Why have SR Technics and AerFin come together to launch this A340 end-of-life programme?
Bob James – AerFin as a business is focused primarily on the engine side of the MRO services and we previously had good experiences having engine and component maintenance work undertaken by SRT. This new collaboration is really a developing and a continuation of our existing relationship.
We’ve been working closely together to develop a solution to bring to the A340 market, recognising that the aircraft type has perhaps suffered with changing operators and with new aircraft deliveries coming in. The two firms got together and decided to try and bring a solution to the marketplace using the strength and skills of SRT in its MRO work and reach into the operator base, and the asset management and financial capabilities that AerFin can bring. We felt that bringing the two strengths together would be very advantageous to both parties but, more importantly, enabling us to bring a solution to a much needed challenge in the market place with lowering the operating costs for A340 operators.
What do you see as the key opportunity in the A340 aftermarket?
Bob James – There are companies taking A340s and disassembling them, and there are a lot of aircraft lessors and larger manufacturers which are exposed to residual values on A340s, but they are each operating independently, in isolation. Ultimately the A340, with its four engines, has perhaps had a perception of higher operating costs, higher maintenance costs, higher fuel burn. What we are looking to do is to bring the technical services and strength we have in managing that asset – from a parts, a material and a component perspective – and combine that with MRO services to deliver a bigger picture solution to the operators and to effectively keep the aircraft flying.
The asset values of A340s have fallen considerably, but people are still conservative as to extending the life of that product because they are faced with a higher maintenance cost. To lower that cost you need access to material and equipment, and with our recent acquisition of 11 Cathay Pacific A340-300s that gives us a volume of sustainable material. Rather having just one or two aircraft being disassembled, we have a pipeline over the next three years of secure equipment.
We’ve been able to take that access to material and combine it with the strengths of SR Technics, which is very capable in MRO management and component repair, and has an established client base. SRT is looking for the material to service its customers and, rather than dealing with multiple parts traders they, it is looking for one entity that has financial strength and a supply of sustainable, quality material. Bringing these two things together is what’s important in lowering the cost of maintenance for the A340, rather than handle what is actually a fragmented market.
Klaus-Peter Leinauer – The message that we got from the market is that customers are looking for a nose-to-tail solution and we are able to provide that. We have a great deal of experience overhauling the CFM56-5C but also in overhauling the airframe – with SWISS as one of our biggest customers. But we don’t focus as much on asset management as AerFin does, and that’s exactly the reason why this collaboration with AerFin is so interesting. Customers were asking for services combining asset management for the airframe with the technical aspects and managing the engines. There are similar products in the marketplace, but they are either focused on the airframe or the engine side. We have the capabilities and experience and on the MRO side, and now through AerFin we also the financial aspects which completes the portfolio. Our approach in the Beyond.Fleet.Service programme of combining the two together that’s unique.
Bob James – To add to that, we are seeing that some operators are interested in taking the A340. If you compare the capital cost of a 10-year old A340-300 to that of an A330-300, the difference is absolutely phenomenal. Instead of paying $1m a month in rental on the A330, you could be paying $250,000-$300,000 for a very good quality A340. This costs difference, coupled with Airbus’ commitment to keeping the fleet flying and to high-density configuration, provides carriers with a high-capacity, long-range aircraft with significantly more capability and life-extension potential at a much lower operating cost and capital cost. And that’s the product that we’re looking to bring into the market.
How will SRT be lowering MRO costs?
Klaus-Peter Leinauer – The cost of an engine overhaul is very much driven by material costs and for an engine type like the CFM56-5C, SRT mainly manages overhaul cost by managing the material and using a lot of used serviceable material. This is sometimes not easy to get from the market and here we have a good opportunity, together with AerFin, to get better access to such serviceable material to manage the costs for the customer. The idea is that the more aircraft that we have in our portfolio, the more customers we have on board, the more engines we have and can use. And we can use not just the material from these engines, but modules or even whole engines to support the fleet.
What would a typical Beyond.Fleet.Services contract look like?
Bob James – It’s a programme that is tailored depending on the ownership structure and the exit strategy requirements of the operator. It’s worth bearing in mind that some of these aircraft are leased and a lot of are subject to residual value guarantees, so there are a lot of different implications in terms of ownership structure.
