buying and selling parts as customers needed them," says Jim Innella, president of the Distribution Services group of Miami-based Aviation Sales, a leading redistributor of surplus airframe and engine parts and distributor of new parts.
"Starting about five years ago, there was a move toward exchange programmes in which the airlines procure certain components which they would turn back to their suppliers - as they needed repairs - in exchange for new or refurbished parts. The extent of the repairs would determine the service charge," he says.
Now, Innella says, parts leasing programmes are becoming more popular than exchange-type plans. "As airlines change fleets, they find that they have a lot of inventory they can no longer use. This often means having to dispose of it at far less value than they paid for it," he says. "That has made leasing programmes attractive, because they allow the airlines to get what they need - when they need it - without having to make a long term investment in large amounts of inventory."
As these trends in parts support have evolved, Innella says, airlines have been taking a hard look at their suppliers and are reducing the number they do business with in favour of a select few. Because of this, he says, the size of the supplier, its financial stability, its ability to offer a wide range of parts, and to offer them with volume discounts, have become important factors.
"As the airlines have moved toward using fewer suppliers, they have started to form partnerships or alliances with suppliers of redistributed as well as new parts, and will be giving these suppliers a more detailed look at their parts requirements," he says. The latter represents a major change in the relationship between the suppliers and their customers, Innella says. "In the past, the airlines considered this information very proprietary and rarely shared it with their suppliers. Now, they are sharing this data in an effort to work toward better inventory management, service and pricing," he says.
According to Innella, about 40% of Aviation Sales' revenue is now generated by customers involved with some kind of a "programme type activity" such as parts exchange, parts leasing, purchasing services, parts repair, asset management, and aircraft disassembly. Only three years ago, that proportion was just 2%.
"In the past, many of these programmes were associated more with operators of older, first- generation aircraft that were moving through the used market," he says. "Today, even new aircraft owners are becoming increasingly involved with long-term leases of parts - and other parts management plans - because they don't want to tie up capital in large inventories. They are also getting away from buying into the [aircraft manufacturer's] initial provisioning lists," Innella says.
AIRLIANCE VENTURE
Dave Sisson, president of the AirLiance Materials joint venture formed by Star Alliance partners Air Canada, Lufthansa and United Airlines, agrees that getting out of inventory management makes sense for the airlines; although he points out that, among some operators, a resistance factor prevails. "That will continue until they become confident that an outside source is capable of managing parts and is able to meet their requirements for dispatch reliability and safety," Sisson explains. "But I think we, as an industry, are moving in the right direction in that regard. In fact, AirLiance, by policy, is looking to do this for its partner companies, as well as other airlines."
Chicago-based AirLiance Materials was formed in May to redistribute surplus aircraft parts, mainly for jet airliners with 50 or more seats. The three partners, with a combined fleet of over 1,000 aircraft, account for 10% of the world's surplus parts market - valued at over $1.3 billion annually.
Sisson agrees that parts leasing and other support plans offering greater supplier involvement will become common. Those plans may be extended to include parts pooling arrangements among several carriers, with a single parts agency providing the management. "Those carriers which operate the same type of equipment may want to enter agreements with a single supplier to manage a parts inventory that each could draw from. This could be extended to include repair management services, either as part of the pooling arrangement or as a separate programme," he says.
Sisson stresses that repair management will be a growing portion of the parts distributors' business - with North American firms in particular. "I was recently approached by a large Asian carrier that discussed a parts repair management plan they would like AirLiance to provide," he says. "This airline is based far from the North American repair facilities they would like to use, which is why they are looking for a locally based company to manage the repair for them. At AirLiance, this is going to be a natural outgrowth of what we do - and probably will be for other companies in the parts business - even though we are not a repair station."
Suppliers may also be moving more into a business with which they are not commonly associated - the redistribution of parts purchased directly from original equipment manufacturers (OEMs). One example is Aviation Systems International, a Boca Raton, Florida-based company which buys, sells and leases airframes, avionics and engine parts for airlines.
