With a combined backlog of more than 10 000 commercial aircraft, both Boeing and Airbus have never been in a stronger position, particularly when it comes to negotiating with their suppliers. As a result, the OEMs have been increasingly pressuring the latter to offer significant price concessions in order to be able to sell new aircraft at lower prices. However, these efforts are forcing downstream suppliers to take action as well.

As the demand for lower airfares continues to affect the whole value chain, from OEMs to their suppliers and on down, competitive pricing in the supply chain will likely be an on-going challenge in 2014. This is especially true as the industry giants are actively taking measures to tackle the rusk/margin balance in an attempt to reach double digit profitability levels. One of such initiatives is Boeing’s “Partnering for Success” program, which aims at reducing suppliers’ prices. However, many of the latter have been reporting the demanded price reductions (15-20%) to be unreasonable.

“Suppliers have previously complained that such initiatives as Boeing’s “Partnering for Success” are a one-way street that benefits the companies much more than them. Now, with Airbus andRolls-Royceseeing the higher profitability of such peers as Boeing andGEthere’s even more pressure coming from them than in the past,” says Zilvinas Sadauskas, the CEO of Locatory.com. “On the one hand, such deals help the OEMs keep new aircraft production costs, and presumably prices, lower, while providing some post-delivery revenue tailwinds. However, it ultimately leads to the fact that their reach is extending beyond their own supply chain.”

Most experts believe that Boeing is aggressively using its program to capture more of the aftermarket economics

Most experts believe that Boeing is aggressively using its program to capture more of the aftermarket economics. For example, many suppliers have reported that if desiring to be on the 777X, they will now have to provide a much greater amount of material for the aftermarket to Boeing, rather than directly to the aftermarket. Such an arrangement, for instance, helped landing gear manufacturer Heroux-Devtek win a coveted spot on the 777X supplier team.

“Currently Boeing is considered to be the third largest aftermarket player after GE and Lufthansa Technik. Nevertheless, the manufacturer currently supports only 15% of its fleet, which is why it’s still ambitious to capture a larger piece of the pie. Thus, there are reasons to believe that the OEM is getting more direct in trying to set limits on the price increases suppliers can pass onto the aftermarket,” says the CEO of Locatory.com “For instance, if in the past spares often sold for as much as three times the price they have in the OEM supply chain, now Boeing may be looking to limit the escalations to twice the price.”

Aftermarket providers have already started to feel the squeeze. A Canaccord survey compiled within the past few weeks shows that over 60% of MRO providers feel that OEM competition is increasing. However, as a result, some of the OEMs suppliers now have little choice but to pass the squeeze down the supply chain. For instance, Parker Aerospace‘sparent company, Parker Hannifin, which has had initiatives under way for more than a decade to cut supplier costs and improve manufacturing efficiencies, has recently launched an initiative with its suppliers similar to “Partnering for Success” to accelerate price reductions.

“This is definitely real and it’s not going away. The aviation supply chain is currently increasingly challenged to keep pace with OEMs to dramatically increase the rate of production of components, systems and services. However, with OEMs increasing their focus on winning market share and benefitting from the current demand for aircraft and air travel, the supply chain must be able to access the finance they need to continually invest, as well as to be more open and transparent with OEMs on making the changes required to meet demand and continue to foster innovation in new materials, technology and process management,” shares Zilvinas Sadauskas, the CEO of Locatory.com “All in all, while the industry outlook may be bright, the challenges still remain, and the suppliers in the industry have no choice but transformation.”

The influence of the aftermarket services on today’s commercial aviation industry is undeniable. The data provided by ICF SH&E indicates that the spare parts market has grown by over $5 billion in 12 years’ time and now accounts for almost half of $56 billion worth MRO market. Moreover, with early aircraft retirements affecting the aftermarket, the carriers are increasingly adopting an active surplus materials strategy to become less dependent from the OEMs. However, operators of some popular aircraft types are less lucky than the others.

If in the 2001 the aviation serviceable parts market was worth about $11 billion, with just 10% claimed by surplus parts, today surplus parts account for about 18% of a $15 billion market, and the share could climb to 20% by 2015. According SH&E, as the useful life of various aircraft models continues to get shorter, the share of surplus parts being sourced directly from part-outs currently reaches about 82%. Meanwhile, while surplus parts are making their mark, demand is not being met on some of the most popular models, including the B777 and its GE90 engines, and the B737NG.

If in the 2001 the aviation serviceable parts market was worth about $11 billion, with just 10% claimed by surplus parts, today surplus parts account for about 18% of a $15 billion market, and the share could climb to 20% by 2015

According to Zilvinas Sadauskas, the CEO of Locatory.com, a lack of B777 surplus parts in the aftermarket should raise no eyebrows: “On the one hand, the aftermarket for the type still hasn‘t been able to form – spares and components of these aircraft are simply disappearing, since the manufacturer‘s tightening control affects the spares‘ pricing and availability. At the same time, long-haul aircraft experience less overload due to less landings and other factors, and thus only a few of them, if any, have been torn down for parts, since they are simply too expensive.”

