Inventory – Is It Worth What You Think?
A hypothetical client asked AVITAS to review and inspect their spare parts inventory and opine on the value of the collection of parts. After a review of the list of parts and a visit to the warehouse facility, it was quickly apparent that the client had significantly over estimated the value of the inventory. They had seen the collection of parts from a recently retired aircraft as having significant value in the used market. Much to their surprise, there were two substantial issues that affected the value of the parts.
First, the inventory needs to be properly managed. Even though a part was removed from a perfectly serviceable aircraft, that part is only worth a fraction of its potential value in the “as removed” condition. Don’t misunderstand this statement. A part that had been removed and simply shelved has value, but it is not nearly as valuable as a part that has a recent “overhauled” or “repaired” tag allowing immediate installation. The actual value in the marketplace is very dynamic, but a part with an “as removed” tag will typically have less than 40% of the value of a part ready for immediate use.
Second, for the inventory to have value in the current market, it needs to be relevant, with market demand. As one would remember from their basic economics class, this has everything to do with supply and demand. Simply put, when there is either excess supply or limited demand, the value of the specific item goes down. In the aviation world, the part-out of a relatively young aircraft will bring higher values compared to parts from an aircraft near the end of the fleet’s life. Even though a part for a particular fleet had significant value when it was new, if there are only a few aircraft of that type still in service, the part will continue to lose value as that fleet retires.
A good example of this is the Boeing 747 fleet. As seen in the graphic below, the fleet of all variants of the 747 once grew to nearly 1100 aircraft.
The bad part is that the peak in this fleet was around the year 2000. Even the later model 747-400 had a peak nearly seven years ago. Looking at the entire fleet today, the number of retired aircraft now exceeds the number of active aircraft. When the fleet gets to this inflection point, there is already a vast supply of parts in the market. So, as the fundamental concept of economics states, when the number of aircraft available for part-out increases and the number of aircraft needing these parts decreases, the values for these parts will be decreasing.
The moral of this story and the advice offered to our clients is:
1) Consider getting an expert opinion on the value of an inventory before making a purchase
2) Plan for periodic onsite inspection of inventory to ensure the parts are being maintained, stored properly, and have the appropriate paperwork
3) Consider the fleet type and where it is in its life cycle. A fleet that has not yet reached its inflection point may have better value in the immediate future compared to a fleet that is nearing the end of it useful life.