Updated: Oct 20
In this article we will talk about the Consignment Agreement in aviation and why it is fundamental for the correct management of a surplus stock.
No publication can really be exhaustive of such a complex subject, but this is, without any doubt, the most complete one you can find.
We will also explain our strategy for selling your surplus faster and why a Consignment Agreement is more convenient than a bulk sale, and we are sure to give you an extensive knowledge of it: the use of consignment to sell surplus parts is indeed a powerful option, sometimes not so clear or only vaguely imagined from hearsay.
This guide is free and available to everyone interested thanks to Horix Aerospace, which manages over $30M in assets becoming a disruptive force in the Aerospace Industry with both its Trust Consignment Program and unique Business Model.
Before we get started, let's go back to the near past.
2020 slammed on the brakes of the exponential growth of the air transport market. Many airlines saw their first-half 2020 results go heavily into losses, many were subsidized by government aids but as time went on, the losses ballooned.
Many companies started to disinvest, a lot of aircraft were prematurely phased out for dismantling and the number of auctions for spare parts became embarrassing.
In the last 18 months, it appears that decisions made by airline boards have been made unanimously. If we sell entire inventories then we will have good quarterly results and shareholders will tell us we are doing well. Sounds familiar?
Airlines and Maintenance, repair and overhaul (MRO) businesses consider surplus parts to be any stock item that has not been used in recent years: in such difficult times, the point of view changes from “Asset” to “Liability”, and a bulk sale is always considered as a simple shortcut to get rid of these costs, for cash; this reasoning is sound enough, but a large margin loss must be taken into account. Let’s see why.
Bulk Sale vs. Consignment Agreement: who wins?
Seems like a bulk sale of unused spare parts is a great and fast source of income, but what is the percentage loss on the sale of a bulk lot of parts?
Based on the initial purchase price of the parts and on the average purchase price of the parts by an expert trader, we estimate the loss to be in the range of 80-90%.
This huge loss is also understandable: consider that a potential buyer has to take the risk of this business; consider also that the selling price of a surplus or obsolete item must always be lower than its FMV to ensure market competitiveness and marginality.
For those without experience in the field, FMV stands for Fair Market Value, or the average sales price for an asset on the open market, depending on its condition.
Is it then a good option, for an airline, to sell in bulk? Not a bad deal, for sure good to get cash in the short term, but absolutely not advantageous on a mid to long terms point of view.
Bulk sales are economically dangerous; the reason is simple: the more parts you put in the hands of large traders, the less likely you are to sell your parts to the FMV.
Let’s also imagine that you need a part already sold in a bulk sale: you will have to buy it back again, while with a Consignment Agreement you can have it back to stock at virtually no cost.
Think about that and look at the big airliners: do you really think their core business is selling parts? This is obviously a rhetorical question.
You manage an Airline’s inventory and your sales team is concentrated on selling maintenance tasks and/or modifications, therefore not motivated or capable to sell surplus parts; this happens because it's not in your Company's DNA to sell parts.
No Airline has a dedicated sales team answering to RFQs (Request For Quote) lightning fast as we do and we can prove it. We often send RFQs to large Companies, receiving back feedbacks only after several days of constant reminders.
Another key aspect to take into consideration is to physically move high value assets from your location to a third-party Company warehouse. This could generate import/export costs and risks related to the country the parts are going to. This is why US airlines delegate US Companies or UK airlines delegate UK Companies as Consignee.
It is such a specialized, focused sector that not all European countries have players capable of selling consignment parts. This is the case in Switzerland, for example, where we at Horix Aerospace are the only Company structured solely for this purpose.
But how does a Consignment Agreement legally works?
A Consignment Agreement is a contract where the Owner of spare parts (the Consignor) entrusts his surplus stock to Horix Aerospace (the Consignee), which is in charge to manage the asset and re-markets the parts for sale. The Consignee will charge a commission on the revenues generated by the sale of the parts, with the remaining revenue (after deduction of maintenance costs, where applicable) being for the account of the Consignor. When properly managed, this leads to a win-win situation for both Consignor and Consignee in relation to assets that are otherwise unprofitable.
The Consignment Agreement guarantees to the Consignor the full availability of the components and that they are properly stored and preserved.
Now, let's talk about numbers.
As mentioned before, we estimate the loss to the property to be in the range of 80-90% in case of a Bulk Sale.