President and founder Larry Rayman says that the company recently purchased an inventory, with a $30 million catalogue value, directly from AlliedSignal. The inventory included parts for AlliedSignal's auxiliary power units, TPE- and TFE-series engines, as well as spares for AlliedSignal-built air conditioning and pressurisation systems. The company has also purchased the complete inventory of Airbus A300 spares from Continental Airlines, with a value, Rayman says, exceeding $22 million.
"I think that we, as parts redistributors, can become partners with more of the OEMs, because we can buy their surplus inventory and resell it to an assortment of customers, including operators of one or two aircraft," he says. "Often, large OEMs are not structured to serve very small accounts profitably."
Rayman says that a trend toward alliances between OEMs and parts resellers could already be emerging - if the AlliedSignal deal is any example. "After we purchased the [specific] AlliedSignal inventory, they actually had a requirement to buy some of it back. What this has shown is that we have taken a lot of surplus inventory off their shoulders, which cuts their costs," he says.
The OEMs, meanwhile, are also responding to demands from their customers to take a more active role in parts support and asset management. Rob Layton, a marketing executive with Lucas Aerospace, says that more customers for the UK manufacturer's equipment, including flight control, power distribution and cargo-handling systems, are asking about part and component leasing agreements based on cycles or flight hours.
"It was common for OEMs to sell initial provisioning [IP] stocks of spares on delivery of aircraft. The customer was responsible for maintaining and warehousing the stock at his own facility," Layton says. "Now, the market is shifting toward the pricing of spare parts based on usage. As a result, customers are asking OEMs about inventory management plans, as well as other ways to manage the supply chain."
Andrew Musgrave, Lucas Aerospace's general manager, customer support, adds that, for the foreseeable future, the industry will see a mix of traditional IP-type parts stocking and leasing plans. "Leasing plans, involving individuals or pools, are growing, but their growth has been gradual," he says. "This is because parts leasing tends to be favoured more by those who are buying new aircraft fleets, since leasing plans usually include repair and overhaul of the parts. That saves the operator the cost of establishing a support and maintenance infrastructure for that equipment."
According to Musgrave, those flying older fleets tend to select traditional provisioning plans simply because they already have the in-house storage and maintenance support in place. "They know what their costs are, and argue that, because they already have an infrastructure in place, leasing plans might be more expensive. That isn't always true," he says.
Musgrave points out that airlines operating a mix of new and older equipment might be more amenable to a leasing plan that applies just to their new aircraft. "A key advantage of a parts leasing plan is that the customer only pays for the usage of the part, with the fee based on fight hours or cycles," he says. "This means that there are no up-front costs for procuring the parts and maintaining the inventory, which is the responsibility of the OEM. As more airlines spin off repair facilities, and look for ways to cut costs by outsourcing maintenance, we see some substantial opportunities - especially over the next five to 10 years - in component leasing."
ASSET MANAGEMENT
Engine manufacturer Pratt & Whitney believes that inventory management will become a significant area of growth, says Jim Taiclet, vice-president at Eagle Services, whose customer support division now offers three asset management plans, which have been created only within the past three years.
The newest is the inventory logistics [programme (ILP), which has been available for two years. Under this programme, P&W establishes an on-site facility at or near the customer's location. The OEM holds the parts inventory, which is released to the customer as needed. "With ILP, our customer makes all decisions regarding the repair or maintenance of the parts as they are used," Taiclet says.
"Parts in need of repair will be returned to Pratt & Whitney at the on-site facility. Our customer then pays the cost of the repairs on the basis of a pre-arranged rate for the type of repair service performed," he adds.
