PMA Debate

LONDON -- "The Great PMA Debate" was a somewhat ironic title for the Royal Aeronautical Society conference held here in September because arguments over the use of parts manufactured and distributed under FAA Parts Manufacturer Appproval have simmered since the U.S. FAA issued the first PMA in July 1955. At that time, the move to allow companies other than the original manufacturers to design and make spare parts for aircraft under a PMA was intended to help a large number of military aircraft sold to civi lian operators fly again. Yet, after 50 years of seesaw arguments involving airlines, PMA makers, leasing companies and original equipment manufacturers, the issue appears to have reached a watershed. Why? Simply because the perennial brickbats of "questionable quality" and "safety concerns" used by OEMs to challenge PMAs just don't make sense any more. This is due to several factors. 1. There is no statistical evidence, from the FAA or EASA, for safety concerns with PMA parts. 2. The economic imperative for airlines to minimize maintenance costs means the savings offered by PMA parts (when compared OEM catalogue prices) are too large to ignore. 3. While the ramp-up in new aircraft production has increased lead times for OEM parts, according to ILS more than 503,000 PMA part numbers have been listed by 2,668 companies -- of which 392,124 are cross-referenced part numbers, according to PMA Parts Finder. 4. Pratt & Whitney's entry into the PMA market has removed many doubts about PMA quality and credibility. 5. Airlines like United, Delta, Air Canada, Japan Airlines and, most recently, British Airways have struck strategic partnership deals with Heico, reputedly the world's largest independent designer, manufacturer and distributor of FAA- and EASA-approved alternative parts for aircraft and jet engines. American Airlines has a joint venture with the company to manage its alternative parts, while Lufthansa Technik actively encourages the development and production of PMA parts through its 20 percent stake in Heico. Making Sense of PMA Carl Pedersen, president and CEO of Cimber Air Support, a passionate advocate of PMA, told delegates that PMA will become more relevant than ever as operators are forced to look for cost savings without jeopardizing safety. "Yet, whenever the use of PMA parts is put up for discussion," said Pedersen, "the individual who tables the issue is often looked upon as 'the bad guy of the movie' which, to my mind, indicates that the subject of PMA is not fully understood. "For example, EASA will only grant approval to a PMA part today if it's not a critical component, it has been manufactured under license or if any minor changes or more major supplemental type certifications meet specific EASA approval." But now, Pedersen said, EASA has plans in place for a European PMA equivalent (to the FAA's) under the banner of an "EPA" part, for which a tender for review has been commissioned but not yet finalized. "It could be argued that design and manufacturing procedures are already in place under EASA's Part 21," said Pedersen, "but creating a recognized European equivalent will put European operators and MROs on an even footing with their U.S. counterparts, eliminating the unfair trade limitations we have today. To this end, he said the issue of PMA might yet be included in the imminent EU/U.S. Bilateral Air Safety Agreement which, reportedly, currently is embroiled in the politics of fees and charges.

Yves Morier, EASA's head of product safety, confirmed EASA is discussing with its FAA counterparts how best to cooperate on PMA rulemaking. "Currently, there is no statistical evidence for safety concerns with PMA," said Morier. "But the overall experience may not be sufficient to draw definitive conclusions." Chris Carter, who manages the FAA's Certification Procedures Branch, had an unequivocal view. "PMA is here to stay," he said. "It's deeply embedded in our system, and there's an ever-growing demand, especially now that Pratt & Whitney is entering the market," he said. Moreover, in terms of PMA product quality, he confirmed the FAA has no "better than" or "safer than" criteria. The only bar required is the absolute safeguard of industrial regulation. Any latent risk in PMA has more to do with the financial standing of the PMA manufacturer than the PMA part itself, and, in his view, some PMA manufacturers are attaining the scale and stability of many OEMs. Looking ahead, he assured delegates that the FAA will continually refine its processes and work very closely with MARPA (Modification & Replacement Parts Association) on upcoming policy and new changes. "We're also expanding delegation as the industry matures its capabilities and responsibilities," he said. Indeed, the U.S. has signed its first PMA bilateral agreement with Australia, which now has its own PMA approval processes, he said. Rick Geary, a technical delegate from MyTravel Airways, said his priority is "OEM first and PMA second" because airlines ultimately owe some sort of allegiance to the OEMs that initiated a design in the first plac e. However, the views of the holiday charter carrier were not shared by established scheduled airlines. Ameet Bhalla, technical manager, airframe systems at British Airways Engineering, countered Geary's approach by saying that those who jump on the bandwagon of "OEM only" should remember that approvals for PMA parts and OEM parts are made by exactly the same people. "PMA are EASA- and FAA-approved parts," said Bhalla. "They're not bogus parts." He stressed that although BA is regarded as "anti-PMA," it actually has been using PMA parts since 1997 and introduced its own parts approval process in February 2006. Since then, it has approved some 28 different parts, but now will introduce PMAs more widely. Through its partnership with Heico, Bhalla said BA will actively seek PMA opportunities and potential within the 95 percent of Heico's inventory that comprises non-critical items. "We will no longer be a cash machine for the OEMs," he said. Another airline delegate, who preferred not to be identified, voiced his airline's frustration at being "stuck in a corner" because all of its aircraft are leased from lessors that don't that allow PMAs. "Our engine suppliers clearly state that no PMAs can be used," he said, "but we certainly will look at using low cost consu mables." Thanos Pascalis, technical director of Aegean Airlines, thought lessors should follow the example of "informed" airlines and discuss PMA's impact on component values. Additionally, PMA makers should support their products with appropriate documentation, like the OEMs do. Moreover, airlines should put pressure on lessors through their buying power and, where possible, limit the number of lessors per fleet to one or two companies. "Placing say 20 leases with one lessor might allow some arm twisting," he said. Aegean Airlines' CEO, Antonis Simigdalas, who attended the conference as president of the European Regions Airline Association (ERA), said the PMA issue is a clear demonstration of how the air transport industry is responding to issues that concern safety, suggesting that the anti-PMA lobby was "overdoing it a little." In his opinion, compromise on both sides could increase operating safety and potentially improve safety.

