ANALYSIS: Why is used serviceable material creating such a buzz?

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It is no secret that engine manufacturers have been making a push to expand their presence in the aftermarket. As these original equipment manufacturers (OEMs) look to broaden their services, many are finding that securing used serviceable material is providing cost benefits for operators and winning them new maintenance work. While not a new concept, serviceable material is gaining more of a buzz in the aftermarket world because there is more material available for several engine types as more aircraft are retired.

These used serviceable parts are used especially in engine repairs to save money on the airlines' cost of ownership on engines. The material is procured from a previously used engine and refurbished to the standard of a new part. Using this material instead of brand-new parts brings down the cost of ownership for airlines.

Data shows that airlines are thinking about used serviceable material in a more strategic way, and OEMs are gaining more of a role in procuring and managing this material as part of a larger push to gain more of the MRO market.

MORE MATERIAL

One of the reasons why serviceable material is gaining interest is that more is available in the market as vast numbers of certain aircraft types are retired, says Andy Morganthaler, marketing manager at GE Aviation Services.

"Obviously there's a lot more used material becoming available," he says.

There is evidence to show that the economic lives of aircraft have declined since 2008, says Flightglobal Ascend senior analyst Rob Morris, although it is unclear whether the trend is cyclical or structural.

In 2008, the 521 aircraft permanently retired from service that year averaged 31.5 years old, shows data from Flightglobal's Ascend Online database. If adjusted for the time they spent in service before retiring, that number is 28 years. By comparison, the 591 aircraft retired in 2012 had a younger average age at 27.1 years, or 24.8 years when adjusted for storage. Since 2010, 6.1% of the aircraft retired were younger than 15 years, many of which were regional jets.

The reconditioned spares market is driving part-outs of many younger airframes and engines, says Morris, which would be an argument that the reduction in economic lives is a cyclical trend. However there are also arguments that structural factors could be causing the downtrend, such as increased aircraft utilisation and high fuel prices. The conclusion about which is causing the trend is undetermined due to the data available, says Ascend.

There seems to be a consensus among industry players that the amount of material available to the reconditioned spares market is on the rise as fleets are renewed, however there is still a debate alive in the industry about whether observed part-outs of young aircraft signal a widespread trend.

Reports that aircraft economic lives are shortening have sparked a debate in the aviation industry and have been challenged by some lessors and manufacturers.

Boeing issued a report in March saying that it could not find a metric to evaluate the economic life of an aircraft despite reports that lives were shortening. Late last year, Avolon said in its own report that depreciation assumptions being used by the industry were still valid, despite a few instances of early retirements for various circumstances. The lessor says the average age of the world's passenger aircraft fleet will decline "slightly" until the middle of the next decade, but then return to current levels by 2032.

While there are different views on the economic lives of aircraft, data shows that retirements are set to grow.

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.

In a fleet forecast released in June, Avolon expects that more than 15,000 aircraft will be retired in the next 20 years, a fleet made up of about 13,000 passenger aircraft and 2,000 freighter aircraft.

"Although historical retirements have consistently fallen short of expectations based on aircraft age, the surge of orders placed in the late 1980s will result in a wave of aircraft reaching their normal retirement age of circa 25 years from the middle of this decade onwards," says the Irish leasing company's report.

These factors lead to a larger amount of used serviceable material available in the market overall to use in repairs. Airlines' strategy to provide higher load factors and the number of new aircraft entering the market is causing higher retirements than previously expected and some retirements for the parts, says Clayton Jones, chief executive of avionics supplier Rockwell Collins on a 19 July earnings call.

"We now expect over 500 aircraft retirements this year, which is creating a headwind for service and support as the older out-of-warranty aircraft are replaced by newer in warranty," says Jones. "Moreover, some of these retired aircraft are relatively new and are being torn down and sold for spares and for MRO purposes. This trend is clearly impacting our service and support revenue as well, and we expect it to continue for some time into the future."

Boeing forecasts that in the next 20 years, the aviation industry will need 34,000 new aircraft. Of these aircraft, 41%, or 13,940, will replace the existing fleet. The balance of 20,060 aircraft will represent new growth. It does not foresee economic lives of aircraft changing during this time.

Ascend estimates that 55% of passenger aircraft deliveries since 2008 represent those used for replacement.

In addition to increased availability of serviceable material, there appear to be other factors impacting the pool of material available.

For one, airlines now have financing and credit to afford new aircraft, says Craig Richardson, sales, marketing and leasing director at TES Aviation Group. Also, the cargo aircraft conversions market "isn't what it used to be," he says. Soft cargo demand has led to less of a need for passenger-to-freighter conversions.

GE has been in the used serviceable material business since 2000, when it formed GE Aviation Materials through the acquisition of Dallas-based TPI Aviation. Snecma had been a partner in this company to provide both GE and CFM material, but in 2010 it partnered with CFM International to supply CFM56 material.

GE offers used serviceable material programmes for the CF6 and CF34 models and expand the offering to other engine types as they age.

Used serviceable material has been "getting a lot more press these days, but it's not something that's really new to us," says GE's Morganthaler.

But what is new is the increasing aircraft retirements, which leads to more engine material available in the market that is not attached to in-service engines. For example, greater numbers of CF34 engines that power Bombardier and Embraer regional jets will come off of engines as Delta Air Lines transitions to larger regional jets and its Pinnacle Airlines subsidiary retires 140 Bombardier CRJ200s over the next few years.