Under the material management programme (MMP), introduced three years ago, P&W takes on complete management responsibility, including repair decisions. The MMP is offered at a fixed rate per flight-hour for each component covered in the programme. The contract is negotiated for a specific calendar period, and covers specific engine serial numbers. "The contract commences after the engine has gone through a qualifying shop visit, during which all components are inspected and a baseline regarding their maintenance status is determined," Taiclet says. "Our customer is then billed monthly on the basis of the flight hours that the engine was used during the previous month. Any components in need of repair are returned to Pratt & Whitney."
At about the same time that the MMP was introduced, P&W began offering the fleet management plan (FMP), its most extensive asset management programme. As Taiclet explains, customers receive inventory management, along with a complete engine maintenance package including all overhauls and inspections. Another FMP feature is the expertise of a P&W manager, who will be stationed at the customer's site to supervise the programme.
"The Fleet Management Plan is being selected by customers in the primary market - the larger airlines that buy aircraft directly from the OEM," says Taiclet. "But we are also seeing some interest among smaller airlines that buy used aircraft. To date, most of our FMP customers are operating the PW4000, PW2000 and JT9D engines."
P&W has negotiated an FMP with Air Jamaica that will include remote, real time maintenance status monitoring and diagnostics for the engines on the carrier's six Airbus A310s.The programme covers eight PW4152 and four PW4156 engines. "While the aircraft are in flight, the maintenance status of each powerplant will be downloaded via a SITA datalink to ground bases at both Pratt & Whitney and Air Jamaica, which is the lead customer for this service," says Taiclet.
Some 60% of the customers have opted for the FPM, he says, while the inventory logistics and material management programmes account for 15% and 25%, respectively. Taiclet expects that advances in engine technology will drive more customers to look to OEMs to manage and maintain engine parts. "Today, we are dealing with more sophisticated and powerful engines. The components are higher technology - and in many cases, larger - so maintenance is more expensive," he says. "Also, greater quality control is needed because of the metals and coatings used. This is why more airlines are turning over the support and maintenance work to the OEMs so they can concentrate on their core business, which is moving passengers and cargo."
LESS LEAD TIME
Carl Brown, director of customer service for AlliedSignal's Air Transport and Regional avionics group in Redmond, Washington, says that, in addition to resisting price increases, more customers are demanding lead times of 30 days or fewer, rather than the catalogue lead time of 60 days. Also, they want at least 90% of the parts quantity delivered per order, which is not always possible, especially where out-of- production systems are concerned.
"More of our operators not only want a 90% fill rate - even on obsolete parts - they also want time-defined deliveries. Unless they request an expedited delivery, they do not want an early shipment, due to inventory costs," Brown says. These factors, he explains, are changing the way that OEMs are projecting demand for spares. "Until recently, we would make those projections on the basis of orders placed over the past two to three years. Now, we have expanded that to as much as five to six years back."
To make these parts forecasts, Brown says, AlliedSignal is using the latest logistical tools. "AlliedSignal Aerospace signed a contract with Caterpillar Logistics [in 1997] to develop a sophisticated logistical tool system so that all divisions of the company can work better with their major supplier chains," he says. The avionics group will begin to use the system in early 1999. "As we continue to gain experience with computer-based logistics support tools, we will be in a better position to minimise inventory on site with our customers, yet continue to support them in a timely manner. But, at the same time, we can look at the whole supply chain - not just what is in the warehouse."
Brown adds that AlliedSignal is getting more requests from its customers for asset management plans, particularly on buyer-furnished equipment. At the same time, standard warranties are becoming less acceptable. "The demand is moving toward a total life-cycle programme that would include part warranties, usually for about 10 years, instead of the standard three- to five-year coverage," he says.
Airframe OEMs are also taking a more active role in parts support, mainly in response to customer demand, says Morrie Viken, manager of repair, overhaul and exchange services for Boeing's airline logistics support organisation in Seattle. This, he says, represents an important change. "The airframe OEMs tended to concentrate support programmes mostly on avionics, but this has been extended to include repair and overhaul of line replaceable units [LRUs]," says Viken. "In that regard, more of our customers are asking about component exchange programmes."
