New Aircraft Pricing Could Rise As PMA Bites

Move By Airlines To Source Cheaper Parts Could Also Boost Used Values The last decade has been characterized by minimal increases in the net prices of new aircraft, even in the context of a backlog that now extends for many years. Competition between Airbus and Boeing, as well efficiency drives, the...

For immediate service; more information; and multi-user access (site license), non-profit organization, educational institute pricing, contact Karen Garner kgarner@accessintel.com at (301) 354-1612.

This story is only available to paid subscribers. Please login below with your username and password if you are a subscriber.

Username:
Password:
	What is my password?

Subscribe     Trial

Move By Airlines To Source Cheaper Parts Could Also Boost Used Values

The last decade has been characterized by minimal increases in the net prices of new aircraft, even in the context of a backlog that now extends for many years.

Competition between Airbus and Boeing, as well efficiency drives, the expansion of the low cost model, and a more business approach to aircraft purchase decisions have all combined to contain net pricing of new aircraft. In 1990 the net price of a new A320 was $40 million; a decade later it was still $40 million. Even today the same new A320 has a value of $45 million. The modest increase in new net prices has contrasted with the inexorable rise in list prices. In 1990, list prices and net prices were similar, at least for small orders. Today, the starting point for discounts compared to list prices is greater than 30 percent.

However, a near revolution is emerging which has the potential to see a notable rise in new net pricing, unless original equipment manufacturers (OEMs) can find ways of cutting costs. OEMs have traditionally been able to charge list prices for spares, partly as a means of offsetting discounts for original installed components. Engine manufacturers are particularly noted for charging higher spare prices for engine components to compensate for the sometimes cost pricing of installed engines. The cost of developing new components is largely based on the expected revenue stream from the sale of spares rather than the supply to the airframe manufacturer. Newly installed engines could not be sold at heavily discounted prices were it not for such expected revenue from spares over the life of the engine. Any reduction in the price or volume of spares could have a material impact on the level of installed engine discounting.

Parts Manufacturer Approved (PMA) components have been available for a number of years but more recently major airlines, in their quest for lower costs, are also sourcing PMA components. PMA components are spares which have not been manufactured by their original equipment manufacturer but by a third party manufacturing under approval by the Federal Aviation Administration or equivalent. The past has seen limited PMA sourcing as many operators have sought to ensure quality by acquiring components only from the original manufacturer. Times are now changing and operators, including British Airways and Lufthansa, are no longer so averse to acquiring PMA parts. The saving can be considerable with up to a 40 percent discount compared to brand name list prices. Pratt & Whitney previously announced that it was to manufacture spares for CFM56 engines at a considerable discount and a number of customers have already signed up.

The expansion of the PMA business appears to be a certainty as more airlines seek to lower maintenance costs. While during periods of growth, OEM profits can easily increase due not only to greater production quantities but also because of an increased need for spares, recessionary periods can see a shortfall in revenue streams. With PMAs the revenue stream for the OEMs seems even less certain. To continue to compete with the cheaper PMA components, a fall in spare pricing seems inevitable. As such OEMs will be needing to recoup their investment from higher installed prices, whether it be engines or hydraulic pumps. While after sale support programs and overhauls are becoming an increasingly important source of revenue for the OEMs a material fall in spares pricing could see a rise in installed unit pricing which will have to be passed onto the airframe manufacturer and therefore the aircraft customer. Any rise in net prices for aircraft has the potential to impact demand for new aircraft. However, in view of the correlation between new and used aircraft prices, a rise in net prices for new aircraft may also have the beneficial effect of allowing values of used aircraft to rise.