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Sunday, April 1, 2007

Product Focus: The Dawning of a New Era for PMA Parts

Cari Shane Parven

The airline industry continues to face obstacles in its path to profitability. Some airlines have begun using PMA parts as a serious part of cost-reducing strategies.

The road was paved more than 50 years ago, but it has taken the airline industry nearly five decades to make a habit of taking the "road less traveled," a road lined with PMA (parts manufacturer approval) parts. Arguably just as safe and undoubtedly less expensive than OEMs, the PMA road has, in just the past few years, started seeing a lot more traffic. The attention lavished for generations on OEM parts is increasingly being shared by PMA suppliers, as more and more airlines, desperate for cost cutting measures, are finding that PMA parts are the industry’s new darling. Still, others in the airline industry cannot be persuaded and continue to see PMA parts as an Eddie Haskell-type, a trouble-maker posing as helpful.

PMA parts are not new to the industry. In fact, the FAA approved the use of spare parts for aircraft back in the 1950s in response to demand for parts for out-of-production military aircraft. Even though PMA parts have been around for half a century, they still carry a stigma. Up until recently they’ve been the industry’s wallflower, invited to the dance only by a handful of desperate cousins. But, in the post-9/11 economy, financially strapped airlines have begun seeing the upside of PMA parts, the financial benefits of dancing with the wallflower. First and foremost, PMA parts are less expensive and can be used as a cost cutting tool. Analysts, PMA suppliers and airlines who purchase PMA parts, brag of multimillion dollars savings and continued safety records. But still, not everyone is singing PMA’s praises.

Differing Philosophies

In every industry, the airline industry included, there are many differing philosophies of business, conflicting lines of reasoning and different arguments for every opinion. And while many airlines, such as Air Canada, Delta, American, United, Japan Air have completely embraced PMA parts, others, such as Jet Blue, have only partially embraced PMA and still others, such as British Airways are just beginning to look at investing in PMA parts. Often, the decision to purchase PMA parts or stick with contractual obligations to OEMs is based on an airline’s overall business philosophy. It’s that particular airline’s way of doing business said Kevin Michaels, principal of AeroStrategy, an aviation management consulting firm. That’s why those particular air carriers haven’t entered the PMA market. "Some car buyers will only go to a General Motors dealer to have their GM car serviced, [but others] will buy generic parts. That same philosophy manifests itself in the airlines. What makes sense for some might not make sense for others." said Michaels.

Cori Fergusen, chairperson of the 14-month-old Operators PMA Committee at the Modification and Replacement Parts Association (MARPA), said another reason airlines are wary about purchasing PMA parts is their lack of understanding of the PMA parts approval process. That’s what the Operators Committee is all about, she said, explaining the process. Just one year ago the average airline approval took 14 months. In just one year since the creation of the Operators Committee, that number has been reduced to three or four months, thanks to the streamlining by Fergusen’s committee.

And the savings grow every year. According to Ferguson, while airlines such as Delta brag cost-savings of $3 million a year, other airlines, such as United, have seen savings in the $30-million range, savings that are growing at a clip of $5 million a year and based solely on the purchase of PMA parts.

But there’s a long way to go. Analysis of the PMA industry by AeroStrategy suggests that the market available to PMA suppliers is more than $1.3 billion. Currently they only have $330 million of the market. "Suppliers can capture 25 percent of the available market," said Michaels. "But," said Fergusen, "right now they only have three or four percent of the market." Michaels expects that number will grow with global acceptance of PMA parts. In the United States, the majority of carriers are currently purchasing PMA parts, said Ferguson. And, said Michaels, the interest is growing on a country-by-country basis but will require "a major change of policy by air carriers because the majority of leasers frown on PMAs."

"It’s fair to say, the bankers need to be persuaded," said Kenny Highlander, manager of repairs and technical purchasing for Jet Blue.

Jet Blue, which recently began purchasing non-flight critical PMA parts, said its not currently purchasing flight-critical PMA parts because their financial backers aren’t interested. According to Highlander, the leaser believes that, for example, a $7.5 million engine would be devalued if its parts were replaced with PMA parts rather than OEM parts. If the bankers believe the residual value will immediately decrease with PMA parts usage and therefore won’t back an airline that chooses to purchase PMA parts, there’s no way the airline can afford to take the PMA parts route, said Highlander. "It’s like keeping original parts in an antique car. It devalues the car if you don’t. In the eyes of the banker, it devalues the engine if you don’t use original parts."

Alternatively, Jet Blue has endorsed the use of PMA suppliers for non-critical parts such as seat cushions, cargo panels, o-rings, ceiling panels, etc. "We started using PMA suppliers for these not critical parts 18 months ago," Highlander. "We had purchased all new aircraft, but then the honeymoon ended and repairs needed to be made."

In 2006, the first year purchasing PMA parts, Jet Blue saw a $500,000 savings. The cost savings does have some persuasive qualities. "We’re constantly evaluating our options," said Highlander of expanding PMA purchases to fight critical parts.

Saving Millions

Despite the stigma, Delta has been purchasing PMA parts for years, said David Linebaugh, principal engineer at the air carrier. "No one has specifically gone back in the archives to see when use of PMA parts began at Delta, but it’s never been an issue." But, up until three years ago the purchase of PMA parts was conducted randomly by individual engineers." By 2004 Delta ramped up its efforts assigning one specific person to handle PMA parts approvals. There was a dramatic increase PMA parts purchases. "We realized we needed to cut costs, so we organized one person to focus on and review the process."

The cost benefits were in the millions.

While Delta is committed to increasing its PMA parts purchases, Linebaugh said he understands the concerns in the industry, "if you don’t look beyond the surface. If you ask for data and have a process to see how parts are made and you visit a place and verify there’s really no reason not to believe they make the part as well."

Linebaugh said he has varying opinions of his 10 to 15 different suppliers. "Just because I’m high on a supplier doesn’t necessarily mean I’m high on every supplier. I put every supplier through the ringer."

And that’s where Ferguson and the Operators PMA Committee comes in. "We are creating standards for airlines to use for approving PMA that will help the airlines that are cautious, such as Southwest and Frontier who are just starting to explore the process. We don’t have the chance for growth if we’re fiddling with the process," said Ferguson of the months-long approval process that her committee has cut down exponentially. "Each carrier has their own rules, we’re not trying to make it universal, just trying to give each carrier the chance to look another airline’s approval process so the process doesn’t have to be 14 months long. Nobody understands the process and that’s a huge problem … so that’s what our hurdle has been. Its FAA approved, why are we going through this double check? There’s a common sense value-added review that carriers feel compelled to do."

While economic maintenance pressures and other financial pressures in the industry itself continues to push more airlines to look closely at using PMA parts, AeroStrategy points out that airlines must recognize that PMA parts are "no panacea. They will not, of themselves, return the industry to profitability. PMA parts should thus be viewed by airlines as one element of a broader cost containment strategy - nothing more."

Some suggest that PMA parts suppliers will eventually take over the market, but AeroStrategy’s Michaels isn’t sure when that could happen. "There’s probably a tipping point somewhere, but I don’t know if we are anywhere near it."

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