Printed headline: Availability Issues
Four years ago, the aircraft and engine teardown markets were lucrative enterprises for operators looking to make a return on end-of-life aircraft. Returns on components were also financially rewarding to asset management specialists and MROs with teardown capabilities. However, soon after, fuel costs started to plummet—with Brent Crude (a trading classification that serves as a global benchmark for price for oil purchases) falling below $50 per barrel by January 2015.
Buoyed by the drop in prices, many airlines changed their strategies to keep mature aircraft active in their fleets longer, with some deferring new orders. At the time, many part-out specialists noted that change was afoot in the segment, with operators and lessors increasingly attracted to keeping aircraft in storage or reselling them instead of sending them to the scrap yard.
Fast-forward to June 2018, and the price of Brent Crude has risen steadily to around $76 per barrel. New-generation aircraft such as the Airbus A320neo and Boeing 737 MAX have also started to make an impact on the global fleet, a trend that will accelerate over the next decade and potentially hasten retirements. Other widebody aircraft types such as the Boeing 787 and the Airbus A350 have become further established, while stalwarts such as older Boeing 747 and Airbus A340 variants are slowly decreasing. On the engine side, many maintenance and overhaul shops are running at full capacity due to the volume of shop visits; materials on some mature engines are somewhat scarce.
Taking these factors into account, have the airframe and engine part-out markets experienced noticeable change? The answer is yes, but while the parts of the airframe disassembly segment have slowed to some degree, demand on specific engine types for disassembly or lease have skyrocketed.
MRO shop capacity constraints is one area that has affected the engine teardown segment, according to James Bennett, director of sales and marketing for UK-based AerFin, which conducts engine teardowns on its own acquired assets in Caerphilly, Wales, typically over 21 days. “It is clear that engine teardown slots are hard to come by these days as every engine MRO is running near full to capacity,” he says. “From a revenue-generation perspective, the last thing providers holding the capabilities want are teardown slots and instead, they would prefer to do overhauls and core performance restoration jobs.”
However, demand outstripping supply has benefited some engine part-out specialists, he says. “For engine teardown specialists able to accommodate these requests, performing these tasks has actually become quite lucrative.” Bennett says this means engine teardown companies can charge premium rates when a slot opens up to do work quickly, instead of a typical waiting period of 4-5 months or longer. But he believes this will change over the next two years once more CFM Leap and Pratt & Whitney GTF engine-powered aircraft enter the market. “Inevitably this will lead to more aircraft retirements,” he says.
This view is shared by Damon Bowden, vice president global sales and business development at AerSale, which conducts a part-out operation for in-house and third-party aircraft and engines in Roswell, New Mexico. AerSale started teardown work in 2011 and has since done more than 500 engines and around 100 aircraft. “With the current amount of aircraft on order and with carriers only having so much capacity on their aircraft, new A320neos and their engines will replace some of the older A320s and their engines, which will then go back into the market,” he says.
While the scenario of Tier 1 airlines offloading their assets to Tier 3 carriers in developing countries is possible, Bowden feels this could also generate some good part-out opportunities. “The aircraft themselves will have run their life span with their engines requiring heavy shop visits, so there is a likelihood they could be parted out,” he adds.
What Is in demand?
Bowden says in the case of engine teardowns, demand typically centers on certain assets at different time periods. “The engines of the moment are the V2500 and the CFM56-5B and -7B, because demand in the marketplace for shop visit inputs is so high there are not that many people out there able to acquire engines for teardown,” he says. “The engines that become available are aggressively bid on, with the result often being the OEM winning.”
Aside from engines removed from the aircraft, Bowden says there is also a strong penchant for auxiliary power units, landing gears and thrust reversers. “These are the hard-hitting components that, if in good condition, can be sold at the earliest opportunity in order to realize the revenue as quickly as possible,” he says.
Universal Asset Management (UAM) is among North America’s largest asset management companies, having disassembled in excess of 300 of its own and third-party aircraft. Unlike AerFin and AerSale, UAM does not perform specific engine part-out work. But according to UAM President Shawn Kling, on aircraft disassembly projects—which it carries out in Tupelo, Mississippi—component demand has been consistently long-term, with few dramatic changes. Customers still seek to procure what he describes as particularly “high-usage items” from an aircraft. “There’s always going to be demand for avionics and mechanical components with high failure rates such as wheels, brakes and slides,” he says.
However, Kling says the market is noticeably slower for widebody aircraft disassembles, which he attributes to airlines keeping assets flying longer as well as to larger aircraft types presenting a more challenging proposition. “Anything that is beyond a two-engine market is a tough asset to place right now,” he says. “There is high demand for aircraft to operate, and we are also seeing more aircraft entering and leaving storage rather than seeing aircraft going with the purpose and intent to disassemble,” he says. Bowden adds: “A lot of the disassembly opportunities lie in aircraft at the very end of the process for an airline or a lessor where they have tried to market an aircraft unsuccessfully or simply possess an asset so old that it is the right time to disassemble it.”