Boeing introduced a spares exchange programme (SEP) for the 737-600/700/800 in October last year, to enable operators to reduce inventory. Under the SEP, Boeing provides for a minimum number of specific parts with the operator, and stocks the rest at its own support facilities. Specifically, the SEP covers the "reliability coded" LRUs which appear on the aircraft's minimum equipment list - those which must be operable for the aircraft to be dispatched. Under the SEP, Viken says, as parts need replacement, customers contact Boeing, which will then send replacements within 24h via overnight courier. Customers then have four to seven days to ship the old part back to Boeing.
Currently, 320 specific part numbers are covered under the SEP, including valves, pumps, actuators and avionics, although additional part numbers can be added at customer request. Not included are components for the engine or APU, which are supported by their own OEMs. The SEP is paid for per flight-hour, for 10 years. Pricing takes into consideration the operator's fleet size, average stage length, and where the aircraft operate.
Boeing expects to sign its first customer for the programme by year-end. The SEP is now administered from Boeing's support facility at Seattle Tacoma International Airport, but, as more European operators sign up, the manufacturer plans to include its Amsterdam support centre under the plan. By October of next year, Boeing plans to extend the programme to the 777. Pricing and part numbers involved are being worked out.
Viken feels that the SEP offers two major advantages. "First of all, customers make virtually no investment in inventory storage for the parts covered under the plan. And, because it involves a single supplier [ie, Boeing], customers do not have to deal with all the original suppliers of the parts. Boeing is responsible for all warranty and delivery issues, as well as tracking and repair," he says.
As parts are modified following engineering changes, Boeing will automatically supply the upgraded parts as exchanges take place. "The airlines are telling us that they don't want to be in the business of holding inventory and they want a one-stop shop with respect to parts support. Because of this, we are entering a new era of partnerships between the airlines and the OEMs, and between the OEMs and manufacturers of the parts," says Viken.
REDUCING INVENTORY
All of the trends cited by parts suppliers have also been noted by the carriers. In January 1996, for example, Dallas-based Southwest Airlines instituted a policy to reduce its overall parts inventory by 10% by the year 2000, says Marlin Clement, manager for purchasing and inventory management.
"To do this, we are using the knowledge base and automated tools our vendors have in place to plan and track customer parts needs," he says. "This will reduce the inventory on hand as well as turnaround times to acquire parts. Using someone else's expertise in inventory management will free us to concentrate more on our core expertise, which is moving passengers. Clement says.
At Southwest, Clement says, inventory on hand is tracked on the basis of its dollar value per aircraft in the fleet. "We have set goals to improve inventory management so there is a reduction of the dollar value of that inventory per aircraft." To do this, he says, Southwest will identify vendors capable of meeting the airline's parts needs throughout its nationwide system. Rather than opting for a conventional just-in-time approach, the airline favours a modified system. "Southwest likes to stock a small core inventory at the airports it serves," says Clement. "At the same time, we want to be able to rely on the suppliers to feed the inventory, but not at the levels we once had. So we want to reduce the amount of core inventory we have."
Another alternative Southwest is considering is a so-called "pay as you use" plan, in which the airline would stock some OEM-owned inventory on its own property, with the carrier paying for each part as it is taken out of stock. "Right now, we are giving our major suppliers data about our spare parts usage over a 12-month period, as generated by our three maintenance centres - Dallas Love Field, Houston Hobby Airport and Phoenix Sky Harbor International. Each centre has stores where the parts are stocked for use in maintaining the aircraft," Clement says.
Southwest is in discussions with five vendors to develop a parts inventory management plan. The vendors supply a variety of components such as nuts, bolts, seals, bearings and hoses, as well as expendable and rotable parts. But Clement cautions that not all inventory management plans necessarily result in a cost savings. For example, Southwest talked with Boeing about a modified version of its SEP, which would have involved 150 LRU part numbers on the Boeing 737-700. Upon close examination of the proposal, Southwest came to an interesting conclusion.
