Fast 5: Kellstrom CEO On Parts Market Trends, Expansion Plans

Oscar Torres, president and CEO of Kellstrom Aerospace, discusses parts market trends and where the company sees aftermarket expansion opportunities.

Coming into 2024, what is Kellstrom seeing in terms of material availability and demand in the commercial aftermarket?

We are seeing a continued, dramatic increase in demand for materials. Operators are experiencing very high utilization of their fleet with significantly reduced availability of parked serviceable aircraft or engines. As a result, MROs are anticipating increases in engine and aircraft inductions in 2024 which will require a lot of material. Kellstrom operates in both the new parts distribution as well as the used serviceable material (USM) markets. From a new parts distribution standpoint, we have continued to work very closely with our OEM partners to ensure that we have the material that will be required on the shelf to support the MROs and operators. From a used serviceable material standpoint, we continue to see that although many aircraft were parked or retired in the past couple of years, the number of teardowns has actually been lower than historical levels. As a result, the availability of used serviceable material has been more constrained. Once again, Kellstrom has continued to work with our trading partners to improve our inventory position in an effort to support these material requirements.

Have procurement strategies and service requirements from Kellstrom’s airline customers changed in recent years? If so, how?

Our airline and MRO customers absolutely evolved the procurement and service requirements over the past couple of years. The most dramatic area where we saw this was in their desire to generate cash by reducing inventory levels. This resulted in them placing greater reliance and customer service expectations on companies like Kellstrom. As noted previously, Kellstrom took a number of actions on both the new parts and USM sides of our business to build up inventory and accelerate and increase the ordering of material in order to support our customers’ requirements.

How has the company navigated supply chain challenges over the past year, and what it is expecting in this area for 2024?

Kellstrom’s management team identified very early the likelihood that many company reactions to the COVID pandemic were likely to result in supply chain issues. As a result, we took proactive measures to work with our OEM and USM trading partners to ensure that we had the material on the shelf to support our customers' requirements. This was particularly effective in our new parts distribution segment, where we were able to place orders early and in larger quantities in order to have the material available.

Is Kellstrom seeing parts pricing fluctuations in the aftermarket?

Over the past several years inflationary pressures have had a significant impact on the aviation parts market. To date, the more significant impact has been on OEM parts. This has been a function of increased labor costs as well as the increased cost of raw materials. Although the price escalation has dramatically slowed in comparison to 2022 and early 2023, the 2024 price escalation was still greater than historical norms. From a USM standpoint, we have seen a significant increase in the cost of acquiring assets for teardown. The high utilization of the current fleet combined with lower availability of serviceable green-time assets is resulting in many assets that previously would have been torn down being repaired and made operational. This has reduced the number of teardown assets at a time when engine inductions and material requirements are up. I anticipate that this combination is likely to lead to more price escalation in the USM market.

Is Kellstrom looking at further expansion this year through acquisitions? If so, in which market area is the company exploring?

The company is always evaluating opportunities to expand the products and services that we offer to our customers. These opportunities include organic capability expansion as well as expansion through mergers and acquisitions activities. Kellstrom provides three basic value drivers to our customers: 1) lower operating costs; 2) reduced asset downtime; and 3) increased asset values. We will continue to evaluate opportunities to acquire or build capabilities that expand on our ability to provide those value drivers to our customers.