A version of this article appears in the September 8 issue of Aviation Week & Space Technology.
While much of the commercial airline world gears up for the introduction of new, more-efficient engine types to power tomorrow’s dominant narrowbody aircraft, the aftermarket can be forgiven for keeping the lion’s share of its attention on current-generation equipment. The Boeing 737 MAX and Airbus A320-neo—combined backlog: 5,500 and rising—are clearly tomorrow’s story, as are the CFM International Leap and Pratt & Whitney PW1000G geared turbofan engines that will power them. In aftermarket terms, however, a growing backlog of current-generation engines means there is plenty of work to keep shops busy now.
Demand for CFM56 repair is well-documented. Earlier this year, Bernstein Research projected that new CFM56 spares sales could rise 9% annually through 2019, even though as much as 90% of the content for the first-generation models—about one in five CFM56s flying—is being harvested from the used serviceable-material market.
The International Aero Engines (IAE) V2500 series is in a similarly solid position—and perhaps in a slightly better one, compared with its head-to-head competitor on the A320ceo (conventional engine option) family, the CFM56. The V2500-A5 powers 47% of in-service A320s and has a slightly higher share of the remaining A320ceo backlog. Within the current-generation Airbus narrowbody family, the V2500’s biggest share is on the A321. Aviation Week Intelligence Network’s Fleet Discovery shows that the 60% of the 974 in-service A321s are IAE-powered.
Even allowing for inevitable A320ceo-family cancellations that turn into A320neo orders, the V2500 in-service pipeline is nearly full and will swell a bit more before commercial production of new engines ceases. IAE says 2014 deliveries will top 500 and maintain a similar pace through 2017, as the manufacturer feeds record Airbus A320-family production rates leading into the A320neo transition. IAE shipped its 6,000th engine in February; the milestone powerplant found a home on a JetBlue Airbus A321. The 6,000th shipment came 25 months after the 5,000th and 54 months after the 4000th—shrinking intervals that illustrate both the rising demand for Airbus narrowbodies and the V2500’s steadily improving market share.
The rising production rates, combined with 25 years of deliveries, mean the V2500 aftermarket picture is bright now and should be for the foreseeable future. Aviation Week’s MRO Prospector projects that 3,200 V2500 engine overhauls are in the pipeline for the three years ending in 2017, with a roughly equal number of overhauls scheduled for each year.
Long-term, Prospector projects the V2500 aftermarket to ramp up from a 2014 figure of $2.5 billion, to $3.7 billion in 2018 and then $4.5 billion in 2023. Work on the V2500-A5 generates an already dominant 96% of aftermarket revenue and will gobble up the remaining share it does not have, hitting nearly 100% by 2023, with a few scraps left for the handful of V2500-D5s projected to still be flying on MD-90s.
A steady ramp-up in V2500 shop visits is a key component to IAE majority shareholder Pratt & Whitney’s near-term aftermarket prospects. While PW2000 and PW4000 work has wobbled, the V2500’s performance has strengthened. Pratt’s installed base is transitioning as legacy models such as the JT8D, JT9D, and early PW2000s and PW4000s are phased out. Counting IAE products, the Pratt family’s installed commercial engine base has dropped to less than 6,000 today from about 7,000 aircraft in 2005, a recent Jeffries analysis shows. The IAE fleet has more than doubled, to about 2,700, while the legacy Pratt fleet has declined 47%, to about 3,000 engines.
Pratt has about 60% of the V2500 fleet under long-term agreements, compared to just 20% of the PW2000s and 40% of the PW4000s. Louis Chenevert, CEO of Pratt-parent United Technologies Corp. (UTC), noted at an industry conference in June that PW2000 and PW4000 aftermarket revenues have “stabilized,” while the V2500 is “what really moves the needle.” While the falling fleet size is a temporary drain, Chenevert notes that most of the company’s in-service engines have not had their first shop visits.
Year-over-year spares sales were up in the high-teens in the second quarter, indicating strong demand and high amounts of new material going into shop visits.
“The good news is the airlines are flying,” Chenevert said. “The cycles are there; the hours are there.”
Whether the good news coming out of UTC is the start of a trend reversal, or a blip on the radar screen, remains to be seen.
“The long awaited bow-wave of narrowbody MRO work is starting to materialize, but some engine MROs are seeing lower-than-expected revenues as airlines do the minimum required and surplus material is still a factor,” Canaccord Genuity analyst Ken Herbert noted in a July aftermarket report. “Demand for existing engines with any green time remains strong.”
Herbert added that deferred engine maintenance, a significant drag on engine overhaul revenue in 2012 and 2013, is more of a drag on independent shops than original equipment manufacturers (OEMs). This is partly because the OEMs have both a significant share of fixed-price contracts and a steady feed of used parts to help them minimize costs while keeping customers happy.
“While there is a large amount of A320 material available, the industry is just starting to see it pick up on the 737NG,” Herbert noted. “Much of the initial 737NG material that has hit the market has not had much useful life left in it. However, as we get closer to the entry-into-service (EIS) for both the 737 MAX and the A320neo, we expect a surge in the availability of used material on the 737NG as well as the A320ceo.”
Engine material accounts for about 65% of the $3.5 billion annual used-parts market, ICF International calculates. Although the sunsetting of an existing fleet has a clear effect on aftermarket sales as used parts become more plentiful, OEMs are finding ways to capitalize. An ICF survey found that 73% of operators place a premium on a used part supplied by an OEM, while 68% said they would consider paying a premium of up to 20% for such parts.