AWIN data indicates that due to the popularity and durability of the model, of more than 1 000 B777s delivered, only five have been scrapped or written off. Therefore, currently only 20% of B777 inventories may be found on the open market. Meantime, the situation for the B737NGs is a bit different. At the end of 2014 almost 40 737NGs at an average age of 12 years have already been forced into a premature retirement with an objective to benefit from the spare parts sales. Nevertheless,while some of the younger B737NG models have been recently torn down, allowing for the used material to hit the market, much of it simply has too little useful time left, thus not resolving the deficiency, states the CEO of Locatory.com

Nevertheless, according to the executive, the situation can be expected to change in the nearest future. As more airframes age and the 777x moves from the paper-airplane stage to the production lines, more and more popular widebodies will eventually hit the aftermarket. “The same is true of the 737NG as well. As the 737MAX’s planned entry into service, slated for 2017, gets closer, and aircraft with a higher concentration of significant green-time parts are broken up, the drought in the aftermarket fill probably come to an end. As usual, all the industry has to do is simply wait for a little longer,” concludes Mr. Sadauskas.

Locatory.com continues to perfect its newest artificial intelligence assistant Amber A.I. Due to a newly introduced extension the service is now available for Mozilla Thunderbird users. Moreover, the application boasts a package of the latest updates such as attachment and Cyrillic alphabet support.

Following the latest introductions, the system plugin can be integrated with the relevant Mozilla Thunderbird client by following a simple setup process. It functions the same way it does on Microsoft Outlook: you log onto Locatory.com, receive an e-mail containing part numbers, click on the Process button and instantly receive the availability report in a new email client tab. Afterwards, sending multiple RFQs to vendors of your choice is just another click away.

“As a default email and chat client Mozilla Thunderbird is widely used all over the world. The number of Mozilla Thunderbird desktop opens increased by 600% in 2013 alone, so no wonder it is listed in the top 10 of the most popular e-mail clients,” says Zilvinas Sadauskas, the CEO of Locatory.com. “This is why the Locatory.com team has decided to integrate the power of Amber A.I. within this software. We are confident that this will contribute to our goal of creating a more efficient and transparent aftermarket for the aviation industry.”

In addition to all the classic Amber A.I. tools, the extension features a pack of the latest updates for extra convenience

In addition to all the classic Amber A.I. tools, the extension features a pack of the latest updates for extra convenience. Now Amber A.I. can process any format of files attached to e-mails without the need to open them. This allows to process relevant information through Locatory.com marketplace by simply forwarding the attachment to Amber A.I.

The new function supports such widely-used formats as Microsoft Office document, OpenDocument, Portable Document, Electronic Publication, Rich Text, Compression and packaging, Text, as well as Feed and Syndication.

“Moreover, considering the overall market size and the development rates of the aviation industry in Russia and the CIS, Amber A.I. has been enhanced to understand not only part numbers written in Latin, but also the ones written in Cyrillic, with an added option to convert them into Latin. As a result, Amber A.I. is now even better at saving your time because you no longer need to spend hours encoding and converting the relevant data as the system can processes the numbers in both alphabets!” shares his excitement the CEO of Locatory.com.

The new features are also available for Amber A.I. users on all the previously supported platforms worldwide.

Following the latest trends within the aviation industry, spare parts business, once a mundanely straightforward enterprise, has evolved into one of its most dynamic sectors. However, as in most cases, the new developments were accompanied by unique challenges. On the one hand, technologically advanced components help to drive down maintenance costs on the newest aircraft. On the other hand, they also radically alter the cost-benefit calculation of whether an airline should stock its own spares or participate in a pool.

In the past the majority of airlines was fond of keeping enormous stocks of spare parts and components to ensure maximum support for their fleets, whilst relying on such straightforward supply formulas as stocking two shipsets of parts per aircraft. Today, spare parts supply calculations are more complicated and involve much larger numbers. At the same time, enormous in-house stocks are increasingly difficult to justify. Nevertheless, according to a recent survey carried out by Oliver Wyman consultancy agency, in North America alone airlines spend $110 million on poorly positioned spares.

“In today’s aviation, the more advanced an airliner is, the larger the fleet is needed in order to justify stocking its own components. For 747-400s, only a fleet the size of 20-25 aircraft would generate sufficiently low flight-hour costs. For the next generation of aircraft, like Boeing 777 and Airbus A330, that fleet size jumps to 60-70. When it comes to the 787s, the estimated figure is at about 100. Add into consideration the multiple logistical challenges and it becomes easy to understand how the provisioning for a fleet can turn into an extremely costly affair, even as reliability improves,” comments Zilvinas Sadauskas, the CEO of Locatory.com. “At the same time, a mere mention of sourcing aircraft components from pooling silos to an aircraft lessor is still rather likely to be met with a firm refusal. Naturally, one may wonder about the reasons behind so much caution over the use of pooled spares on board.”

