Optimizing Component Availability Sourcing post COVID-19

Optimizing Component Availability Sourcing post COVID-19

Today aircraft are being prematurely retired because of a market shock that is reshaping the industry.

The airline industry has been hit hard by the COVID-19 pandemic, and many airlines do not expect a return to pre-COVID operation levels for many years.  As a direct consequence there are excess aircraft in the market place which have no use within the owner’s operation and for which there are no remarketing opportunities.  Aircraft asset values have fallen.  As a result of the downturn many aircraft will be retired early and parted out.  This is having knock-on repercussions for inventory values (which are considered in this article Wave Of Used Parts Expected In 2-3 Years and by Richard Browne of Naveo in this AWN article Cost-Cutting, Fleet Trends Will Change Surplus-Parts Market).

The latest standard components removed from relatively new aircraft will be available on the market, which will have a disruptive impact on the traditional pooling power by the hour (PBH) market.  There are normally five primary cost elements associated with delivering aircraft component availability:
Repair costs; Warehousing & logistics costs; Capital depreciation costs; Lease costs and Exchange costs.
There are other requirements such as component engineering and reliability, however, while they impact availability and repair costs, they are not a direct supply chain cost.  Repair and logistics costs are largely volume-based and associated with the operational levels of the airline.  Some economies of scale can be delivered through aggregation of demand and consequential procurement bargaining power.  Capital depreciation and lease costs benefit most significantly from  economies of scale, delivered through pooling as the investment to service level ratio decreases rapidly with increased levels of demand.  Many pool providers are burdened with historical investments and long-term leases, and can no longer deliver pooling solutions profitably.  Some have already exited the market.  With the avalanche of surplus lower-cost, high-quality spares from prematurely retired aircraft, the transactional repair cost is driving the availability sourcing strategy.  The repair shop providers will have to become more competitive to secure their slice of the reduced market.  This low cost spares market scenario, combined with surplus aircraft in their own fleet and limited aircraft remarketing potential is driving operators to re-evaluate the economics of pooling (or certainly pooling scope) for certain aircraft types and their wider component availability sourcing strategy.

The question now being asked is, would it be more economical to deliver component availability (or a large portion of it) from surplus aircraft?

Similarly, lessors are looking to extract value from surplus early retired aircraft.  This is explored in these recent articles, Do Lessees Have The Power Now? and Pressure And Opportunity For Lessors

With thousands of surplus aircraft availability in the market and an estimated 1,000 aircraft returning from lease in 2021, many with no forward lessee, lessors are looking at how they can extract value from impaired assets.  This may include broadening their offering to provide maintenance with the aircraft lease, which is something lessors have historically avoided. This issue has been addressed by Oliver Wymann How Lessor Maintenance Could Change Due To COVID-19 .  Whatever business models may emerge, it is certain that the landscape has shifted and change is inevitable.

Heretofore airlines needed to consider; whether to insource or outsource component availability, which sub-set should be outsourced to PBH providers, what service levels are required, what OpEx budgets and in-house capability for spot trading (buy/exchange) are required.  A new dimension that needs to be considered is internally sourced material from owned surplus aircraft.  In addition to reducing the component access, depreciation or lease costs that surplus aircraft may present, teardown aircraft can provide an opportunity for significant repair cost reduction through burndown of surplus parts over several years.  In many cases the cost savings can even exceed the NBV of the retired aircraft.  This strategy can reduce the TCO (total cost of ownership) for components and become an important savings initiative at a critical time for the industry as airlines relaunch with more debt to finance, as a consequence of COVID related loans.

Today aircraft are being prematurely retired because of a market shock that is reshaping the industry.
In December 2020 advisory firm Ishka estimated that 15-year-old planes’ valuations had fallen by between 20% to 47% since the beginning of the year.  Cargo conversions are mitigating further devaluations but other analysts estimate 50% reduction in aircraft valuations.  It is estimated that there are 5,000 surplus aircraft in the system.   Supply for components already outstrips demand and consequently, to respect the most basic laws of economics and avoid a complete market collapse, not all retired aircraft will be torn down but many will at a higher volume than previously seen, as discussed in the article Look For Restocking And Teardowns To Increase In H2 2021.  So, the spares market is already flooded and there is a tsunami predicted.  Aircraft teardown is not new.  Historically, teardown was a consequence of an aircraft reaching its economic end-of-life.  The objective was to teardown and remarket the engines, APUs and components to maximise the residual value.  In an already soft and further weakening surplus spares market this may provide small amounts of short term cash but, like selling the family jewels, it is not a sustainable strategy.  This has been highlighted by AWN article Parts Opportunities In Distress.  A more optimal approach is for airlines to consider their surplus aircraft as a source of spares and avoid ongoing availability costs such as investment CAPEX, pool fees, consignment lease, exchange fees, scrap CAPEX and also to mitigate repair cost through surplus burndown.

The obvious conclusion is that teardown is no longer a one-off project to maximise aircraft residual value, it is now an integral part of an airline and MROs  procurement and material availability sourcing strategy and should not be considered or managed in isolation of the broader strategy. This is a necessary mind shift for the industry.

