Printed headline: Aviation’s Middle Age
Jet fuel prices have trended upward since early 2016, although they are still about 40% lower than during the early part of this decade. However, few within the industry would be surprised by further increases, which raises questions about whether growth in the midlife aircraft and engine market can be sustained.
Despite the introduction of new-technology widebodies and narrowbodies, midlife aircraft have seen a surge in demand in recent years due to relatively low fuel prices, teething problems with new equipment and the much better reliability associated with several mature platforms. The grounding of the Boeing 737 MAX in early 2019 provided another boost as airlines sought replacement capacity, although the premium several operators are paying in rent to cover the shortfall is likely to be short-lived.
Even so, values and lease rates of global workhorses such as the Airbus A320 and 737-800 are strong, report lessors and appraisers, though some softness is reported for the smaller A319 and 737-700.
“We continue to see strong demand for midlife A320- and Boeing 737NG-family aircraft,” says a statement from lessor GECAS. “Although new technology is in the market, lower fuel costs and mature reliability mean that these remain attractive assets.”
The definition of “midlife” varies by organization, but a practical guideline is the age at which an aircraft would complete an initial lease, normally 8-12 years. GECAS says that about 60% of its portfolio have had their leases renewed with existing customers, while the rest are transitioning to new operators. It is in that remaining 40% where opportunities lie for MRO providers, as they can provide the reconfiguration, modification and painting that new users require.
“Other technical challenges arise when transitioning the aircraft from one regulatory jurisdiction to another, [as] compliance in one jurisdiction rarely means compliance in another without making the necessary changes,” says John Leech, senior vice president of midlife aircraft leasing for Aircraft Recycling International, which is part of Hong Kong-based China Aircraft Leasing (CALC).
Leech adds that nonregulatory configuration demands can be significant. For example, Chinese airlines tend to prefer two-class narrowbodies, whereas U.S. and European operators are increasingly opting for single-class layouts. However, within the CALC portfolio Leech observes more customers renewing initial aircraft leases, he says, due to “familiarity with the specific aircraft, quantifiable fleet planning [and] relative ease for operations and the redeployment of technical staff within these airlines.”
The widebody market has seen considerable upheaval over the past decade, with new models such as the Boeing 787, Airbus A350 and A330neo entering service. At the same time, the appeal of four-engine aircraft has plummeted: The former long-haul workhorse 747-400 is being rapidly phased out of passenger service; production of the A380 is to stop, and initial leases are not being renewed; and the popularity of the A340 continues its long slide.
“Today, the Airbus A340-200 is all but finished as a passenger aircraft, while the active Airbus A340-300 fleet is in decline,” says Mike Yeomans, head of valuations for aviation consultancy IBA. The malaise has spread to larger models such as the A340-600, he adds, with Virgin Atlantic and Qatar Airways operating their last services this year, and Lufthansa transitioning slowly away from the type. For MRO providers that service the type, opportunities for reconfiguration work appear slim, as Yeomans reports little ongoing interest in the A340 platform. That said, the -200/-300 models have teardown appeal since their CFM56-5C engines share some commonality with the in-demand -5B engine that powers Airbus narrowbodies.
Another widebody suffering in its middle-to-later years is the Boeing 777-200ER, which has an average age of 17 years across the global fleet. Much more popular than the A340, its situation is not as grave as the Airbus model, but Yeomans reports that “storage and availability levels have crept up” and that “IBA has seen some quite soft pricing and lease rates on Boeing 777-200ER aircraft.”
Unsurprisingly, the most popular midlife engines are those that power the most in-demand narrowbodies, the CFM56-5B/7B and the IAE V2500. “In the narrowbody market the -5B, -7B and V2500-A5 markets have seen unprecedented value performance despite the [CFM] Leap and [Pratt & Whitney geared turbofan] engines rolling out,” confirms David Archer, senior analyst at IBA.
