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Monday, August 1, 2005

Bizjet MRO

Are OEMs Squeezing MROs on Parts Discounts?

In an effort to clear out their warehouses and bring in much-needed cash, aviation original equipment manufacturers (OEMs) are slashing retail parts prices as ruthlessly as they can. Unfortunately, some manufacturers are being accused of reducing price discounts to maintenance, repair, and overhaul (MRO) centers at the same time, in an effort to offset their retail sell-offs. In essence, goes the rumor, some OEMs are giving to retail customers with one hand and taking back from MROs with the other.

Is there any truth to this rumor? Aviation Maintenance decided to find out.

Fact: it's price-cutting time!

One thing is certain, OEMs are slashing retail parts prices. Some examples:

In 2004, Gulfstream announced that it was cutting the price of 9,700 spare parts, everything from tires, wheels, and washers to actuators, windows, and windshields. Moreover, the price cuts applied to parts used on all Gulfstream models, including the G100 to G550, GII to GV, and the Astra.

"Our customers have spoken and we continue to take action to bring down parts prices," said Larry Flynn, Gulfstream's president of product support. "By far, this is the largest single one-time price reduction on spare parts that we've ever implemented." In fact, Gulfstream launched its price-cutting program ten years ago, under the name "GulfSave."

In March 2005, Raytheon Aircraft Company announced a price rollback on more than 17,500 Beech and Hawker parts, some slashed as much as 50 percent. It was the second such price cut. Five months earlier, Raytheon Aircraft had announced price reductions on 10,000 parts. "This most recent parts price reduction program is a continuation of an ongoing campaign to provide our customers with factory direct parts at a substantially discounted rate," said Ed Dolanksi Raytheon Aircraft's vice president of customer support.

Fact: some discounts are down

In a perfect world, MROs and other third-party service centers would pay wholesale prices for OEM parts. By paying less, they would be able to make a profit by selling parts to customers at retail rates.

MROs have never lived in a perfect world, but when it comes to the issue of OEM parts prices, the past was closer to perfect than the present.

A case in point: "Most OEMs used to provide authorized MROs with a 15 to 20 percent discount on their retail parts prices," said Chris Gress, accessories customer sales and service manager for Duncan Aviation of Lincoln, Nebraska. "In those days, you got a larger discount on new parts and less for exchange parts. Four years ago a major OEM dropped their discounts entirely in favor of applying list prices for everyone across the board, including authorized MROs.

"Still, from our perspective it's business as usual. We have a broad base of factory authorizations, so it's not a major problem for us," Gress added. "My sense is the heartache is coming from the non-factory authorized service segment of the industry and the parts reseller channel it serves, as their parts source has been constricted."

Meanwhile, although Banyan Air Services has "nothing but good things to say about the Cessna Propeller products division [McCauley Propeller]" said Walter Rittenhouse, Banyan Air Services's senior vice president of technical services--because Banyan is an authorized service station working with a reasonable discount structure--the company doesn't get any discount on Cessna Citation jet parts.

"Citation has 10 owned-and-operated Citation service centers plus 24 authorized Citation service centers globally, so they aren't interested in supporting independent MROs like us who want to repair Citations," Rittenhouse explained. "As a result, we don't get any discount on Citation parts. This means we must routinely charge our customers extra over Citation's list prices to make a living."�

The impact

Price discounts are vital to MROs because, said Rittenhouse, "the markup of parts is very much what a service station lives on." MROs count on price markups and labor charges combined to make their living. If they don't get a break on retail prices, then they either have to raise labor rates, charge extra for parts, or both.

For Banyan, charging extra for Citation parts is the best way to cope, otherwise their customers wouldn't be able to get Citation jets serviced at Banyan's Fort Lauderdale Executive Airport location. "By paying above list for Citation parts, our customers know that they are getting access to a value-added service that otherwise wouldn't be available at our location," Rittenhouse said.

However, charging above list isn't a profit strategy employed by Duncan Aviation, which is an authorized Citation repair center. "We will mark up parts that are provided by the operator and/or parts that we did not receive a discount on to cover our costs," said Steve Gade, Duncan's vice president of sales and marketing, "but at the end of the day we have to price our services including parts at a competitive market rate to attract and retain customers. To make a living in a world of falling parts discounts, we have to grow our parts and labor margins by increasing volume, maximizing our parts purchasing power, working more efficiently, and reducing warranty expenses by doing quality work."

OEM response

It is difficult to get MROs to speak publicly about discounts and the same is true when it comes to OEMs. However, Raytheon Aircraft and Gulfstream were willing to address the issue on the record.

Speaking for Raytheon Aircraft, Ed Dolanski responded to the charge of OEMs squeezing MRO discounts by saying, "When you compare the discounts offered by OEMs to repair stations, Raytheon Aircraft Corporation's discounts are among the most generous, if not the most generous, in the aviation industry." He admitted that Raytheon Aircraft's discounts vary depending on sales volume. "We're not going to give the same discount to someone buying $1,000 worth of parts versus someone who buys $2 million worth annually," Dolanski noted. But is Raytheon Aircraft trying to recoup some of its price cuts by getting MROs to pay full price? "No," Dolanski said. "Our strategy is not unlike that of consumer retail where the focus is on profit based on volume versus the traditional profit margin percentage on a single sale. This provides a win/win solution."

As for Gulfstream's discounts to MROs? If they are authorized Gulfstream service centers, then they are eligible for discounts that haven't changed for the past ten years, said Larry Flynn. If not, then "they pay the same price as our retail customers. We view unauthorized service centers as competitors and see no reason to give them any sort of advantage." Either way, Gulfstream's policy in this area "hasn't changed since I revamped it ten years ago," he said.

Making sense of it all

For all the people who were willing to speak to Aviation Maintenance for this article--both on and off the record--there were many others who didn't. In fact, several calls to MROs and manufacturers on this subject went unanswered, despite repeated attempts.

Of those who did respond, some said little beyond "we value our relationships with our suppliers" and refused to say anything more. Others made bitter comments along the lines of "this kind of thing is nothing new," without providing any concrete proof.

Nevertheless, some MROs have gone on record about specific manufacturers who have cut their discounts, a change that puts pressure on MRO margins at a time when the entire aviation industry is suffering economically. As a result, the question is no longer whether OEMs are squeezing MRO discounts, because some clearly are. What remains to be documented, however, is how big this problem is, and how many OEMs are doing it.

-By James Careless

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