Supply, demand, and expectation. Anyone who owns a successful business understands these are the fundamentals of a market economy. Weigh the demand for a good or service against the supply, and this is how value and price are determined. When the demand is great and the supply is low, prices go up. When the supply is great and the demand is low, prices go down.
Then there’s expectation. What is expected to happen with future supply and demand help determine the decisions a business makes regarding inventory. In the realm of MRO inventory analysis, paying attention to what is going on in the greater aviation market is crucial to keeping supply costs down while meeting demand. And with oil prices continuing their downward plunge, paying attention is now more important than ever.
In the world oil market, after years of demand beating out supply, a confluence of political, social and economic events have turned the tables, resulting in a slide in oil prices of around 50 percent since June 2014. On the surface, this drop in demand and glut of supply seems like an answered prayer for the aviation industry—commercial airlines are always trying to find ways to cut costs and build profits—what’s not to like about paying less today for the exact same product you paid more for yesterday? But according to a recent Bloomberg Business article, falling oil prices could throw the commercial aviation industry into chaos. Why? Two words: capacity discipline.
Capacity discipline is the method of controlling supply even as demand goes up. A Forbes article published last June credits capacity discipline as being the secret sauce in the commercial aviation industry’s profit recipe. It notes that since the financial crash of 2008 and its ensuing drop in consumer demand, the commercial airline industry has exerted discipline in adding back the capacity as demand growth returned. This has kept the industry profitable. But with oil prices continuing to offer attractive opportunities to increase both capacity and profits, analysts fear the commercial aviation industry won’t be able to resist the lure and will relax the capacity discipline that has kept them in the black in recent years.
What does this mean on the MRO inventory analysis front? For one thing, demand for supplies and parts may go up as airlines boost their fleets and flight schedules. MRO suppliers, distributors and servicers will need to be ready to meet this need as it arises. Now would be a good time to look through the maintenance and purchasing logs to determine what part and kit orders may be going up in the coming months. Now is also a good time to discuss a plan with your distributors in the event capacity discipline does relax over the next year. Will your suppliers be able to meet an increase in demand? It’s better to know sooner rather than later if inventory drought is a possibility. That way you can have a plan B distributor in the ready if necessary.
But as the greater oil market illustrates, expectation can backfire. That’s why, when conducting MRO inventory analysis and considering the potential for relaxed capacity discipline, service providers must also consider the possibility that oil prices will go up again, and/or commercial airlines will continue on their disciplined course. If this occurs, a glut of inventory can put a serious ding on the profit sheet.
To keep this from happening, Kapco Global suggests working with a distributor that provides supply chain services. This way, providers can plan for needing more inventory or less depending on how the wind blows, without gambling profits on what could be unnecessary stocking expenditures. A well-positioned global distributor can provide what you need in quick turnaround. And if you’ve established a good relationship with your distributor and outlined a plan of action that accounts for multiple expectation outcomes, the chance of a surprise problem cropping up at an inopportune moment goes down exponentially.
Kapco Global is globally positioned to provide MRO providers with the quantity and variety of supplies they need to meet the fluctuating needs of the commercial aviation industry. We believe that strategic planning will make it easier to meet the requirements of a market whose future is in a constant state of change. Contact a sales representative today, and let’s make a plan together for whatever is coming down the pipeline.