Airlines are facing significantly higher costs for shop visits on next-generation engines, and they are finding creative ways to mitigate the higher price tag with used material—if they can find it.
Based on industry surveys and analysis over the past several years, Cavok Vice President Dave Marcontell said at the MRO Network Aero-Engines Americas conference in February that his company’s research points to next-generation engine shop-visit costs rising 10-130% above the earlier-generation engines that they are replacing, exceeding the rate of inflation.
The higher prices can mainly be blamed on material costs, Marcontell says. Based on the available technology, obtaining better-performing engines is requiring exponentially higher material costs, he said. Reasons for that include the need for materials that can withstand higher pressures and temperatures as engines become more efficient and the mandate from governments to lower carbon-dioxide emissions, which requires running engines at higher temperatures.
In addition to the rising material costs affecting the price of engine overhaul visits, vertical integration of OEMs is another, albeit less important, reason for the increase, Marcontell says. Particularly aggressive in recent years has been GE, he notes, pointing out that the company recently formed a joint venture focused on coatings with Praxair Surface Technologies. GE acquired Avio’s aviation business in 2013 and purchased nearly a 10% stake in Taikoo Engine Services Xiamen in late 2014.
“For operators, the cost pressures are going to be unrelenting, so you’re going to have to be creative,” Marcontell told the engine conference attendees, noting that design engineering representative (DER) repairs, parts manufacturer approval (PMA) parts or used serviceable material (USM) could be used instead of buying new parts.
Airlines already seem to be increasingly embracing the last of those three options. Used serviceable material is not a new option, but the airlines’ attitude toward it these days is significant enough to be turning analysts’ heads.
In a January 2016 research note, Canaccord Genuity analyst Ken Herbert called the emergence of USM a “structural shift in the commercial aftermarket,” and he calculates that it made up about 20% of all commercial aerospace material purchased in the fourth quarter of 2015. This used surplus material created a $200 million headwind for new-parts sales last year, he wrote. The percentage is expected to “gradually increase,” with demand for certain aircraft and engine types varying.
“We expect demand for USM to continue to grow as demand continues to be increasingly institutionalized by the leading airlines,” Herbert writes, noting that this used materials market is ripe for consolidation, as “many are facing significant inventory valuation headwinds.”
One way that airlines have been keeping MRO costs affordable is by employing used serviceable material instead of buying new parts—including those for engines—when possible. In the past, airlines would typically only use this material from their own engine types, but today they are accepting material from other operators, says Marcontell. The downside with this approach is a lack of used serviceable material for the most-in-demand, later-generation engine types, he says.
However, airlines are becoming more savy about how they source the material, and they are adapting their operations accordingly.
“Leading airline MROs such as Delta TechOps and Lufthansa Technik have significantly increased their purchasing of USM and view it now as a legitimate source of material savings,” says Herbert, referring to the general surplus parts market. “Both Delta TechOps and Lufthansa Technik, as well as other MROs and airlines, have added to their USM procurement teams and expect surplus material to increasingly account for a greater share of their material purchasing.” He notes that airlines in the Middle East and Asia are following the lead of their U.S. and Europe-based peers, becoming more aggressive about using USM.
Especially for engines, Delta Air Lines is one operator that has taken the lead on crafting an aftermarket strategy focused on bringing technical capability in-house and using alternative materials when possible. It recently announced a partnership with Rolls-Royce, an OEM that has historically kept tight control over the aftermarket but now wants to partner with independent shops. This will allow Delta to add capabilities for Rolls-Royce Trent XWB and 7000 engines.
Sonny Stern, Delta TechOps’ vice-president of sales for MRO Services, noted that this represents an “if you can’t beat ’em, join ’em” approach.
“We’re going to increase our engine shop, we’re going to build a new test cell, we’re going to start doing more of our own engineering for repairs for future engines,” he says. “So that’s how we are planning to mitigate our risk of additional increased costs—by taking more technology and bringing it in-house.”
During a panel at the engine conference, Stern said the airline’s strategy is not necessarily to bring every repair in-house but rather to diversify the ways in which it maintains its engines and aircraft as well as those of its partners.
In addition to the engine deal with Rolls-Royce, which will allow Delta to develop its own repairs—potentially alongside universities and technology companies—it is also getting into the materials-sourcing game with a new company started late last year called Delta Material Services. He says the airline still sees the need to do business with companies such as AAR and AeroTurbine in the future, but it will now be able to source more material directly from other airlines and lessors as well, to achieve significant cost savings. Furthermore, he says, Delta is forming an engineering company that will allow it to in-source its engineering work.
United Airlines is also finding alternatives to new OEM parts in the marketplace, says Michael Stafford, MRO sales and customer service manager for the airline’s technical operations department. To mitigate costs, he says United tries to source used or aftermarket parts and PMAs but notes that this is becoming difficult. The airline also has an in-house engineering shop, which allows it to perform some repairs itself. He agrees with Delta that OEM partnerships are important for the future.
“At this point, it’s becoming increasingly obvious that if you don’t partner with the OEM, it’s going to be a very difficult road going forward,” he says, citing vertical integration’s impact on areas such as parts availability.
Canaccord Genuity expects materials prices for engine parts to increase 5-8% in 2016—an aggregate price increase of about 7%, and higher for the Pratt & Whitney V2500 engine specifically, Herbert says. This is in part due to demand for materials on the V2500, CFM56 and General Electric GE90 engines rising in line with more shop visits, as well as older engines with a lack of greentime, or remaining usable service life. In addition, a lack of used surplus material for newer engines plays a role.
As newer, more complex engines enter the market with technologies such as ceramic matrix composites, different approaches to MRO may be required.
Marcontell’s advice for airlines is to exercise caution over long-term engine deals and convince lessors that alternative parts are acceptable. “With over 40% of the fleet leased, you’re going to have to convince the lessors, and in order to do that, convince other airlines that work with these lessors,” he says.