One aircraft that has been a popular teardown option for AerFin is the A340. In 2015, it launched an end-of-life project with Swiss MRO SR Technics for the -200 and -300 variants of the aircraft, covering operational cost reductions, including engines, airframe and component maintenance. In the ensuing years, it has undertaken end-of-life projects centered on the A340-300 with the likes of Hong Kong’s Cathay Pacific and Philippine Airlines. In the Cathay project, AerFin took 11 of the retired aircraft from the carrier, having identified a continued demand for the aircraft’s CFM56-5C engines and A340 components.
However, given the changing environment, not all of these were torn down, as AerFin identified market issues such as entry-into-service delays on new aircraft types and MRO capacity constraints—factors that Bennett says suddenly created engine lease opportunities. “We likely would not have seen this lease opportunity even just one year ago on an engine like the CFM56-5C,” he says. “While a chunk of the airframes were torn down, a number of the engines acquired were repositioned—it’s a real mix,” he adds.
Engine part-out work is also attracting the attention of another European provider. Vallair, headquartered in Luxembourg, carries out its teardown and recycling activities at a facility across the border in Chateauroux, France. In the airframe segment, it focuses its work solely on A320 and 737 aircraft rather than pursuing teardown and leasing opportunities on widebody aircraft. President/CEO Gregoire Lebigot notes that disassembly work, which accounts for less than 10% of the company’s overall business, is becoming more engine-centric, an area he describes as a “hot market” right now. Illustrating this is the fact that in 2017, Vallair performed no airframe part-outs but conducted eight engine teardowns. “This was the first year in the last 10 where no airframes were torn down,” Lebigot adds.
Barring some exceptions, he believes airframe disassemblies have become less attractive for the company as operator demand has led to an increase in prices and competition for acquiring aircraft. “We realized that these airframe teardowns were not generating enough profitability compared to putting the aircraft back in the air,” he says. “With the exception of maybe the top 25 parts taken from an airframe—what we call ‘the goodies’—it is generally not enough to turn a profit on the whole thing.”
The engines associated with the 737 and A320, the CFM56 and the V2500, command a lot of Vallair’s focus. “Spare-parts demand for engines is extremely high for engine types such as the CFM56 and the V2500,” he says. “The OEM simply cannot produce enough parts for these engine types.” Lebigot says while major checks on airframes have been extended on certain aircraft, checks on engines cannot be extended owing to their life-limited parts and performance requirements. Landing gears are also generating high demand from airlines and repair shops, according to Lebigot. “This mainly comes from airlines and repair shops, but it also fulfills our own needs due to the growing number of aircraft we have on lease.”
Engine Disassembly Opportunities
UAM, however, is more confident of the 737 and A320 markets in the years to come, not just in the North America region but also in China, where it opened its first facility in early June under the name of its Aircraft Recycling International (ARI) parent company. ARI, a subsidiary of China Aircraft Leasing Group, acquired UAM in March 2017 and will operate the new facility in a country that Aviation Week’s Fleet & Forecast data projects to grow at a compound annual growth rate of 5.3% over the next 10 years. As a result of the new aircraft influx, retirements of older models are anticipated.
“There’s going to be a large turnover in the Chinese fleet with it being one of the largest buyers of new aircraft over the next five years,” UAM’s Kling says. “There are a lot of A320s and 737NGs that will become available to either store or be moved on to disassembly. The inventory can also be moved to support the new versions of the fleet, as it’s still part of the same aircraft family.” On a global level, despite challenges around volumes, Kling is optimistic that there will be a good level of growth. He also believes consolidation could be on the horizon in the disassembly market. “A lot of interest in the disassembly market from a lot of different players creates a lot of excitement—but the business is not an easy one,” he says. “Many MROs and OEMs are showing a strong interest in it but are perhaps finding it a lot more challenging than they thought due to the level of work that goes into it.”
In the engine segment, AerSale’s Bowden sees no slowdown related to the engine assets the company tears down. “We’ve torn down 69 V2500s, and that will continue to be strong for a long time along with CFM56-5s and CFM56-7s.” Some older assets such as the PW4000 will likely continue to tail off, however. Vallair anticipates “one or two” airframe teardowns this year, while projecting 2017’s figure of eight engines being stripped down in 2018. “I do not see things changing in the engine market for another 2-3 years at least,” he says, factoring the landing gear segment into this. However, having experienced three industry downturns in his career, Lebigot says engine market stability will hinge on how harsh any industry downturn may be.
Bennett says that for AerFin, despite challenges around supply, opportunities exist around the CFM56 engine market for both leasing and disassembly. “If a company can acquire a CFM56-5B or -7B right now, whether for lease or disassembly, it will be looking at good returns,” he says. “In such a saturated market, we have seen instances recently where we have secured deals at rates of around 40% more than 12 months prior.”
Bennett also points to AerFin’s activities in the regional market, where it acquired 15 Embraer 170s from Saudi Arabian Airlines last year. This transaction, he says, illustrates another new secondary market for the aircraft’s CF34-8E engines and a short-term lease opportunity. “Just 6-9 months ago there wasn’t any kind of engine leasing market for that platform—but now there is demand by the week,” he says. c