Many A340 operators are looking for a sunset solution that allows them to navigate their way through the complexities of leased aircraft, where they are faced with meeting return conditions – which could be over a two/three year period, or it could be as far out as seven or eight years. The contract will really depends on the customer, whether the aircraft is leased or owned.
By way of example, it could involve AerFin buying the aircraft and leasing it back with a packaged solution of fixed aircraft maintenance costs on engines, component or airframe under a flight-hour agreement with SRT. AerFin would then manage the financials, looking at the assets, procuring the material and bringing SRT the low-cost of access to material to bring that total solution. Alternatively we could provide a solution whereby the operator could retain ownership of the aircraft.
Klaus-Peter Leinauer – There is a lot of flexibility within this product, we can tailor the solutions on the engines and the airframes to the needs of the customer, so they are different sale leaseback opportunities on the engines, but also the aircraft. We also have the opportunity to provide deferred payment schemes, which allows us to help customers manage their cash flow. There are a lot of different packages we can bundle and customise depending on the needs of the customer.
What interest have you seen so far?
Bob James – There certainly is an interest from many different customers, some of which are existing SRT customers. Others are new operators that have been brought to us by the larger airframe manufacturers, who are seeing a resurgence in interest in a second and third-tier operators of A340-300s. In Europe particularly there is interest in high-density capacity, long-range, low-cost charter aircraft.
Klaus-Peter Leinauer – In developing this programme, it wasn’t a case of us wanting to introduce a new product it was the other way around. We got feedback from customers that they are keen to have this product. Over the past 12 months we have been running a project at SRT to extend our service portfolio and we asked our customers what they wanted and we’ve had overwhelming feedback. This approach is important, because only a product that is being asked for by the market will succeed.
When do you expect the first contracts to be signed?
Bob James – Based on the current levels of discussions I would say within the next three to six months. A lot of the demand is coming from the operators; this is not a product that we’re taking to market blindly, it is being driven by the operators. There are a lot of financial challenges given the residual values of A340s, the fact that many of these aircraft are leased and some are subject to residual-value guarantees. Operators are navigating their way through financing structures with manufacturers, leasing companies and financiers. What we are doing is providing a solution to give those operators and the financiers an alternative means to extend the life of the programme by demonstrating a tangible reduction in operating and acquisition costs, and a clear exit strategy.
How long do you think you can extend the life of aircraft?
Bob James – There are some operators that are currently flying A340-300s, for example Cathay Pacific, that have made it quite clear that they are exiting the. In the instance of Cathay, we’ve acquired the fleet but provided flexibility in allowing the carrier to retain components supporting the A330 – recognising that the A340 has a lot of commonality with the A330. So in this case we’re supporting an operator over two to three years as they exit the fleet.
If you compare that to some other operators that are perhaps less well capitalised and do not have new aircraft coming on board, they are faced with keeping the A340 for the next seven, eight or nine years. If the aircraft are owned, a lot of that will be driven by residual values on the books. With a capital cost of well over $40m or $50m, to sell those aircraft today would result in a major write-down and some airlines are not in a position to do that. In that instance the operator would be looking at a Beyond.Fleet.Services programme that would see them through to potentially retirement which could be out as far as seven or eight years.
What are the long-term goals for this programme?
Bob James – All aircraft have a life expectancy and while we’re launching this product on the A340 – based on the existing asset base, our joint competencies and relationship – we’re starting to see interest from operators on other products. The next move could be, for example, narrowbody focused. The A319 would be another classic example, or potentially A320s or 737NGs. As Boeing and Airbus bring out new generation aircraft, the Beyond.Fleet.Services concept is something that we’re looking to develop and work with SRT into other product lines.
Beyond.Fleet.Services is a great product, it is something that we’re bringing to the marketplace across multiple platforms. Clearly with the A340 we’re not saying that this is a 20-year programme, but we would certainly expect the service offering to be out there for the residual life of A340.
Klaus-Peter Leinauer – There are always changes. For example, the current lower fuel price means that the A340 is getting more attractive. That may change again in the future, but in the current circumstances this is the perfect point in time to announce this product. And for the next 10 years we at SRT are planning to see regular CFM56-5C shop visits. It’s a mature engine, but it’s still very much a core programme for SRT.