Material for engines like the CF6-80C2 have increased "dramatically" over the past two to three years due to teardowns, says Morganthaler. In the past this material was very limited. The type powers several widebodies, including the Boeing 767, 747 and MD-11.

GE estimates the cost savings of used serviceable material to be between 15%-20% per shop visit. It says it has seen fill rates of up to between 80% and 90% of serviceable content in CFM56-3 engine 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.

Connecticut-based engine manufacturer Pratt & Whitney is also actively sourcing used serviceable material in its repairs as its customers try to lower costs. It has not disclosed estimates of how much its customers can save or its fill rate for serviceable material used in shop visits, but says that its materials service can provide significant savings on operators' cost of ownership.

"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 Jerry Tarnacki, Pratt & Whitney services vice-president. "As engines or aircraft assets age, there does become more used serviceable [material] out there in the marketplace."

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 engine OEMs across the board, is providing material for Pratt & Whitney's PW4000-100 engines that 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.

Providing this material in engines can bring down cost of ownership for airlines, but it also has other benefits, such as allowing OEMs to save expensive materials for new engine types.

"The cost of raw material is becoming much more expensive and that material...can be focused on purely new production engines," says Richardson.

TES works with all the major engine manufacturers, including GE through its materials services company.

Rolls-Royce also has an engine leasing and parts trading unit that has more than $30 million of parts in its inventory and more than 20 locations where it stores engines for its engine leasing business.

The OEMs may be making moves to secure more of this material, but there is still competition for airline MROs like Atlanta-based Delta TechOps, which is in the unique position as serving as both an engine MRO specialist and maintenance division of an airline with a fleet of more than 700 aircraft.

Delta's chief executive Richard Anderson told the audience at April's MRO Americas conference that the rising cost of spare parts was a problem for airlines, and that it has typically seen spares prices double every seven years. Along with keeping inventory in check, Delta is trying to find creative ways of procuring its own serviceable material for repairs, using parts manufacturer approval (PMA) parts and designated engineering representative (DER) repairs, which allow certain approved non-OEM repair stations to restore parts through the US Federal Aviation Administration's delegation process.

AIRLINE ATTITUDES

While serviceable material may not be brand new, airlines have recently made a concerted effort to grow their usage of serviceable material, shows a survey of airlines amd MROS published by consulting firm Oliver Wyman in April.

Two-thirds of airlines that responded to the survey indicated that they have been using more serviceable parts in the past three years. By comparison, only 8% said that they declined their use of these parts.

Oliver Wyman

Airlines in the past have used serviceable material in a more ad-hoc manner in the past, says Oliver Wyman, but that is changing. While these parts used to be used for aircraft on ground (AOG) emergencies or parts shortages, airlines are now paying more attention to using the material to save on costs. This is being done through partnerships and organisations within their own companies, says the firm.

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. About 34% of the respondents said that their change in use of serviceable material has "increased significantly" in the past three years, while 33% said it has increased moderately. About a quarter of the airlines surveyed reported that they were seeing about the same levels of serviceable material.

TES' Richardson says that airlines are more often inquiring about the fill rate of serviceable material in the repairs-or amount of used material that the maintenance firm can incorporate to a shop visit.

"What is your used serviceable material fill rate?" is a frequent question airlines pose to maintenance firms before making business decisions about which provider will overhaul the engines, he says. This is just as important of a factor for choosing an MRO provider as labour rate and cost of material, he says.

GE estimates that airline customers could save up to $250,000 on the workscope costs for the CFM56-3 engine if 90% of the material is used serviceable compared to replacing the scrapped parts with new ones.

Pratt & Whitney is providing the material because customers are asking for it, says Pratt & Whitney's Tarnacki. In some cases, the airlines are finding it can help lower costs when returning leased engines to particular used conditions.

"What we see is by these types of arrangements, it enables us to use used material that customers want, to win overhauls," he says.

The engine manufacturer says it is continually looking for new sources of serviceable material across the board for the engine types it repairs through its MRO network, including the International Aero Engines V2500, CFM International CFM56 and nameplate PW2000, JT8D and JT9D engines.

ALTERNATIVE APPROACHES

OEMs and MROs are out on the market looking for serviceable material to use, however each engine manufacturer and airline its own approach for how they find it and use it.

"One of the biggest things for us today around used material is trying to find the right used material," says GE's Morganthaler.

GE is looking to use material that has undergone OEM-approved repairs. It offers the TruEngine programme, a distinction the manufacturer gives to airlines' fleets that ensures the engines do not use PMA parts or DER repairs, which it believes impacts the engines' residual value. The manufacturer is even taking that a step further by identifying parts that have only been maintained in an OEM configuration, which it believes can also impact the value of engines at the end of their lives.

Pratt & Whitney offers DER repairs through its own network for the engine types it services. The manufacturer has gained FAA approvals in the past to offer some CFM56 parts through a supplemental type certificate (STC), but says its emphasis is primarily on providing MRO offerings for its name-brand engines and the International Aero Engines V2500.

Airlines are also finding ways to source their own material to save on costs. In a keynote speech at the MRO conference in April, Delta's Richard Anderson highlighted the importance of using PMA parts and DER repairs to provide an alternative from the OEMs offerings.

"I think the issue that we're always grappling with is trying to break the hold that the OEMs have on spare parts and really trying to develop PMA and other opportunities," he says.

This access to spare parts plays a key role in which choices airlines have for these repairs, says Darryl Rose, associate partner at Oliver Wyman.

"Unless you have some great source for spare parts, you're back to the OEM," he says.