Lessor Issues Phil Seymour, managing director of the International Bureau of Aviation, which co-sponsored the conference with the ERA, pointed out that tracking or identifying parts when returning an aircraft from lease or transferring it to different regulatory authority, cannot be guaranteed by auditing the aircraft's technical records, because they seldom contain the "FAA PMA" suffix to show which parts are PMA. This can only be determined by the documents and tags associated with each part. He also noted that the value of a used aircraft is usually assessed on what has been done to it throughout its life -- for example, a recent D check might add $2 million or $3 million to its value. "Appraisers tend to look at the cost of added items rather than their value," said Seymour. "But how do we compare the values of two recently overhauled CFM56-3C engines, where one has only OEM parts and the other has been fitted with P&W life-limited PMA parts? We can't add the standard $1.5 million to the engine fitted with PMAs, because the cost of the PMA parts may only be $1 million. So, how much do we add in this case?" Despite such conundrums, Seymour said he has seen some recent lease contracts where lessors have asked customers to "talk to us" if they wish to fit PMA parts. So, there are clear signs that lease companies have softened their approach. Cimber's Pedersen posed the proposition that if PMA parts have been approved properly, then aircraft lessors should be satisfied with using a statement like "only approved parts are to be used" -- leaving the "no use of PMA parts" out of lease agreements. As expected, lease company delegates disagreed, with the Royal Bank of Scotland, which forbids PMA in its lease contracts, concluding that PMAs made no economic sense to lessor companies. Diarmuid Healy, powerplant program manager for RBS, maintained that the general view of the lessor community is that PMAs can affect liquidity. Purchasers like to see "protection" against "asset value impairment" in lease contracts, he said. This is why no value issues emerge if only Class 3 OEM parts are involved. However, major concerns could arise if "high ticket" items, such as high pressure turbine blades, are replaced with PMA alternatives. "The ultimate value of an engine is the sum of it parts," he said. "But PMA parts are typically priced at 70 percent of OEM list price, so an OEM compliant engine is worth more. Moreover, airlines would not pay more rent because PMAs are permitted." The only way Healy could see the lessor community permitting PMA use is if all the aviation authorities and operators worldwide accept them unreservedly. "Alternatively, if PMA manufacturers could remove any residual risk from the re-marketing and residual value of the aircraft," said Healy, "then lessors will be more comfortable. But who would do that? It's far too expensive for the PMA manufacturers to do, that's for sure. So I just can't see it happening." John Sharpe, CEO of Engine Lease Finance Corp., said investors prefer assets with long lives, strong value retention and wide re-marketability. So, their prime concern in terms of risk is: if one airline installed PMA parts on a lessor's aircraft, and then that aircraft was offered to another airline which used only OEM parts, the deal could never be done. "It's a very simple equation," he explained. "If only 50 percent of my customer base wants PMA parts in their engines, then that reduces my market by 50 percent, directly reducing the value of the asset."

Sharpe felt that OEMs are to blame for this value differential because the success of PMA puts their strategy of selling equipment with a lifetime spares package at risk. Indeed, by protecting their aftermarket with these guaranteed cost schemes, OEMs have tripled their market share over the past 10 years. As a result, OEMs are extremely concerned about growth in the PMA market. "They're the ones causing problems downstream for everyone else," said Sharpe, "particularly for independent MROs, non-OEM parts suppliers and leasing companies. So PMA is either going to be the death knell of a dying animal or a total game changer." P&W's View If there is to be a "game changer" in the market, it most likely is to be Pratt & Whitney. It intends to seek PMA certification to manufacture up to 48 "high dollar, critical parts" for the CFM56-3 engine by spring 2008. The first of these, high pressure turbine shrouds, received the FAA's PMA approval earlier this year. Rick Deurloo, director of sales for Pratt & Whitney's Global Material Solutions, confirmed that 19 of the 48 parts will require supplemental type certificates (STC) because of design changes that P&W implemented. "We're not new to the PMA market," Deurloo insisted. "As an OEM, we've seen PMA market penetration on the JT8D, JT9D and now the PW4000, so PMA is out there, and we live with it. We made the decision to develop parts for the CFM56-3 primarily on customer demand. ... We believe they will complement our existing aftermarket and allow for future growth," he said. More unexpectedly, Deurloo said airlines are treating his sales teams in a way that they've never been before, which has opened up areas where P&W has had no market presence for years. This has resulted in dialogues with airlines like Continental and Southwest, as well as regulatory authorities in major world regions. Deurloo reported that lessors' reactions to P&W's move have been "more neutral than expected" because they still have concerns over asset marketability and residual values. However, in his view, demand will be the indicator of future marketability. Addressing risk issues, he said P&W is well aware that safety and reliability are key factors, which is why it is running its CFM56 -3 life-limited-parts (LLP) program as an OEM program. "Even though it might take them six months or more, lessors will come on-board eventually," Deurloo predicted. "But the airlines will have to drive it by insisting lease contracts give them more flexibility."