In today’s aviation, the more advanced an airliner is, the larger the fleet is needed in order to justify stocking its own components

It goes without saying that any use of pooled components must correspond with the operators’ duty to safety and airworthiness as concerns any aircraft, leased or owned. As for the lessors, they are naturally wary of their aircraft coming back in substandard condition. Therefore, terms like “no pooled parts” aboard an aircraft are often motivated by the potential risk to the residual asset value of that aircraft. At the same time, it is simply naive to think that all the leased aircraft are returned with the exact same parts that were fitted at delivery. After all, over the years, lessors have been unsuccessful in managing to prevent pooled parts from finding their way onboard their aircraft.

“Today more and more cost-conscious operators are urging everyone in the aftermarket business to generate more value. And for most operators value means flexibility. This is especially true in the case of LCCs, which typically have very tight schedules to stick to and any in-service disruption is likely to have severe consequences. LCCs do not want to spend money, needing to stay nimble in order to respond to any market developments,” says the CEO of Locatory.com. “With a rapidly growing number of third-party aftermarket players and used parts usage on the rise, some image-conscious airlines embrace used material but draw the line at taking components refurbished by independent shops, insisting on parts repaired by the OEMs that made them instead. So, as we see, the ultimate question is actually that of reliability.”

Today more and more cost-conscious operators are urging everyone in the aftermarket business to generate more value

According to Mr. Sadauskas, the term “pooled parts” is often misunderstood, or at least misused, despite commercial pooling having been a market factor for almost 40 years. Component OEMs normally run pools of parts to protect their component repair performance and/or to ensure the adherence to their customer service obligations. Of course, using a single supplier under clear accountability terms seems a much more straightforward and reliable strategy as compared to the one of shopping around, especially when it comes to hot AOG situations.

However, while avoiding individual parts traders, who operate out of a garage and are ambivalent about quality, is an unquestionably smart choice, the option to completely refuse any alternative solutions is not a move that truly makes sense. Nowadays there are various e-procurement platforms which work hard to ensure a healthy pooling environment where every single supplier’s reputation is thoroughly checked. They offer the possibility to trace and provide such information whilst being particularly handy when these issues are concerned.

“When managed properly, parts pooling can offer a wide range of services to carriers to suit all business models,” the executive states. “All in all, it is evident that a change in attitude towards pooled parts is in much need within the industry today. At the same time, it is likely that as the usage grows, the related concerns from both, operators and lessors, will wane.”

Under competitive pressure more and more airlines are abandoning the strategy of holding huge and expensive parts stocks to support their operations. However, it does not mean that they are willing to give up on the extremely reliable dispatch such stocks support. As a result, finding the right balance between spares availability for fleet utilization and the high cost of maintaining stock levels still remains one of the biggest challenges for an airline today.

All carriers share the need to ensure that spares are in the right place and at the right time. Efficient supply chain management requires sophisticated forecasting, well-placed stocks and smart logistics. While there are airlines that can perform some of these tasks, most still lack the scale to forecast part requirements precisely, ending up having to pay impressive amounts of money for excess inventory.

Nowadays, more and more OEMs offer spare parts support for their products on a flight hour basis and push the service to their clients rather aggressively. For instance, with around 11 000 of its engines in operation, Pratt & Whitney has up to 40% of PW4000s and 60% of V2500s under flight-hour support. It is estimated that 80% of GTFs are similarly covered. The company stocks 20 000 new part numbers and 25 000 numbers of surplus parts, and commits to fulfilling orders promptly 95% of the time.

Nowadays, more and more OEMs offer spare parts support for their products on a flight hour basis and push the service to their clients rather aggressively

Nevertheless, engine support is only part of the picture. For instance, up until recently most operators used to hold largest parts stocks at their main bases, with only a set of the most commonly required spares stored at outstations for line maintenance and A-checks. However, considering the latest trends in the industry it is of no surprise that the focus has strongly shifted towards the support for out-of-base services. After all, especially as concerns long-haul operations, aircraft downtime can be greater at an airport than at the main base. That is why the stocks kept in these locations needs to be carefully tailored to every particular operator’s requirements, rather than consist of speculatively placed spares in anticipation of demand. Moreover, while there is the predictability of planned and forecasted maintenance, the unpredictability of defects and non-routine maintenance is a whole other challenge.