In contrast, Archer reports a “limited aftermarket” for older 777 engines such as the Rolls-Royce Trent 800, PW4000-112 and GE90-7/-8-/9. However, there has been a recent uptick in demand for A330 powerplants—the Trent 700, CF6-80E and PW4000-100—due to engine issues on newer widebody platforms, notably the Trent 1000-powered 787.
“For midlife widebody aircraft, the CFM56-5C and Trent 900 have both suffered heavily from the A340 market downturn over the last decade, [although] -5C engines can reach a relative premium for teardown due to material commonality with the -5B program,” Archer adds.
Another potential source of demand for midlife engines is as a life-extension option on older aircraft platforms. Years of low fuel prices have pushed several operators to keep aircraft in service longer, but a more recent rise in prices might cause some to reassess that strategy. Fitting newer engines might be a compromise position, although GECAS’ Campbell says, “There isn’t much evidence of this at present, although from time to time it happens.”
What has been the case, however, is engines staying in service longer, which has increased the maintenance burden with repairs being made on engines that might once have been torn down. Fewer teardowns also mean tighter stocks of materials. Combined with new-parts shortages from OEMs busy with issues affecting their latest products, this situation has contributed to severe engine-overhaul bottlenecks.
One solution to avoid the time and expense of an overhaul is to rent short-term capacity. “There is some evidence of engines being swapped onto older airframes, though this is primarily driven by the economic principle of avoiding the expense of engine shop visits during the course of the lease,” says Leech.
Archer confirms this, saying that some 737 Classic operators have bought CFM56-3C1 engines with attractive remaining green time (the engine cycles left to be burned before teardown) rather than pay for overhaul of their existing engines.
“A similar example would be the Pratt & Whitney PW4168A engine, the least popular powerplant for the A330 family,” he says. “We have seen a healthy leasing market develop for this engine as owners have sought to avoid expensive shop visits.”
However, much of this replacement activity is in the mature rather than midlife segment of the market. In the latter, engine availability is generally too tight to permit opportunistic engine-swapping.
Trading any aircraft equipment requires good technical knowledge, and that need only increases as aircraft age. In middle age, aircraft and engines have already undergone heavy checks and had expensive life-limited parts replaced, so knowledge about the current condition of the aircraft—especially the engines, which represent the major part of an aircraft’s value as it ages—is essential.
“When leasing midlife aircraft, it is crucial to have the exact technical status of the engines and airframe to be able to predict and plan for future maintenance events during the term of the lease,” says Leech.
Accurate and up-to-date records are essential to satisfy potential buyers and lessees of midlife aircraft, because values can plummet without the right documentation. “We find that the parties in this space are very savvy around value so it’s important to have up-to-date records and status of the aircraft,” Campbell notes.
The move to electronic record-keeping should also help in this respect. GECAS has scanned all of its paper documents into a digital archive. Developed by GE Aviation Digital Solutions, the AirVault Asset Transfer System is a continually updated digital records archive that gives GECAS staff instant access to technical information. As well as guarding against the loss of paper records, AirVault helps GECAS and airlines lower transition costs by eliminating the need to thumb through thick binders of documentation.
Past the Peak?
Assessing whether the popularity of midlife aircraft has peaked is difficult. Numerous investors have entered the trading space in recent years, as midlife aircraft tend to offer better yields than aircraft ordered new or bought via sale and leaseback. As a result of more new money chasing older aircraft, Leech says that it is “a seller’s market, and therefore the value to the potential purchaser has decreased, with returns diminishing.”
Nonetheless, Campbell says that GECAS still expects to see “decent demand” for midlife aircraft for the next few years at least. “Also, with the OEMs sold out on new-technology models through 2024, midlife aircraft should still have a role to play for several years to come.”
On the engine front, Archer points out that any downturn in the aircraft market tends to have a delay before it hits engines. “Investment in engine assets is invariably tied to the performance of the asset in the market. If investing in costly maintenance will not see a return, then workscopes will inevitably be reduced.”
He concludes: “As for now, aircraft are continuing to fly, shop visit demand remains high, and investor appetite remains strong.”