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Moving markets

Airlines are looking to further decrease their financial commitments for spares and repairs
Jason Reed, President, Component Solutions Group at GA Telesis, says he has seen a trend in the last couple of years away from PBH deals. The airlines are used to leasing proposals, from aircraft to airport gates, and there is a feeling that paying a fixed price for an inventory of 600-700 items that will include items that rarely move, may not be the most cost-efficient solution.
Instead, they are looking at leasing a Main Base Kit at their operational headquarters of perhaps 50 to 100 selected part numbers that have a low MTBR, plus a repair management contract to cover any other items that go unserviceable. He defines low MTBR as 10,000 hours, with special interest in those items with 5,000 hours MTBR. In military speak, these components are Essentiality Code 1 (the aircraft is ‘no go’ if the item fails).
If a leased item fails, it is simply replaced from the MBK stock and then returned to GA Telesis for repair. For other items that fail, they are returned under the repair management contract, which sees the company repair at cost plus an agreed margin. In addition to reducing cost for the airline, the leasing programme also reduced the size of the inventory that needs to be held.
He says the capital strength of GA Telesis has enabled it to become an early mover with this new business model. The company can also use the buying power of a customer airline when purchasing stock on its behalf to achieve better pricing. He adds that this process has helped the company to become the largest Boeing 787 inventory holder in the world, with $150 million of stock, and it is a trend that grows rapidly.
However, PBH contracts will continue to run for some time, and so there is a still large investment in stock. For his company, that means $120 million a year on buying material, plus 10-15 aircraft teardowns and 40-50 engine teardowns a year. Some of that material comes from airlines who may find it difficult to sell their inventory, whereas GA Telesis has a 3,000 strong customer base.
He also sees that those low MTBR items are increasing in price as more people respond to the trend towards leasing. In fact, he estimates catalogue prices will increase by 100% in the next 10 years. Again, it needs a trader with strong finances to operate in such a market.
The lease model will typically run for 10 years, after which the customer has the option to purchase the inventory at the start of the programme, or hand it back to the company. As GA Telesis will have written down the stock to a predetermined value, it will be able to sell the material at a profit to support PBH operations. That sales revenue will be reinvested into additional low MTBR items.
The focus for the lease model is the Airbus A320 Family and Boeing 737, simply because of the numbers involved, but also includes the Boeing 767 and 747. This is a mix of programmes that will have a fleet for a very long time, and those with inventory that can be written down to zero, so there is no book value at the end of the lease. He notes that widebody aircraft have the greatest risk on residual value, both on inventory and the asset itself.
The residual value of these items is volatile, some having spiked 100% in the last year, some having dropped 20%. Other factors can also come into play. Boeing 777 inventory is slowly going down in value, with the exception of a few parts, but this could change dramatically when a major airline dumps 50 aircraft on the market in a short space of time as it introduces a new type.
On the other hand, the Boeing 767 has just got a second life, thanks to the Amazon freighter programme. While everyone thought it was dead three years ago, it now has at least another 10 years. With the 767 resurrection has come the return from the grave of the GE Aviation CF6 engine. It has long been a mainstay of the GA Telesis engine business, but he says he never thought he would see the recent uptick in the business. >>

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