The recent pandemic has put aviation in its biggest crisis as demand for air transportation has nearly collapsed. Besides lower revenue streams, airlines are also facing excessive capacity, and pre-COVID operating levels are not expected to return any time soon according to a recent study by Richard Brown of Naveo.
To support their operating fleet in terms of material management, operators have predominantly outsourced material availability and repair cycle management of rotable components to MRO providers under flight hour-based agreements. This was done to manage steady cash flows, reduce the spending on underutilized assets, secure operational impacts from missing material and bundle forces to manage the complex backend supply chain. With the pandemic in full swing, this traditional model has come under pressure.
Flight hour-based agreements often include minimum flight hours / minimum fleet clauses which in the current market situation have an adverse effect on the airline MRO economics. Effectively airlines also pay for securing asset availability whereas on one hand the availability is not required (reduced operations) and on the other hand availability is accessible differently on the market (USM).
Operators have taken a far-reaching decision on determining the capacity to serve limited demand. Essentially, building on two strategies with profound effects on their flight hour-based support:
Aircraft not required are parked and only a minimum is kept in service to serve the limited demand for air transportation. To reduce the parked fleet a passenger to freighter conversion might be considered. As a result, the exposure to minimum flight hour charges can be reduced while costs of refurbishing removed components due to idle time will have to be borne by the operator to return the aircraft back into service.
On the other hand, limiting the number of parked aircraft and serving demand with overcapacity might result in higher flight hour charges but will help to avoid future maintenance costs due to service suspension. More important, however, will be the ability to provide sufficient capacity within adequate response time once the demand for air transportation has picked up again. Here, the latter strategy might be favorable.
As another effect of the COVID pandemic, an increased number of mature aircraft will never return into service although retirement was scheduled for later. Subsequently, more aircraft are becoming available for part-out where engines and aircraft components can be worth more reaped than flying. While buyers do not want to overpay and suppliers do not want to give away valuable assets too cheaply, it is not expected that there will be a stabilizing effect in the market i.e. no sudden increase of offered USM to the market.
The availability of USM allows airlines and MROs to reduce material expenditure (e.g., 20-40% cheaper than new parts), hence, holding solely fast-turning essential aircraft spares and sourcing others as required becomes increasingly viable economically. Moreover, with increased availability of aircraft spare parts at affordable costs, replacing a component instead of repairing it and becoming independent of turn-around-times (TAT) and not having to cope with the complex and resource-intensive repair cycle management process (RCM), one can ask the question to what degree single purchases of aircraft components can substitute PBH agreements.
Even if in cases, MRO providers complement maintenance and availability services with other elements such as engineering services, logistics and warranty management, given the fact that most operators have these competencies as well inhouse a strengthened USM market is putting further pressure on flight hour rates and pushing the market to alternative services.
USM is no longer a source for operator’s ad-hoc material requirements or a broker market for tear-down assets. It increasingly becomes an integral part of an airlines MRO and material availability strategy, particularly in relation with continued digitalization and connecting various systems and platforms within the supply chain.
SR Technics, a world leading MRO service provider, recently launched its new component services brand STRADE – powered by SR Technics. The new brand operates as an independent unit inside the Group and provides component sale, lease, loan and exchange services on all major aircraft platforms. It benefits from SR Technics’ legacy in aircraft know-how and product reliability to offer 24/7 quality rotable services to customers worldwide. It is a response to a clear market demand for a more flexible and dynamic approach to component support, creating value through a renewed digitalized operating model.
Written by Oliver Gubler, Head of Digitalization and Strategy at STRADE