Now let's look together at what could be done to dramatically reduce this loss and turn unused, surplus parts in stock, into a source of income.
Let’s make an easy example: let's start with a batch of parts with purchase price of 10,000,000.00 USD.
If management expects the bulk sale to be worth about 15% he will expect to sell everything for at least 1,500,000.00 USD. After negotiations, it would be great to get 10% of the original value, so 1,000,000.00 USD.
We are talking about a loss of 9,000,000.00 USD, which for an airline may not be significant, but in a period like this, where airlines are heavily subsidized to survive, losses are to be limited.
Now let's have a look at the benefits that a Consignment Agreement might bring to this transaction.
We already said that a surplus or obsolete part must be sold at a price slightly lower than the FMV in order to find a customer in the market.
We therefore consider a total average sales value of 80% of the initial purchase value, or a total of 8,000,000.00 USD.
These are the strategic calculations we make when we buy parts in Bulk.
The sales commission that the Consignee retains from the sale of parts ranges from 5% for high value parts to 30% for low value parts.
For ease of calculation, let’s consider an average sales commission of 20% over a total amount of 8,000,000.00 USD, equal to 1,600,000.00 USD.
The difference for the Consignor is 6,400,000.00 USD.
Now draw your own conclusions:
Amount you can collect on a Consignment Agreement: 6,400,000.00 USD
Amount that can be collected in a Bulk Sale: 1,000,000.00 USD
The advantage of Consignment vs. Bulk Sale is a remarkable 6X.
It’s now easier to understand why parts trading companies are so interested in finding stocks of parts, ready to buy.
The Steps to Create a Consignment Agreement
The process used in setting up a Consignment Agreement is described in our Infographic which you can find here.
First, the surplus stock must be analyzed, with an estimate of its value. This task can require the sales team to work for several weeks;
Once the Consignment Agreement is signed, we physically move the parts to our Stock;
Now the manual work begins, each part must be identified, inventoried, stored and every available document checked to define conditions (New, Serviceable, Overhauled, Unserviceable or As Removed;
Each component is traced in our ERP System;
The parts are finally placed on the market at its Fair Market Value;
The Consignor receives a Monthly Consignment Report as well as the Credit Note for the parts sold.
This is where our sales skills come into play, let me explain a little more.
Why does our Team perform better than others?
We believe that relationships and a solid network are fundamental in any environment or market; we still believe this, more than ever now that meeting and shaking hands have become a nostalgic memory.
A successful sale is a direct consequence of a good relationship between a company producing or just selling an item, and the company willing to buy.
Clients are the most important asset of any business, so it is important to protect and understand them, for better or worse.
Customer in fact is different from Client, which comes from the Latin "cliens", that also means "one who is protected”; the word Customer comes from the Latin as well as “custom”, which simply means “practice”.
But how do you create great relationships? With a good, transparent, simple and honest communication.
When you need a Quote, you usually send several RFQs to vendors that you assume they have the part in stock. You are frustrated with the time lost, waiting for a feedback, and then realize that your request is not being considered.
A successful sale starts with a time-efficient Quote. The price alone is not enough, the Quote is the Business Card of a Supplier, represents his reliability and demonstrates the ability to react and understand the priority.
We at Horix Aerospace have developed a system that allows us to monitor incoming RFQs 24/7/365 so that we can reply to both Asia and the Americas at lightning speed. This system is named Horix Lightning Fast Response Time and its motto is No Excuses, No Delay.
Do you understand why an airline or an MRO company will never be able to sell parts like we do?
Focus. The Focus of an MRO or an airline is different from our Focus. If you move away from the focus, your ability to react changes.
Everybody tells you what they do and how they do it but nobody really tells you why they do it.
At Horix, we consider and possibly anticipate with transparency the concerns a company might have before entering into a Consignment Agreement. We know exactly how a client feels about dealing with a trader because we've been through frustrating experiences ourselves.
Horix Aerospace is there to change the rules of the game. We believe in thinking differently. The way we challenge the rules is by creating a transparent relationship with the Consignor and a trust relationship with our Clients. This is the reason because we are the Trusted Solution for Aerospace Components Management.
If you are a Manager who want to know more about Consignment Agreements, or you are going to make strategic decisions for your Company, get in touch with me at any time: firstname.lastname@example.org.
Your Consignment Agreement partner,
PS: I would be really happy if you would leave a feedback below the post, it takes a minute of your time but it is a source of great satisfaction for me!