Richard Mumford, a partner at law firm Stevens & Bolton, gives an overview of how the parting out sector has changed in recent years.
The tear down and part out market for commercial aircraft has seen significant change overthe past six years.
The advent of the recession brought significant uncertainty in the leasing and operating market and a drive towards the use of cheaper, used parts to salve squeezed operator margins led to the tear down of younger aircraft that could not be put more fruitfully out into the market on long term lease.
In the medium term, however, demand for secondary market aircraft has remained strong and so while margins have been squeezed, the demand for parts has held up in many areas leading to low margins in the gap between the purchase and sales sides for parts companies, as well as scarcity of certain parts and types.
The uncertainty in the market, together with these squeezes in supply and margins, has caused a wider range of market participants to seek aircraft to tear down for parts.
At a recent conference, one aircraft operator explained how he had purchased an entire aircraft frame out of the desert for US$80k to obtain a single overhead bin for which he had been quoted US$50k in the spares market.
In turn, aircraft ready for tear down have been rising in value, thus squeezing or eliminating the margin to be made in tearing them down at all.
Clients tell me that there is an excess of money over commercial sense in this market, and so many are diversifying further into purchasing aircraft with remaining cycles to put out on lease and then tear down at a later date. A whole new raft of lessors is being created by this process.
In turn, this fragmentation may well lead to more competition for end of life leasing and thus lower lease rates, thereby starting the cycle over again.
An in-depth look at the parting out sector will be in ATE&M 133.