At the 2011 Gorham Conference, Michael Howard of Aerostrategy explained that oil prices are likely to continue to increase. This means that airlines are going to need to find ways to cut costs in order to remain profitable. This helps to drive air carriers to investigate use of PMA parts as a means of saving costs without jeopardizing safety,
At the same time, this could affect some of the markets for older types. High fuel prices exacerbate aircraft operating costs – less fuel-efficient aircraft become even more expensive to operate – and thus high fuel prices put pressure on air carriers to retire older aircraft in favor of newer, more fuel-efficient, aircraft. Howard explained that aircraft retirements are surging – they seem to be at a 400 aircraft per year level, which means that air carriers are already replacing large quantities of older aircraft. The older aircraft are often the ones with the most PMA-saturation, so this means that fuel prices are influencing the market that is available to PMA parts.
Rising MRO Spend
Aerostrategy analyzes PMA use as a component of the whole (air transport) MRO market. Howard explained that the air transport MRO market was valued at about $43.6 billion in 2010. This was down from a high of $45 billion in 2007, but up from the 2009 level of $42.7 billion. Aerostrategy sees the air transport MRO market continuing to grow at an average annual rate of 3.5% for the next decade – rising to $58.4 billion by 2019.
Howard explained that airlines are simplifying their MRO supply chain in order to preserve cash. This can mean that PMA companies must shift their marketing resources to reach MROs. In some cases, though, air carriers are helping to make sure that they retain their PMA savings by working with their MROs to ensure the use of PMA parts on their aircraft. United Airlines’ Michele Bassi-Degenkolb explained that this is part of her airline’s cost-saving strategy.
Excess Inventory Trends
In 2009, Aerostrategy estimated that the industry held $47 billion in excess inventory, which could be utilized without replacement in order to cut costs. In response to the poor economy, air carriers were able to reduce MRO spending by 15-20% in 2009. One factor in this reduction was the ability to draw down excess inventory. But air carriers cannot rely on this strategy forever, and Aerostrategy sees a bottoming-out to this trend, with an attendant increase in purchase of new parts (including PMA parts).
While excess inventories may be running out, there are other sources of parts being tapped. Disassembly (parting out) of aircraft for their parts is gaining momentum – this puts more surplus parts in the system and these surplus parts compete with the sale of new parts in the market. Howard explained that there is significant parting-out occurring among 737s and A320s.
Aerostategy estimates that the total surplus parts consumption in 2009 in the transport aircraft industry was about $2.3 billion.
Fuel Prices and Growth
Howard explained that if fuel stays in the $80-$110 per barrel range, then Aerostrategy predicts that we should see modest growth (2-3%) in both U.S. Gross Domestic Product (GDP) and airline profitability. In such a scenario he sees a 5 year CAGR of 12% and strong growth in the air transport market in 2011 and 2012.
In support of this trend, he explained that 2010 PMA was up 4% over 2009 levels from $353 Million to $367 Million. Part of what is driving this faster-than-MRO-growth-rate is increased penetration within air carriers.
Howard explained that the retirement of PMA-friendly platforms, and OEM and leasing impediments will eventually cause PMA growth to slow down, but we do not yet seem to be approaching that “tipping point” because PMA is still seen as a safe and reliable way to reduce costs. Thus, while the growth of PMA cannot go on forever, it will continue to grow for quite awhile and the slow-down point is far enough in the future that Aerostrategy is not willing to even begin to estimate where or when that “tipping point” may be found.
Throughout this year’s Gorham Conference, there was a general agreement that leasing contracts are a major impediment to the growth of PMA, but that some of these hurdles are slowly being surmounted. As with other industry segments, the key to surmounting the perceived hurdles is treating the leasing industry as potential partners and opening lines of communication with them.
An Aerostrategy study shows that airlines believe that leasing companies are the biggest barriers to use of PMAs, but Howard sees situations where leasing companies are starting to get more comfortable with the use of PMAs, particularly for older types.
The Aerostrategy study shows that leasing companies are the biggest obstacle but they are not the only obstacle to PMA penetration. OEM total care and power by the hour contracts often exclude PMAs and they can reflect significant impediments to the use of PMAs – particularly among engines. David Doll added his belief that one of the reasons that OEMs purchased MRO facilities was to protect their aftermarket parts sales markets; he concluded that OEM MRO facilities may reflect another impediment to PMA penetration.
Aerostrategy sees the PMA industry continuing to grow at a rate faster than the rate of MRO growth, and is currently predicting that the PMA market will grow from in $367 Million 2010 to $665 Million by 2015 (assuming fuel prices remain within a moderate $80-$110 per barrel range). If this prediction proves correct, it will mean that the PMA market will have grown at a rate of over 12% over that period.
At the Gorham Conference, Michele Bassi-Degenkolb asked if Aerostrategy has looked at air carrier inventories to assess PMA penetration? Howard said that they have not done this for the whole market. Michele Bassi-Degenkolb pointed out that United is pushing PMA at their MRO service suppliers, and is looking carefully at their contracts to make sure that there are no impediments to PMA. She explained that airlines are getting smarter as they understand better how to overcome PMA impediments, in order to take advantage of the savings and reliability improvements associated with PMA.