"We looked very closely at this proposal and found that the flight-hour costs would have been more than what we would spend with a standard parts provisioning plan," Clement says. "One of the reasons for this was that the plan did not consider the very favourable warranties we got as the launch customer for the 737-700. In fact, on the avionics alone, we got a 10-year warranty."
He adds that the proposals were based on supplying Southwest's three maintenance bases. As the carrier also wanted to stock supplies at additional locations, the programme would have been even more expensive.
Since the original proposal, Boeing has reduced the price and made further refinements. "By the time they did that, we were about to take delivery of the aircraft, and we had to have the parts in our stores at that time. However, we are willing to listen to further proposals," Clement says.
INVENTORY PLANS
Bruce MacCoubrey, general manager of supply and chief purchasing officer for Air Canada, says that the airline is actively looking at inventory management plans to match the carrier's projected growth for the next three to four years. "We are looking to our suppliers to develop more just-in-time type plans, and are asking our major vendors to develop innovative ways to manage inventory," he says. "In addition, we are going to co-ordinate all surplus parts purchases and sales through AirLiance Materials, which will give us one source to deal with."
Air Canada is "giving its highest priority" to asset management agreements with its engine OEMs. "We are now reviewing opportunities for full asset management with respect to our engine parts, and plan to make a decision sometime within the next six months ," MacCoubrey says. Air Canada operates Pratt & Whitney and General Electric products and, with the delivery of its first Airbus A330, will use Rolls-Royce power for the first time. Airframe items, including seals and bearings, are also high on the list for inventory management. "We are looking at ways for our hardware suppliers to hold the inventory, and to give them access to our internal inventory system. In this way, they will be able to automatically supply us as needed," the company says.
Among some airlines the trends are clearly in the direction of getting as far away from the inventory storage and management business as possible. Perhaps the reason is best summed up by Pratt & Whitney's Taiclet when he says: "With airline deregulation happening worldwide, ticket prices are market driven, and the carriers can no longer bury the high cost of inventory management in what they can now charge for tickets."
SPARES SPECIALISTS
Two key economic forces are influencing aircraft maintenance and causing patterns in the sector to shift.
First is the fact that original equipment manufacturers (OEMs) make an increasing proportion of their profits in the aftermarket, margins on sales being relatively slim, and now want to claim the market before someone else does.
Secondly, the airlines can see the attraction of letting OEMs or third parties perform their maintenance and supply them with inventory management.
The result of these influences is now beginning to emerge. A couple of years ago, the picture was one of third party maintenance providers battling with the airlines' own maintenance shops. Now OEMs are trying to take the market from both while, in the meantime, the airlines' own maintenance shops have grown in ambition, spinning off into autonomous divisions and gearing up to attract third party work.
Whoever is providing the maintenance, however, they know that another tier of the industry is being carved out - independent spares providers, the "fourth party" which, by meeting the needs of all, meet the need of the many through combining specialisation with sheer economy of scale.
Daniel Shine, vice-president of EDS' consultancy division, A T Kearney, says the shift is occurring in the aeroengine sector partly because the number of spares per engine lifetime has reduced substantially. "The equation is changing," he says, estimating that where 3-3.5 engines-worth of spares would once be needed over 30 years, the figure is now less clear. "No-one knows where it is. It's closer to 1.5-2, but I don't think it's one to one." With most engines sold at close to cost "-it's better to make your money in the aftermarket. It's the name of the game", he says. Shine says General Electric has become "a master" of the game. An illustration of GE's market perceptiveness was its purchase of British Airways' engine overhaul base in Wales in the early 1990s, which Shine says was a "coup" because it gives GE access to "everyone else's engines".
SR Technics, the maintenance arm of Swissair parent SR Group, admits to being furious at attempts by the OEMs to bite into its business, while a source at Germany's MTU Maintenance believes that the big engine manufacturers have become protective over granting overhaul approvals to non-operators.
Source: Flight International
