airplane

Aircraft, Engines, & Parts Manufacturing

Industry Insight

Date April 2016

Approximate net recovery on cost

Synopsis

Current trends

  • Airline profits soared in 2015 thanks to low fuel prices
  • Domestic and foreign airlines serving the U.S. carried an all-time high of 895.5 million system-wide scheduled service passengers in 2015

 

Key statistics

  • Industry revenues: $233 billion (manufacturing)
  • Major product categories: Engines, structures, avionics, fasteners, wings, landing gear, leading edges
  • Significant companies: The Boeing Company, United Technologies Corporation, Lockheed Martin Corporation, GE Aviation
  • Market share of top: The four largest companies account for more than 57% of industry revenue in the U.S.
  • Recent sales trends: Declining defense spending has caused contraction while commercial sales have soared. IBISWorld estimates that, in the five years to 2020, industry growth will increase at a 4.1 percent annualized rate. In 2015, global air traffic passenger demand rose 6.7 percent

 

Long-term agreements make inventory more valuable: To manage the cost of subcontracted parts, aircraft manufacturers utilize long-term agreements (“LTA”) as a way of securing the supply chain and controlling costs. Typical factors considered when entertaining LTAs include the size of the supplier pool for the part, the time it takes to bring suppliers on board, regulatory requirements and the reputation of the supplier. The LTA obligates the aircraft manufacturer to purchase finished goods produced under the contract. Thus, aircraft parts suppliers’ inventory that is subject to LTAs typically carries higher liquidation values. In contrast, suppliers who are manufacturing to forecasts face deeper discounts because they don’t benefit from a guaranteed exit strategy.
 

Inventory intended for active platforms: Like automobiles, aircraft manufacturers are continually phasing models in and out of production. Inventory manufactured or warehoused for active platforms or current models typically retains more value than inventory servicing retired models. While planes certainly remain in operation for many years after they are discontinued, predicting the need for replacement parts becomes more of a challenge. Due to the specialized nature of products and the economics of order size efficiencies, manufacturers often produce more parts than are ordered and keep the extra quantity on hand as “spares.” Spares typically retain minimal value in a liquidation scenario.
 

Raw material lead times impact value: Some aircraft components require the use of specialty metals in proprietary forms to meet performance requirements. These alloys may be lighter or have different chemical properties that enable materials to wear longer and withstand greater stress. But the lead times for these raw materials can be lengthy – six or more months in some cases. Manufacturers producing these types of products including castings, forgings, various nickel alloys, and aviation grade aluminum and other alloys should be procuring these materials subject to existing orders or LTAs. If the company faced liquidation, those raw materials would likely retain a higher value as the customer contracting the parts would be motivated to purchase in order to move it to a new supplier, minimizing disruption and production delays.