Risk Management Strategies For The Aftermarket

By Robert Trebilcock
Source: Aviation Week & Space Technology

Best Practices

For many organizations, the starting point for a risk-management initiative is a cost-versus-risk trade-off assessment. Risk cannot be eliminated, but it can be mitigated. One common approach, says Sawchuk, is to determine how much revenue is at risk as a result of the part or action being assessed.

For example, if a part goes into some but not all aircraft, a percentage of revenue is at risk if that part is not available. “Over time, they may determine that 20% of revenue is at high risk, 30% is at medium risk and 50% is at low risk,” Sawchuk says. “They will then look at strategies to shift the 20% of revenue at high risk to a medium risk.”

There are a variety of steps airlines and MROs can take to mitigate those risks, according to Spafford and Sawchuk. Some of these are:

•Hedge positions on commodities. Many airlines hedge their fuel costs to protect themselves from unexpected price spikes. Few, however, take a position in commodities such as titanium or other alloys that can have a huge impact on the price of components, such as turbine blades and brakes.

“When you consider that an airline might buy $30 million worth of brakes and $100 million worth of turbine blades, hedging might be a wise thing to do,” Spafford says. He also urges organizations to include escalation caps on the prices of important commodities in their contracts. “Create an index of the 18 most important commodities to the parts you are purchasing and put an escalation cap of 2.5 percent a year in the contract,” Spafford says.

•Selectively support the development of alternative sources of supply. Spafford urges clients to pursue several strategies to expand their sources of supply. For instance, a maintenance organization may establish partnerships with surplus or teardown providers, similar to the approach taken by European Air Transport. He also believes carriers and MROs should selectively support manufacturers of approved parts. “I'm not suggesting turbine blades or engines,” he says. “But there are parts where this is a sound strategy.”

Finally, large carriers with leverage can form joint buying consortia as new aircraft types are introduced and require dual sources of supply when possible.

•Do not put all of your eggs in one basket. Just as FedEx is deploying its inventory around the globe, OEMs, airlines and MROs should urge manufacturers with more than one plant to manufacture in at least two locations. “That way, you mitigate the risk of losing supply when a plant goes down,” says Sawchuk. Many organizations forget that parts production tends to be clustered in one region, he adds, which could put it at peril from natural disaster. Auto manufacturers learned that lesson following the 2011 earthquake and tsunami in Japan.

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