Finding customers for used parts is big business. But no matter how innovative airlines and suppliers are, the opportunities in brokering pieces of aircraft and engines will never be as lucrative as finding homes for whole ones.
That, in a nutshell, explains why AerCap has throttled back its AeroTurbine subsidiary, shifting its focus to a more supporting role for the megalessor’s equipment-disposal needs.
AeroTurbine, known for its innovation in the used parts business, saw its top ranks quietly trimmed in late 2015, with at least six high-level executives leaving the company. While the move surprised some aftermarket observers, AerCap maintains the change is nothing more than a sensible big-picture business decision.
“We took a look at . . . the amount of capital we had tied up in AeroTurbine, and we decided that downsizing the business to a level that really just supports the AerCap leasing business was the most appropriate path forward,” says AerCap Chief Financial Officer Keith Helming.
CEO Aengus Kelly suggested that the company explored a complete sell-off of AeroTurbine. It is unclear whether they could not reach a digestible deal or could not find an interested buyer.
“There are certain parts of AeroTurbine that are very important for us to keep,” Kelly says. “We’ve looked at all the alternatives for the company, and we do need a portion of the AeroTurbine platform to support AerCap. And that’s primarily focused around the aircraft maintenance teardown and the engine leasing and trading aspect of the business.”
Founded in 1997 as an engine-parts trading company, AeroTurbine evolved into a major player in the used-parts arena, breaking into airframe parts when it found itself buying entire aircraft for access to much-desired used engines. It also ran heavy maintenance lines, including work for Frontier Airlines for several years, and served as a boutique provider of drop-in MRO services.
In recent years, its increasingly valuable role has been in helping its parent companies—both lessors—maximize the value of older aircraft being phased out by tearing them down and remarketing usable parts. AerCap acquired AeroTurbine in 2006, and then sold it to International Lease Finance Corp. (ILFC) in 2011. AerCap then bought ILFC in late 2013, reacquiring AeroTurbine in the process.
The majority of AeroTurbine’s revenues came from used parts. It sourced about 30% of its teardown targets from its lessor-owners, with the rest coming from the open market. AerCap’s move to cut AeroTurbine back to a more supporting function suggests that the lessor sees more value in channeling capital into its primary business.
AerCap does not break out AeroTurbine’s financials, but the division is believed to have generated about half a billion dollars annually in recent years. AerCap’s 2015 revenues were $5.3 billion, or about $1.8 billion more than consultant ICF International’s estimate of the size of the entire used parts marketplace that largely sustained AeroTurbine.
Despite the changes, AeroTurbine will continue to play a key role in AerCap’s overall strategy.
“Going forward . . . we will have the AeroTurbine business,” Helming says. “But again, it will be there primarily supporting the AerCap leasing business.”
The lessor, which owns or manages some 1,250 aircraft and has another 450 on order, and touts AeroTurbine’s ability to help customers “divest [themselves] of older aircraft and streamline their fleets while addressing future growth.”
AeroTurbine also will maintain its partnership with -Lufthansa Technik (LHT). Announced in 2013, the deal was to include LHT taking an equity stake in the AerCap subsidiary. But the final agreement focused on AeroTurbine’s ability to provide LHT with a predictable supply of used material and LHT’s ability to repair parts.
“LHT was and is in close partnership with AeroTurbine,” says an LHT spokesman. “Both LHT’s and AeroTurbine’s business models ideally complement each other, and this is irrespective of the recent changes at AeroTurbine.”
AerCap’s rightsizing of AeroTurbine aligns with moves other major industry players have made to feed their own businesses with used parts while making a few dollars on the side. Delta Air Lines, long a consumer of used materials to support its strategy of leveraging older aircraft without sacrificing reliability, has launched its own used-parts subsidiary.
“That’s going to give us a continuing opportunity to tap into the used-airplane market and the used-parts market,” explains Delta CEO Richard Anderson.
Adds Gil West, Delta’s chief operating officer: “It is just trying to vertically integrate our spending in that area and look for opportunities not only to benefit ourselves but then to commercialize that for other carriers as well, and take that margin that we have been given to somebody else and have that roll to our bottom line.”
Chromalloy also is expanding its used-materials division, wrapping it into a new asset management portfolio that includes more third-party services, including parts sales, pooling and equipment leasing.