USM Market Hot But Volatile

usm market hot but volatile

As airline competition rises, the pressure is on to cut costs – hence the growing interest in alternatives to new parts, such as used serviceable material (USM).

The USM market is expanding, as new players enter, existing players increase their business, component support contracts drive interest, and Asian carriers become more receptive. Airframers like Boeing have also launched programs that leverage USM. Airlines, MROs and original equipment manufacturers (OEMs) are all players in this market.

USM is a growing part of MTU Maintenance’s business: “We are experiencing double-digit growth in this area each year,” said Patrick Holzkamp, head of purchasing engines and used parts. The unit uses and sells USM materials.

Savings are “more than 50 percent overall, plus a quality improvement if the parts are overhauled in our shops,” declared Manuel Huensch, senior manager of corporate purchasing with Lufthansa Technik (LHT).

On average a USM part can be 60-80 percent of the price of a new part, according to Rudy Bryce, general manager for the GE Aviation Materials and TrueChoice Transitions program. However, USM may not fit the objectives of every shop visit, he added. “So an understanding of the type of workscope, what modules are being exposed, and what time-on-wing and residual value targets are being set are critical to understanding the potential demand.”

But prices fluctuate, depending on factors such as where the part is in its lifecycle. Early in the lifecycle, high-demand USM parts can be marketed at 85 percent of the OEM catalog list price, said Vincent Benoit, Air France Industries (AFI) director of components and asset management. And, if the OEM has supply chain issues, USM can sell for more than the catalog list price.

LHT actually prefers used material over new material if the part is overhauled in the MRO’s shops or within its network. “This ensures the quality our customer expects and reduces costs,” Huensch said. LHT employs used parts in nearly every area – engines, components, landing gear, and airframe “but never incident-related material,” he clearly stated.

Benoit said that USM can be cost-efficient in cases such as the replacement of high-scrap-rate engine parts, the replacement verses the repair of rotable components, or when creating a pool or maintenance base kit. It can also serve to decrease pool access costs to airline customers.

But the market is volatile. “The challenge is … for asset owners to recover their investment,” Benoit said, adding “the market now is facing a higher retirement rate, overflowing a shrinking market on legacy applications.” Investing in the right parts at the right time is critical, Bryce agreed. “Get this wrong, and it is very easy to build up inventory on non-performing parts.”

Engines

In the last few years there has been above-average fleet growth, and production rates in 2016 were not high enough to cover demand, MTU’s Holzkamp asseted. This situation, together with low oil prices, has made older aircraft attractive to operate. ‘Park rates’ for commercial aircraft engines have declined to their lowest rate since 2001, he added, citing data from the Ascend aviation consultancy. The upshot is a strong demand for MRO for these older aircraft, more cost-intensive shop visits for mature engines as they are being flown longer, and a parallel demand for cost-effective alternatives in replacing life-limited parts (LLPs) and other parts. One of the options is USM, obtained through tear-downs.

For airliners in the over-100-seat class, about 800 engines were retired in 2015 and 2016, well down from 2013 (1,300) and 2014 (1,100), according to Ascend. The engine types most affected (until March 2016) were the CFM56-2/5A/C, JT8D, JT8D-200, CF6-50, CFM56-3, and CF6-80C. The slow retirement rate increases the demand for cheaper material and, in turn, tear-down. At the same time, half-time engines can become scarce, if the demand is higher than supply. For the next decade, retirements will remain cyclical with a probable peak at around 1,800 airliner engine retirements, predicted Holzkamp, noting that for older models, such as the CFM56-3, there is more supply than demand. For other engine types, the supply and demand ratio depends largely on the types of parts in question. For slow moving ‘C-parts’, there is currently more supply than demand. But, given market volatility, things could change quickly, he warned.

The 737CLs, 747s, A320CEOs and A340s also have seen a large increase in surplus availability, driven by fleet retirements and renewal programs, according to Carl Glover, AAR’s vice president of parts supply for the Americas. USM is a key part of AAR’s parts and aftermarket parts and services offering.

MTU Maintenance “deal[s] in everything – from sought-after LLPs such as for the CF6-80 right down to the smallest brackets,” said Holzkamp. “‘A-parts’, or fast- moving parts, such as LLPs with remaining flight cycles that cover a minimum of one complete engine run can be very popular – in particular, LLP parts from large installed fleets such as the CFM56-5B/7B and V2500.” But MTU Maintenance also deals in [slower moving] ‘C-parts” because each small saving and used part can add up to create big savings for our customers.”

