As the title infers, this is part II. If you have not read Part I, please look back at the previous blog by the same title.

The data which triggered my thought process was this graph, created by our friends at ICF International:

 

Let’s understand the basis for this data; from ICF:

“Alternatives to new OEM parts are therefore a big

deal. PMA parts are the best known, yet have achieved a modest 2% market share

after decades of effort. A less glamorous, but fast-growing alternative is

surplus parts, which have emerged as the key threat to the OEM service parts

revenue stream. My firm has studied the surplus parts market extensively and

estimates annual consumption is $3.5 billion – about six times as large as PMA

parts and a 12% market share. Moreover, the use of surplus parts is poised to

grow significantly over the next decade. ICF’s nominal scenario is for surplus

parts usage to reach $6.2 billion by 2023 (constant dollars) – a 5.6% annual

growth rate.”¹

So, according to this forecast, there will be 5.6% annual growth through 2023, to a $6.2 billion Surplus Market. What data is available to support this?

 

Let’s take a look at Boeing forecast data:

Source: Boeing Current Market Outlook 2014-2033

I like this chart because it’s simple, yet reflects critical data:

• Gross Domestic Product (GDP) is a reliable indicator of commercial aviation activity. If you want to forecast global, regional, or a country’s aviation activity, you should start by looking at the applicable GDP forecast. There are many sources for GDP forecasts including the IMF and World Bank among others. This GDP forecast above supports the Surplus Market growth forecast.
  
• Number of Airline Passengers: Growth in this area suggests that more aircraft will be needed to fly them – no argument there. This forecast above supports the Surplus Market growth forecast.
• Airline Traffic, Revenue Passenger Kilometers (RPK):
• 1 paying passenger flying 500 kilometers is 500 RPK’s.
• 1 ton of cargo flying 500 kilometers is similarly 500 RTK’s.
• RPK’s and RTK’s are among the most basic measures of airline productivity.
• BTW, the overall Load Factor formula then, is Available Seat Kilometers divided by RPK’s.
• Another BTW: For a given market, low Load Factors suggest overcapacity – a profit killer.
• This forecast above supports the Surplus Market growth forecast.

Now let’s look at the forecast for the total number of aircraft:

Source: Boeing Current Market Outlook 2014-2033

You don’t need to be a ‘Poindexter’ to understand that more aircraft equates to a bigger Surplus Market. This data suggests that the total number of aircraft will more than double in twenty years – astounding! Yep, this data too supports the Surplus Market Forecast.

 

Next, the forecast of the number of aircraft being retired per year:

Source: ICFI: The Surplus Parts Market, Richard Brown, Washington DC, 16 June 2014

A significant contributor to the amount of parts on the surplus market is the annual amount of aircraft retirements; the amount of parts is directly proportional to the aircraft being retired. According to the graph above, by 2023 the amount of aircraft being retired per year will surpass 1000, and this data too strongly supports the Surplus forecast.

Before we get too enamored by the forecast of 1000 retirements per year, the significant relationship that exists between the price of fuel and aircraft retirements should not be overlooked as illustrated:

Source: Aircraft Retirement and Storage Trends, Economic Life Analysis Reprised and Expanded, Dick Forsberg, March, 2015, Avolon

The data implies a direct relationship between the price of fuel and aircraft retirements. This relationship should be intuitive since older aircraft tend to be less fuel efficient and when fuel prices are high there’s a corresponding rise in retirements. As of this writing however, fuel prices have come down significantly. This may have a moderating effect on the Surplus Parts market forecast. Royboy’s opinion is that current low fuel prices are a temporary aberration. Note also that according to the cited Avolon data, there is a 1.5 year average lag between changes in fuel prices and resultant corresponding changes in retirements. In economics parlance, that makes fuel prices a Leading Economic Indicator regarding aircraft retirements.

 

I’d like to re-post the following information from Part 1 of this blog:

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’ (see previous blog)
• The OEM steps in to moderate the market and prices
• The OEM enlists the assistance of aftermarket specialists to buy-up and control the spares
• Some spares may be taken off the market to keep prices high and forcing operators to order new parts directly from the OEM
• 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
• 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
• Alternative-parts PMA manufacturers may step in to answer the operator’s calls for shorter lead time and lower prices
• Tear-Down specialists start to look for opportunities

I re-posted this information because of its potential to effect the Surplus Parts market forecast. To use words employed by ICF, the last two bullets regarding PMA and Tear-Downs are aftermarket ‘Countermeasures’. I like that term since it is widely used in the field of Electronic Warfare, my original Air Force career field.

CONCLUSIONS AND OBSERVATIONS:

• Overall, there is cause for optimism to embrace the forecast rise in the Surplus Parts Market of 5.6% per year through 2023.
• The basic economic markers of price of fuel and GDP should be monitored for their direct influence to accelerate or tamp the forecast in ways previously discussed.
• OEM’s appear to be getting aggressive regarding their intervention on the parts in circulation in the Surplus Market. If this activity grows and matures among OEM’s, look for the forecast to attenuate.
• Can Royboy speak frankly here? It’s my opinion that if this type of OEM activity continues to grow unchecked, there will be growing alacrity among aircraft operators and aftermarket participants to seek new laws, regulations, or creative inventiveness as countermeasures to seemingly monopolistic and anti-competitive OEM interventions.

PS: Leave us a comment on the ASA blog site.

 

Over ‘n out

 

Roy “Royboy” Resto

www.AimSolutionsConsulting.com