ANALYSIS: Airlines see used serviceable materials driving savings

Washington DC
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As airlines look to widen their profit margins, aircraft maintenance is a line item where operators have opportunities to cut costs. Some of these airlines are finding substantial savings through used serviceable parts procured from a previously used engine and refurbished to the standard of a new part. Particularly for engine repairs, this material can save money on airlines' cost of ownership.

The world market for used serviceable material is worth $3 billion, says Canaccord Genuity analyst Ken Herbert in a recent research note. An estimated 90% of material for older engines, such as the General Electric CF6-80C2, the CFM International CFM56-3B and the Pratt & Whitney JT8D, falls into this category, but Herbert notes that retirements of narrowbody engines will begin to make additional material available to the market.

“Many [original equipment manufacturers] OEMs have been forced to reduce their forecast for spare parts sales at least once or twice during the year, with the emergence of the [used serviceable material] market most often cited as the source of underperformance,” says Herbert.

According to the Flightglobal Fleet Forecast, recently published by the Ascend Advisory Team, 2,780 passenger jets are expected to be removed from service over the next five years. Between 2018 and 2022, an additional 3,840 jets will be retired. Ascend estimates that 55% of passenger aircraft delivered since 2008 represent those used for replacement.

Airlines are now paying more attention to sourcing and making use of used serviceable material to save on costs in more instances than aircraft on ground (AOG) emergencies or parts shortages, shows a survey of airlines published by consulting firm Oliver Wyman in April.

Two-thirds of airlines that responded to the survey indicated that they have been using more used serviceable parts in the past three years. By comparison, only 8% said they declined the use of these parts. More than 70% of airlines responding to the survey said they were "actively seeking out" used serviceable material, with almost 50% saying that the material was part of a comprehensive parts strategy.

“Airlines are getting better at managing this market in a more sophisticated way, and they’re using it more proactively as a cost savings lever,” says Oliver Wyman partner Chris Spafford.

Southwest Airlines is an example of an airline finding savings from used material. This year, the Dallas-based carrier opted to change the maintenance contract for the CFM International CFM56-3 engines from a power-by-the-hour agreement to an end-of-life programme with MTU that harvests its engines for serviceable material which then ends up back in the fleet.

“On the -3 side, the engines that are going to MTU, we are tearing down a lot of our owned engine assets that we don’t need for spares,” says Amanda Gower, manager of Southwest’s powerplant supply chain. “So they’ll tear the engines down for us to piece-part level and make the parts serviceable and put them in a customer-owned property stock so those will be fed directly back into our engines.”

Gower does not disclose how much the airline is saving from employing this strategy, but says that “it’s a big number”.

“With the -3 programme, it’s all about minimising expense on exiting fleets,” says Gower. “So if we have an opportunity in the industry or in the market to go and buy a serviceable engine with green time that is cheaper than doing a full overhaul, then we’re looking at those options, as well as we’re looking at leasing engines from the market to run out the green time.”

A number of new partnerships between lessors, maintenance, repair and overhaul (MRO) providers and airlines are combining the sourcing of used material with repairs to increase options for airlines wanting to use it in their own engines.

One of the most significant recent deals is Lufthansa Technik’s intent to acquire a 15% stake in International Lease Finance's (ILFC) AeroTurbine, with a future option to increase that stake to 19.9%. Under the agreement, which is pending regulatory approval, Florida-based AeroTurbine would supply Lufthansa Technik with used serviceable aircraft and engine components for the MRO company to repair for eventual sale.

One of the benefits of the agreement is that it ensures an MRO firm has predictable access to parts, which can be difficult in the spot market nature of the business, says AeroTurbine senior vice-president Joshua Abelson.

With parts costs making up 70% of the cost of engine overhauls, MROs could be spending $600 million to $2 billion per year depending on the size of the operation and the types of component services they offer, he notes.

“We’re talking to four to five other people – there are definitely other seats at the table,” says Abelson..

Rockwell Collins’ Intertrade has also recently moved into providing used serviceable material to the market by working with a network of repair stations to part out engines and re-certify used serviceable parts to be used as spares or replacement parts.

The company is focusing on tearing down engines and providing material for newer-generation engines, such as the CFM International CFM56-5B and -7B and International Aero Engines V2500-A5. Other potential aircraft types include the Pratt & Whitney PW4000 and CF6-80 market, it says.

OEMs are looking to offer used serviceable material to their customers as well, and are increasingly formalising partnerships with lessors specialising in engine material.

Connecticut-based engine manufacturer Pratt & Whitney is sourcing used serviceable material in its repairs as its customers try to reduce costs.

"As our customers are looking to lower cost and cut costs, they're looking at all areas, and this is one they do look at," says Pratt & Whitney services vice-president Jerry Tarnacki.

Pratt & Whitney provides used serviceable material at more than 30 locations around the world, including its network of MRO facilities, on-site customer locations and warehouse sites. To procure some of these parts, Pratt & Whitney has partnered with TES Aviation Group, a firm specialising in material sales, engine leasing and engine management.

TES, which works with several engine OEMs, is providing material for Pratt & Whitney's PW4000-100 engines, which used to power recently retired Airbus A330 models. The engine manufacturer is using the material to repair engines at its Eagle Services Asia engine overhaul facility.

Cincinnati-based General Electric offers used serviceable material programmes for the CF6 and CF34 models and is expanding the offering to other engine types as they age.

Material for engines such as the CF6-80C2 has increased "dramatically" over the past two to three years due to teardowns. In the past this material was very limited, says Andy Morganthaler, marketing manager at GE Aviation Services.

GE estimates the cost savings of used serviceable material to be between 15% and 20% per shop visit. It says it has seen fill rates of up to 80-90% of serviceable content in CFM56-3 engines per shop visit. By comparison, serviceable material has made up to 60% of the CF-80C2 and less than 50% of the CF34-3 models.

While OEMs are making more of a push into the aftermarket by offering this material as part of their overhauls, third-party MROs are offering alternatives to combat rising costs of new spares, including Delta TechOps.

“For an airline, one of the biggest problems is the 8% OEM cost increase, at least, that you get every year,” said Delta Air Lines chief executive Richard Anderson at the MRO Americas show in Atlanta in April.

To mitigate these cost increases, Delta is using alternatives such as using parts manufacturer approval (PMA) parts made by a non-OEM company and performing its own designated engineering repairs (DER) to restore parts that it may find in engines on the market, which it parts out.

“The MRO is an offshoot of us looking after our own CASM, and that pressure is on us every single day of the week, said Peter Turner, vice-president business development and MRO, at the MRO Americas show. “So if we can find innovative ways to mitigate those engine OEM or airframe OEM cost increases, then that’s fantastic.”