According to Zilvinas Sadauskas, the CEO of Locatory.com, the airline industry still has a lot to learn about massive improvements that are made possible for inventory management with some relatively simple software changes: “Making it all work starts with forecasting and IT. If you don’t have a good information system, you will be dead in a few months, since you will simply lose track of stuff.”

Appropriate application of such tools enables carriers to avoid delays caused by the lack of materials whilst cropping gross part stocks by 10%, the executive states. As a result, one gains the ability to provide a better service level for parts and more reliability for maintenance operations. Moreover, network suppliers can enjoy significant improvement in their business performance, not to mention the fact that direct costs for fleets of 10-15 aircraft can be cut by 20-25%. However, all these great perks are subject to at least a few years’ worth of operational data. At the same time, some airlines are reluctant to give access to their data needed in order to outsource contractors, or, alternatively, supply it in formats that are unusable.

“If industry players are seeking to significantly cut the currently excessive supply chain-related costs, closer collaboration between OEMs and suppliers must be accompanied by the overall increased openness and trust. There is also the need to challenge the existing status quo surrounding manufacturing processes and productivity, including program management and engineering productivity. The question is whether the industry is finally ready to apply the kind of focus and strategic thinking needed to achieve what it means to be truly competitive: profitable growth,” says Zilvinas Sadauskas, the CEO of Locatory.com.

With airlines worldwide carrying unprecedented numbers of passengers and aircraft manufacturers reaching record production rates, the recovery of the global aviation industry is unquestionable. As a result, IATA forecasts the airline industry to generate $746 billion revenues in 2014. However, with the actual profit accounting for as little as $18 billion, there are still important questions to answer.

Despite the fact that IATA claims the global airline industry’s ROIC to be 5.4% higher than it has ever historically been, the actual income of the world’s carriers is still generally disappointing. Moreover, recently, due to negative changes in growth of some of the promising regions and political tensions worldwide, the agency has downgraded the industry’s financial forecast for 2014 by 8.9%. This means the actual earnings account for less than $6 per departing passenger. Thus, with a record order backlog and annual deliveries of $125 billion or more to fund over the next decade alone, this throws out a challenge to the world’s aviation financiers.

According to Zilvinas Sadauskas, the CEO of Locatory.com, although financing aircraft orders while still struggling with profitability is a major challenge, which has recently fueled many talks about an “order bubble”, the global aviation industry should start by addressing more daily cash flow related issues. “On the one hand, the aviation industry is currently worth more than it has ever been. However, most of these impressive sums exist only on paper and invoices, since most of the money in commercial aviation comes from the actual flying operations. This often results in even the major companies not having any actual cash,” says Zilvinas.

There are a few reasons behind such a state of affairs. Aviation is a highly seasonal industry, which relies heavily on the changes in air travel demand, as well as on aircraft maintenance cycles. As a result, the carriers are the busiest and most profitable during summer, while such major MRO procedures as C- or D-checks are usually planned to be performed in winter. Thus when the airlines are short on money, this results in cash flow gaps which affect the whole industry, including the MROs and their suppliers.

Aviation is a highly seasonal industry, which relies heavily on the changes in air travel demand, as well as on aircraft maintenance cycles

“The picture becomes only grimmer when we remember discounts and credit lines offered by the MROs to lure major clients. As a result, airlines sometimes even demand debt discounts as the only condition on which they are willing to play at least part of the money for services. Not to mention the cases when an airline goes bankrupt. The vicious cycle can be only broken by careful expense planning and process management. This includes aircraft utilization as well as MRO-related demand,” says Zilvinas Sadauskas, the CEO of Locatory.com.

According to Locatory.com, a Boeing 737NG aircraft belonging to a major airline would typically operate about three to four flights in a 24-hour period. However, only 12.6 hours are used for revenue generating operations. Delays and scheduled major maintenance checks account for approximately 2.6 hours. This leaves 8.8 hours where the aircraft is available, but not used. At the same time, an additional hour of B737NG utilization might generate about $1.3 million per year. Moreover, operators often loose money due to inefficient spare parts and supply chain management processes.

“By optimizing check intervals, reducing technical delays and increasing airplanes parts availability, an operator might win an hour or two of additional aircraft utilization, thus becoming more profitable. To achieve that, however, the industry must seek closer collaboration in order to ensure that various processes within an airline and an MRO provider are well managed enough to enable more accurate demand forecasting, as well as cash flow management. Therefore, the industry players must show great collaboration by sharing vital information such as fleet data, engineering change orders, part reliability and other,” explains the CEO of Locatory.com. “By ensuring a more holistic approach to operations it is also possible to achieve increased value from IT investments, enabling to efficiently manage all the relevant data – from quotation handling to maintenance execution; from configuration management to supply chain and logistics; and from cost tracking to invoicing. While there is still no single solution, joining efforts is the key to build a more transparent and profitable industry.”