Airlines , MROs and lessors need to develop or source the inventory planning capability to consider a multiplicity of sourcing scenarios. This will enable consideration of their specific operation, current assets and the market, and match this with the optimal associated availability sourcing strategy.  For the relaunching operations, this will optimize decisions related to identification of the optimized sourcing strategy incorporating all supply sources, from new pool scope, to on-site stock, lease and consignment scope etc.  To optimize service levels and costs, the new aftermarket and business landscape requires a fundamental rethink of sourcing options for spares availability.  It is also important to consider what is feasible in terms of pre-existing agreements.   Some airlines that have traditionally heavily outsourced through pooling or Repair Cycle Management contracts may have operational challenges to develop the capability to in-source the planning, RCM and trading capabilities necessary to exploit the opportunity.  This may be seen as another headache in a period of dramatic business transition as airlines struggle to relaunch.

Perhaps this is the time for component service suppliers to innovate and rethink supporting airlines through development of technology enabled services and innovative business models to support their customers in addressing the challenges of the emerging market.

READ: Rethinking Spares Availability 

Bridging the Inventory Planning Gap

Typically, in MRO and airline inventory planning, the response to this gap is to develop manual workarounds, which usually give less than optimal results. People work outside the ERP using spreadsheets, tribal and tacit knowledge, and their best subjective judgement, unsupported by any analytical system

Armac Aviation Inventory Planning

The Inventory Planning Gap

Inventory management for airline and MRO differs from standard manufacturing techniques and is much more complex. We are repairing and keeping serviceable highly engineered, mission-critical assets, as opposed to manufacturing from raw materials and distributing.

Armac Aviation Financial Reporting

Aviation Spare Parts Planning – 5 KPI’s for the Airline C-Level Executives

In the first of our series on Opening the Black Box on Aviation Spare Parts Planning we look at 5 key KPIs that every airline should track.

Airlines have traditionally relied on expert Inventory Planners to drive their investment decisions in spare parts for maintenance engineering.  However, a ‘just-in-case’ engineering mindset coupled with emotional buying behaviour driven by the most recent AOG experience can result in costs spiralling, while having the right inventory availability to address the next, unplanned AOG still remains an issue.  Management thinker Peter Drucker is often quoted as saying “if it can’t be measured, it can’t be managed”, so how can an airline objectively measure the effectiveness of their inventory planning approach and the value for money it achieves?

This article suggests 5 KPIs to provide an objective measurement of an airline’s inventory planning capability.  The uncertain, complex and dynamic nature of an airline’s operation makes results difficult to interpret and compare, as there are always ongoing changes in fleets, routes, aircraft configurations, component sourcing strategies, maintenance plans etc.  However, these factors need to be considered when tracking KPIs over time, rather than used as an excuse to perpetuate a subjective, expert-centric, ‘best educated guess’ approach.

KPI #1: Inventory Turn
This is defined as the value of the stock being issued divided by the overall inventory value. Expect this to be low, as most component parts fail very infrequently.  Parts should be subcategorized in terms of their usage rate and operational impact; a higher Inventory Turn would be expected for high usage / low essentiality parts and visa versa.  However, if it is very low, it could indicate a change in sourcing strategy is prudent. Airlines should look to pool, exchange or source certain categories of very slow moving component parts on the market when needed rather than hold them in inventory.

KPI #2: Inventory Per Tail
This metric provides a mechanism to compare versus peer carriers, though what is “good” versus “bad” can depend on the overall scale, aircraft type and mix.  Surveys of commercial airlines in recent years have shown a range from as low as $700,000 in spare parts per aircraft to over $14,000,000!

KPI #3: Inventory investment – Actual V’s Target
The budget needs to include all operational and capital spend, including repair cost, holding costs, logistics, exchange costs etc. Setting a realistic budget needs to consider both planned and unplanned demand.  Forecasting inventory requirements is difficult given the highly stochastic nature of the demand for aviation spare parts.  Airlines need to provision to recognise the variability inherent within the forecast.  The real drivers of demand need to be understood e.g. flight hours, upcoming checks etc. rather than depend on the assumption that past usage is indicative of future need.

KPI #4: Inventory Service Level – Actual V’s Budget
Service level represents the percent of time a part is available where and when required.  Again, the challenge is setting a realistic overall target service level for each category of part.  Typically, improving service level becomes incrementally more expensive to the point where the cost becomes prohibitive.  Hence, the airline needs to determine the optimum trade off between investment and service level in order to set sensible target values.

KPI #5: Inventory Cost Per Flight Hour
Again, a metric that can be used to compare versus peer airlines. Also, it can  be used to compare and evaluate third party outsourcing options offered by Providers who often charge on a per-flight-hour basis.

To ‘open the black box’ on our inventory planning we need a communicated inventory policy in place within our organizations.  Then we need the process, organizational set-up and systems & data to be in place to execute against this policy.  Finally, we need to have the KPIs to track, calibrate and measure performance against our budgets and targets.  We’ll address these topics in future posts.


Forecasting Aviation Spare Parts Inventory

Forecasting for Aviation Spares Inventory – Part 2

Our objective is to provision against forecast uncertainty to deliver a level of service. We are spending to mitigate uncertainty, in an economically efficient manner. Obviously, it does not make economic sense to make these risk-mitigating decisions on a part by part basis in isolation. This myopic approach opens the door to inefficiency and waste.