Candidates for USM sourcing are older and retiring airplanes and engines that are typically 12 or more years old, said Jimmy James, managing director of American Airlines Tech Ops procurement. These include airframes such as the 757, 767, 737 and 777.

Air France Industries KLM Engineering & Maintenance (AFI KLM E&M) employs used engine parts and rotable components from mature fleets such as the A320, A330/340, 737NG, 747, 777, ATR, and Ejet, and from the CFM56-5B/-7B, CF6-80, and GE90, added Benoit. AFI KLM subsidiary, AFI KLM E&M Teardown Management, handles the purchase of aircraft and engines and liaises with parts traders.

USM uptake is for fleets that are operational and post-warranty, Glover noted. Nevertheless operators use the market to benefit through initial provisioning tasks and additional stock carriage requirements, where they have not outsourced inventory carriage.

Components

Trends in component MRO (CMRO) are also driving the use of USM, as startup and low-cost carriers cut costs by turning over CMRO and even component carriage to third-party repair specialists and OEMs via long-term, power-by-the-hour (PBH)-type contracts.

Benoit explained that USM availability has allowed new MROs to enter the component market with aggressive pricing, allowing operators to secure better deals in exchange for longer commitments. In addition, the emergence of long-term pool and repair deals increases the level of surplus, as more inventories are consolidated into pools. He sees USM as “a nice short-term solution, easier to implement than PMA parts.”

Traditionally, airlines held their own rotables stock, said Dan Watson, chief commercial officer of the AJW Group. But today more carriers recognize the cost of not having an optimized inventory, increasing their interest in PBH-style programs.

Component repair and structured support agreements are a key part of AAR’s lineup, as well, and are focused on reducing operators’ operational support costs. Glover explained: “Typically they are structured to leverage the use of USM inventories … through aggregating inventory carriage, repair spend, and asset availability.” The growth in this outsourcing model, as well as general fleet growth, increases the market demand for spares.

The expansion of component PBH programs and pooling “opens up the number of people that are active in this market and that are actively investing in it,” Watson added. AJW offers component PBH programs, pooling agreements, partout and engine shop visit management, and ad hoc parts sales and support, among other services.

Traceability

Another key point with USM is a part’s paper trail. American Airlines, for example, dedicates resources to the USM receiving and inspection process. The carrier requires both serviceability and traceability documentation in order to accept used parts, explained Robert Harper, one of the airline’s quality assurance managers.

Serviceability documentation – such as an FAA 8130 tag or an EASA Form 1 tag – speaks to the airworthiness of a part, providing information such as what work has been done on a part and who did it. This side of the USM equation is highly controlled by government aviation authorities.

Traceability documentation concerns a part’s ‘pedigree,’ Harper said. This shows a part’s history – who has owned or operated it. American has its own certification standards that must be met for parts to be acceptable: “One of our fears is accepting a part without good traceability.” A part without traceability raises questions regarding ownership and who may have been previously maintained it.

American is also ‘pretty selective’ about where the chain of traceability leads to, he added. The carrier has been pro-active in informing suppliers of its requirements and repair specifications. It can’t just “grab stuff off the shelf.” The material has to meet American’s approved repair specification or it has be made compliant to the spec by further repairs/overhauls or inspections performed by the airline’s shops or by one of its audited and approved repair stations. The airline regards this requirement as a ‘safeguard,’ but some suppliers may see it as an extra step that adds costs.

These requirements place some limitations on both the carrier and its potential suppliers. If a distributor stocks parts that have been repaired to a generic spec, it may be easier for the supplier to turn inventory because multiple airlines might be able to accept it. If the distributor stocks parts repaired to a unique spec belonging to one airline, perhaps other airlines wouldn’t accept it, Harper said adding that American’s quality control process ultimately helps the airline avoid surprises.

While getting the traceability documentation can sometimes be a challenge, it’s much less so than it was back in the 1980s. Back in the day, the FAA was asked to regulate the used material arena, Harper recalled, but the agency did not have the authority to do so and supported industry efforts to develop voluntary criteria instead. So American works with organizations such as the Aviation Suppliers Association and used material suppliers to make sure that they understand the carrier’s requirements and quality system.