19 Sep 2019
'The key to successful inventory optimisation through the exchange route is selecting the right partner.'
To date, 2019 has seen the fastest growth in airline failures since 2013, with nine operators and 74 aircraft affected*. Profits are being squeezed by rising oil prices, a strong dollar and increasing competition for airlines to meet a large increase in capacity and rising passenger expectations. In mitigation, many airlines are looking to streamline their inventory.
An obvious risk is not being able to secure access at short notice to the components they need, leading to costly aircraft on ground (AOG) situations. The grounded Boeing 737 MAX fleet is reported to cost airlines over a quarter of a million US dollars** per aircraft per day, and while a shorter-term catastrophic event may not incur the same levels, direct costs, leasing/finance obligations, staff costs, parking fees and passenger compensation still need to be considered.
Inventory management options include buying airframe and engine components outright or outsourcing the repairs through a fixed price plan such as PBH, pooling, borrowing or exchanging. Usually, a strategy will use a combination of these approaches, depending on the airline’s operations, fleet size/age, OEM restrictions, cash flow and, of course, the type of component.
Parts exchange is a good option in a catastrophic event or when the required part is expensive and infrequently removed. Airlines don’t have to hold the components in their inventory and can access them quickly should the worst happen. This is generally a cheaper option than outright buying.
In simple terms, an aircraft part is needed; it is shipped out by the exchange partner, usually within one day, with its relevant papers; and fitted to the aircraft. The removed unserviceable component – commonly known as the core – is then returned with its papers to the exchange partner, usually within 14 days. The airline then pays an agreed fee, which is a percentage of the part’s market worth plus the full cost of the repair and any shipping. The net result is no increase in inventory, but immediate access to the required part.
There are two types of exchange – cost-plus where the airline pays the fee at the time of the initial shipment and then the actual cost of the repair once it leaves the MRO shop; and flat rate where a fixed cost is agreed in advance for all exchanges. This option allows for better budgeting but can be a gamble as actual repair costs can vary enormously, meaning airlines could pay a substantial fee for a minor or no fault found (NFF) job.
Exchanges are ubiquitous and are the basic transaction in most support contracts: a Power by the Hour (PBH) contract is effectively a set of exchanges under an hourly rate. The main difference is that an exchange does not require a complex contract or complete set of T&Cs; it can be one or it can be many, but there is no long-term contract to tie airlines in.
It sounds like a perfect solution all round as the exchange partner earns their agreed fee and keeps the component on their inventory list, but there are other factors for airlines to consider, such as lease restrictions, OEM influences, their own operations, and market conditions. There is also a risk of late fees if they do go ahead with it as an exchange may generate several invoices, requiring the attention of different departments across the airline. This makes the selection of exchange partners increasingly important, as you want a partner that will make the exchange transaction as straightforward as possible.
“An exchange contract is extremely flexible,” said Chief Sales Officer, Tom De Geytere, “We can manage the repair of the off core, but we are also happy for the client to return an overhauled unit they have in the pipeline or receive from the back of a PBH or other contract. This can reduce turn-times significantly.”
“AJW explores all options for our customers to achieve inventory optimisation,” said Tom. “We consider component availability, reducing the balance sheet risk and exposure while maximising revenue potential for airlines.”
“Over the years AJW has honed its service to ensure the fastest possible response times; from our 24/7/365 AOG desk, our multilingual teams and strategic hubs worldwide to our world-class warehousing and logistics network,” said Tom. “We know that every minute counts for our customers.”
The AJW Group has a unique insight into asset management, as it manages the outsourced inventory management of a major airline while supporting hundreds more in AOG situations, ad hoc requirements or MRO and vendor network management. The Group has over 6,000 commercial and business aircraft under contract and handles some 10,000 shipments of aircraft components every week.
The Group also has repair capabilities through its own state-of-the-art MRO facility in Montreal, Canada and a global network of specialist workshops. This ensures competitive pricing for the core’s repair and avoids nasty surprises for the airline a couple of months down the line from the date of their exchange.
Overall, exchange offers an effective solution for airlines, regardless of their size and location. In combination with other asset management solutions, it can ensure fast, cost-effective access to parts that might otherwise sit on shelves for months, or even years if they were part of the airline inventory.
The key to successful inventory optimisation through the exchange route is selecting the right partner. With teams all around the world, an extensive global inventory of more than 450,000 Airbus and Boeing line items valued at US$500m and a 90-year history in aviation, AJW is ideally placed to offer competitive pricing, high-quality service and components, and unrivaled value engineering.
*IBA’s market update March 2019
**IBA’s costs for the grounding of the MAX
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