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Economics and Influences on the Surplus Aftermarket, Part 1

In college many of you took Micro and Macro Economics. You likely remember that those classes were characterized by the numbing number of graphs; recall those Supply-Demand curves? I liked those graphs. To a certain extent they were intuitive, and you could derive a great deal of information from them. I hope to do that with this blog. I have not seen these graphs before, so I’m having geeky fun expressing latent talents for academia.


Recently, our friends at ICF International published economic data represented in the following chart:




The release of this data triggered a few articles in industry magazines which offered analysis of the market and the represented data. It occurred to me that the fundamental economic drivers on the surplus aftermarket have not been adequately articulated in the past. Only when these fundamentals are understood, can we judge the quality of analysis and opinion. So, in this Part 1 I hope to articulate those fundamentals, and then with the next blog, Part 2, I’ll combine the fundamentals with current analysis. I hope you’ll find the last two graphs particularly interesting:

  • ANALYSIS OF DYNAMIC EFFECT OF SURPLUS AVAILABILITY ON PRICEs
  • EFFECTS OF STRONG OEM INTERVENTION ON THE SURPLUS MARKET

If I have done my job right, these will all seem simple and intuitive. For all of these, you will recall your college professors repeatedly saying “All things being equal”, and so it is here, these are generalizations.




CHARACTERISTICS:
  • Emphasis is on a given fleet-type of aircraft
  • As the fleet ages, more surplus parts become available

Easy right? Let’s build upon this.




CHARACTERISTICS:
  • Emphasis on a given fleet-type of aircraft with a large production run
  • The total number of surplus parts is greater
  • Many aftermarket suppliers participate

Next:



CHARACTERISTICS:

  • Emphasis on a given fleet-type of aircraft with a small production run
  • The total number of surplus parts is smaller
  • Small number of aftermarket suppliers participating
  • Opportunity for niche aftermarket suppliers to specialize

How about a combined global aircraft types?



CHARACTERISTICS:

  • Emphasis on the average age of all combined aircraft types
  • The number of surplus parts is directly proportional to age

Here’s an interesting but predictable phenomenon:




CHARACTERISTICS:

  • Emphasis on a given fleet type
  • Initially (flat horizontal segment), the part number pool consists of parts predicted to have removal histories.
  • As the fleet ages, certain parts start to fail which had not been originally provisioned-for.
  • Lead-Time to manufacture these parts is as expected, long. The demand may be filled by niche and/or tear-down specialist suppliers
Let’s crank these a little bit:   



CHARACTERISTICS:

  • Emphasis on a given fleet
  • The price of parts and the number of surplus parts availability are inversely proportional

Now we can break this down: 




CHARACTERISTICS:
  • Emphasis on a given fleet
  • Stage 1:
    o   Fleet introduction and growth
    o   Parts are largely under warranty and controlled by the OEM’s
    o   The price of new parts are high
  • Stage 2:
    o   As the fleet grows, individual airline operators gain experience and adjust inventories – excess inventory starts to enter the market from those airlines
    o   Other airlines with different operational profiles find they are undersparred and order more new parts adding to the total pool
    o   Depending on demand, tear-downs may start to occur to harvest additional spares
    o   As the availability of surplus parts starts to increase, prices start to decrease – this includes that those additional spares are in overhauled or repaired condition rather than new, further eroding prices
    o   The number of aftermarket firms participating in this segment increases
  • Stage 3:
    o   The given fleet is in its sunset period and no longer in production
    o   Airlines are starting to park older aircraft further increasing the pool of spare parts
    o   The market is characterized by having too many spares – this drives down prices and dis-incentivizes aftermarket participants

The following phenomenon is emerging and worthy of commentary:




CHARACTERISTICS:
  • Emphasis on a given fleet type
  • Initially (flat horizontal segment), parts are largely under warranty and controlled by the OEM’s, and prices are high
  • As the fleet ages, surplus parts start to become available and prices start to come down for the classic reasons previously described as ‘Stage 2’
  • The OEM steps in to moderate the market and prices
    o   The OEM enlists the assistance of aftermarket specialists to buy-up and control the spares
    o   Some spares may be taken off the market to keep prices high and forcing operators to order new parts directly from the OEM
    o   The spares taken off the market and controlled by the OEM are funneled to the OEM’s MRO affiliate to make them more competitive against non-OEM affiliated MRO providers
    o   The OEM finds ways to unreasonably restrict independent MRO’s from gaining access to its component maintenance manuals, forcing operators to send MRO work to the OEM affiliated MRO, reducing competition and keeping prices higher for the cost of overhauls and repairs
    o   Alternative-parts PMA manufacturers may step in to answer the operator’s calls for shorter lead time and lower prices
    o   Tear-Down specialists start to look for opportunities

University students looking for thesis material may want to take these graphs and do the research to quantify the graphs. In the next blog I hope to merge the theory presented here with the forecasts earlier introduced.


Over'n Out - Roy "Royboy" Resto - www.AimSolutionsConsulting.Com... class="MsoNormal" style="mso-margin-top-alt:auto;mso-margin-bottom-alt:auto; line-height:normal">

Posted By Roy Resto | 2/23/2015 5:27:11 PM
 

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