So, if you have not already caught the drift, the market for Used Serviceable Material (USM) has done the proverbial 180 degree turn.
From the start of the pandemic a forecasted perfect storm of a USM market downturn had caused many to store assets, and/or use asset green time. This to manage a situation where there would be an apparent increase in material availability due to a shrinking market and increased teardowns. Now that we see a returning market is it fair to say that the forecast has not been particularly accurate? Is it also fair to say that the approach has not been particularly helpful to what is now a recovering market?
Aftermarket providers are purchasing fewer used parts than at any time since the global traffic downturn started in early 2020 – a sign that the aircraft retirement stalemate is affecting USM supply, a recent Canaccord Genuity analysis concluded. A survey by the firm conducted in July 2021 found suppliers sourced 13% of their parts from USM market in the second quarter. The figure matches 1st Qtr. 2018 and 2nd Qtr. 2019 for the lowest posted in more than three years and was a 10% drop from 1st Qtr. 2021.*
We believe that the drop in USM purchasing points more to the lack of supply rather than a slowdown in demand, Canaccord analyst Ken Herbert wrote in a related research note.*
This has been validated to a degree with tier one CFM56-5B/7 and V2500 USM holding close to its pre-pandemic pricing levels. Outside of that it was all one way with increasing price deflation from narrow body airframe to wide body engine parts to wide body airframe USM. With the exception being freight aircraft and engine USM. Highlighting the disparity running across different contexts.
So, what are MROs looking at coming into 2022. 10 realities to consider;
- Aircraft and engines coming in for maintenance that was deferred
- Aircraft and engines coming in for maintenance due to the length of time in storage
- Aircraft and engines coming in for normal scheduled maintenance
- Aircraft and engines coming in for teardown, from natural timing, storage and post green time use
- Lower Yield and lower remaining life on teardowns post green time use
- MROs returning from a situation where they downsized
- MROs with reduced capacity due to reductions in staff and expertise
- Component Repair Shops (CRS) returning from a situation where they downsized
- CRSs with reduced capacity due to reductions in staff and expertise
- Narrow body market returning at a pace quicker than forecasted
Teardown forecasts do not create confidence that this shortfall in USM to MRO maintenance is something that can be easily recovered. At MRO Amsterdam, Aviation Week’s own presentation indicates that the number of retirements has not increased from 2019 to 2020 and in fact decreased in 2021, with a return to 2020 levels only in 2022. Of the teardowns that are taking place there is a swing to narrow body, however the Amsterdam consensus was that we are heading for a significant USM shortage.
Oliver Wyman identified an increase in Global MRO engine spend of 37% from 2021 to 2022 levels. Are MROs set up to facilitate this?
So where does it leave the leasing companies, where now is the highest end of asset life value to be had? Could it be that the best option is putting the assets into teardown and consignment early? Not just for the return value, but how about to ensure that you have the right supply to the aircraft you have out on lease and in transition? Is keeping those hourly rates ticking over optimally the best place to have your resources focused?
How well are leasing companies set up to get the best from these scenarios? Through a series of interviews SellUe has asked leasing companies, and others working in that sector, to paint that picture. These help to being clarity to what leasing companies may think about teardown and consignment!
Stay tuned…
Reference; * Published by Aviation Week in October 2021
If you have comments or questions, we would love to hear from you. DM me on LinkedIn or send your thoughts to [email protected]. Please share this piece with your network, and if you want to access to prior editions visit the SellUe blog page.