Airline Industry and Inventory Pooling

For several years, I worked for a major supplier to the commercial airline industry.  Eventually, I had to leave, because the entire industry just drove me nuts - some of the worst structural problems in any industry I have seen combined with an incredible unwillingness to do anything about them.  Marginal Revolution reminds me about the airline industry with this post.

Through the 1990s, the average weight of Americans increased by 10 pounds, according to the Centers for Disease Control and Prevention. The extra weight caused airlines to spend $275 million to burn 350 million more gallons of fuel in 2000 just to carry the additional weight of Americans, the federal agency estimated in a recent issue of the American Journal of Preventive Medicine (fee req'd).

As entertaining as this is, the industry is still totally unwilling to address the real problems in the industry.

One good example is inventory.  Boeing estimates that commercial airlines worldwide hold at least $75 billion in spare parts inventory for their aircraft.  If you include all the supply chain, the real number is probably much higher.  I have estimate in the past that this inventory turns every 3-4 years.  Thats right, 0.33 to 0.25 turns per year.  Ugh.

Here is the problem - commercial airlines run their inventory and supply chains in a far more backward manner than even the Detroit auto makers in the early 1970's.  Commercial airlines generally refuse to pool their inventory for like aircraft with other operators in the same area.  That means that, say at an airport like Chicago O'Hare, United and American Airlines, both with hubs, maintain separate and overlapping parts inventories.

The only equivalent I can think of is if every owner of an automobile felt the need to hold inventory in all the major auto parts that they might ever use.  Every single person would then own thousands of dollars in overlapping inventory.  You and your neighbor, both with a '98 Ford Taurus, might both have an extra starter on the garage shelf, despite the fact that neither will likely need it any time soon.  However, to make sure the part is available when they need it, each Taurus owner will need one in stock, particularly if each owner assigns a high cost to not having the part when you need it (as the airline industry does).

Crazy?  Sure, for cars.  We all effectively share inventory, counting on mechanics or dealers to hold the inventory we need.  In fact, even the dealers and mechanics don't really hold inventory, but count on supply from large regional distribution centers.  I won't get into the equations here, but basically serving multiple randomly variable demands via shared pools dramatically reduces the total inventory the system needs to satisfy a certain service level.  It might be possible to hold 50 starters in a central inventory pool to satisfy a population of 100,000 Taurus owners, a dramatic reduction from every Taurus owner having their own.

In the airline industry, though, pooling is talked about a lot but seldom implemented.  Today, every aircraft owner basically has their own inventory, even for unlikely-to-fail parts, and even when their neighbor is holding the same part too.

I can't do any calculation where inventory pooling would result in less than a 20% reduction in parts inventories in the commercial airline industry.  If this is true, this would represent over $15 Billion in inventory reduction, and therefore cash flow increase, to airlines.  Recognize that this is more cash than the industry has earned in its history.  And still, you can't get anyone in the industry to even consider it.