Printed headline: Regular Returns
The International Aero Engines V2500 aftermarket is on the rise, but the shift to newer-generation narrowbodies and the steady aging of the venerable engine’s fleet means the peak is likely just a few years out.
MTU Aero Engines, the V2500 overhaul market leader, completed 296 overhauls in 2016—good for about 33% of the global market. As of late 2017, it expected the total number to rise “slightly,” with further growth in 2018, says Thomas Schulz, director of engine programs for MTU Maintenance. “Shop visits are not expected to peak on this engine family until the early 2020s,” he predicts.
When the peak arrives, it will be followed not by a major drop, but rather a gradual decline—such is the depth of the V2500 in-service fleet of 6,350 engines, with more than 100 deliveries still to come. Aviation Week’s Commercial Fleet & MRO Forecast projects the peak year of spending to be in 2021, at about $3.7 billion. In 2027, MRO outlay on the engine is forecast to be $3.2 billion—or about $400,000 higher than the projected 2018 amount. Total MRO demand for the decade is projected at $33.7 billion. North American operators are expected to generate 25% of the V2500 maintenance demand through 2027.
This lucrative outlook explains why MRO providers are jockeying for more V2500 work rather than preparing for an inevitable ramp-down. MTU has been among the most active, having launched V2500-A5 overhaul services at its Richmond, British Columbia, engine shop in December, with a test cell slated to go into service early this year.
Richmond joins Hannover, Germany, and Zhuhai, China, as MTU shops that handle the V2500. Zhuhai has also been in growth mode. A joint venture with China Southern Airlines that opened in 2001, Zhuhai focuses on both major narrowbody engines: the V2500-A5 as well as several versions of the CFM International CFM56. An expansion in 2012 boosted capacity to about 300 shop visits annually, and MTU plans to add capacity to meet future demand.
The Zhuhai shop’s ability to handle more of the maturing V2500 fleet—China alone will generate 18% of V2500 aftermarket demand in the next 10 years—will play a major role in helping MTU meet some of its bigger-picture goals. About 30% of its €2.2 billion ($2.6 billion) in annual MRO revenue comes through “OEM cooperation,” as MTU Chief Program Officer Michael Schreyogg puts it, with the balance coming via direct deals with airlines. Newer engines, such as the Pratt & Whitney PW1000G Geared Turbofan, will push this percentage even higher, as the vast majority are entering service under long-term MRO agreements.
This helps boost volume for OEM-partner shops, such as MTU—but it can also squeeze margins, which are higher on time-and-materials (T&M) work done directly for operators. MTU will counter this partly by directing capacity growth to lower labor-cost countries, including China and Poland.
While the OEM volume provides stability, offering a variety of services for mid-life and older engines can help keep shops full and margins high.
“Once an engine matures, the focus becomes reducing costs and maximizing value for operators and owners. After all, as engines age, MRO costs increase due to need for heavier shop visits and material replacement. Often T&M constructs make more sense here, as they provide choice and flexibility to the operators,” says Schulz. “The mature engine market also offers opportunities to find alternatives. There is often a surplus of engines, stemming from the decrease in numbers of engines being actively used, creating an increased supply of spare engines and used serviceable material, which can be fed into cost-effective solutions.”
While an increase in retirements is inevitable as the fleet ages and newer narrowbodies enter service—notably the Airbus A320neo, the most logical replacement for V2500-powered A320ceos—the V2500 market will remain tight near-term. Operators are satisfying demand for lift that, bolstered in part by the low-fuel-price environment, continues to exceed historical trends.
“We believe we will see an increase in retirements as the industry absorbs the newer aircraft, but with fuel prices lower, we believe we will see more downward pricing pressure on the new aircraft and lease rates, as the economics of the older aircraft remain relatively attractive,” says Canaccord Genuity analyst Ken Herbert. “It is interesting to note, however, that lease rates on some engine types that are in high demand have been increasing, especially for the V2500 and the CFM56.”
Higher lease rates mean these engines will remain in service longer, favoring higher MRO spending over part-outs and nudging the V2500’s peak MRO time frame to the right.