Santdard Aero Winnipeg Canada 2008

MROs May, Or May Not, Reap Low Fuel-Cost Dividends

Although lower fuel costs may generate more MRO work as older aircraft get a new lease on life, the impact and duration of that trend is hard to predict.

Airlines are reaping windfall profits, largely due to drastic fuel-cost reductions. To illustrate, according to U.S. Energy Information Administration statistics released on Feb. 25, West Texas Intermediate (WTI) crude was selling for $49.56 per barrel, while Brent crude was priced in Europe at $59.78.  About the same time last year, the respective prices were $102.88 and $108.98. That has translated into bargain prices for jet fuel, priced as of Feb. 25 at $1.84 per gallon for U.S. Gulf Coast Delivery, a 61% reduction compared to $2.99 at about the same time in 2014.

The jury is still out as to whether lower fuel prices will become the new normal, and thus, if legacy fleets of less fuel-efficient aircraft will remain in service longer, giving the MRO industry an unexpected dividend. The answer depends on whom you ask. For now, the signals are mixed.

“Given today’s lower fuel costs, some airlines are looking at keeping some of their legacy aircraft in service longer. I expect that during 2015, some benefit will start to accrue to the aftermarket support industry as a result,” says Ken Herbert, managing director, aerospace and defense research in the San Francisco office of investment banking firm Canaccord Genuity. The money that airlines save on fuel, he says, will translate into more maintenance spending, which means less deferred maintenance, and more discretionary spending—such as interior upgrades—which he expects to accelerate in 2015.

This, Herbert reports, will create a more favorable pricing environment for MRO providers, through long-term contracts and ad hoc work. “If your customer is going to make more, then the service provider will see that as the time to get a price increase—which will be a lot easier to push through.”

A more conservative view is held by Brian Foley, president of Brian Foley Associates, an aviation market research firm in Sparta, New Jersey. “Although I am bullish on my outlook for the MROs, the low fuel prices are not going to mean double- digit growth for the industry this year,” he states. “What I do see is a gradual ramp-up over time.”

In that regard, Foley discerns a trend among MROs to extend contracts on older aircraft, and make those contracts more favorable in order to retain clients as well as attract increased business. “The MROs are in the thinking and hopeful stage, that low fuel prices will continue. That will bring in the older, more maintenance-intensive aircraft, especially as orders for new aircraft are deferred,” he explains.

Robert Gaag, sales director-USA and Canada for Lufthansa Technik, predicts “limited opportunities” for MROs in the field of engine and airframe maintenance, and possibly cabin modifications on aircraft that are likely to continue flying because of the changing fuel economics. However, he points out, new equipment on order with the OEMs will continue to replace older models.

“These new aircraft will be delivered to the airlines whatever the fuel price will be, so any deferred retirement of older aircraft might be used by some airlines to cover certain routes for a season or two, but not necessarily long term,” he remarks. “The effect on additional MRO needs will be limited, but it will influence the availability of cheap spare parts from dismantling of those aircraft.”

James Halstead, managing partner at Aviation Strategy, a London-based consulting firm, reports that some resurgence in demand for legacy four-engine aircraft may be in the offing. “When oil was in excess of $100 per barrel, anything with four engines was painful to operate, and consequently, retirements and disposals of the Boeing 747-400 and Airbus A340 accelerated,” he notes. “Now, with oil going at around $50 per barrel, the four-engine transport is a little more attractive.”

Halstead cites the A340 as a prime example, which he says the leasing firms appear to be pushing back into the market, based on current fuel pricing, lower lease rates and the capital investment required to put them into service. “Compared to the 747-400, the lower capacity of the A340 gives it more flexibility in markets and on routes where it could be deployed,” he says.

Nonetheless, Halstead stresses that there is still the issue of the operational life of an aircraft, which could be determined by how much longer fuel will be bargain-priced. “There may be a difference in thinking about the life of the aircraft, but then the question becomes, ‘are we looking at a sustained low-fuel-cost environment, or a temporary one?’ That will have a lot to do with life-extension decisions of older aircraft.”

Airlines that are not currently evaluating their fleet planning under the current economics—soon will be, according to Brian Foley. “With respect to continued operation of older aircraft, many airlines are taking a wait-and-see attitude to determine whether the lower fuel prices will remain in effect for a while. The fact is, some airlines have not looked at this yet in terms of their own strategic fleet planning.”

The “wait and see” view may be advisable, according to Richard Brown, London-based principal at ICF International. “While oil prices have fallen recently, they remain at levels much higher than we saw five years ago,” he says. “ICF and others suggest that fuel prices at current levels represent a short-term fluctuation, driven less by market fundamentals than by political motives, as OPEC seeks to maintain market share and U.S. shale drillers increase supply.”

Brown also argues that a much longer run of sustained low fuel prices will have to occur before there will be any impact on aircraft retirements. “Most airlines plan for fuel prices to remain high, and therefore their best options to protect themselves against fuel price volatility is to invest in a modern fuel-efficient fleet.”

For now, it appears that the wait-and-see approach is prevailing. “We have not seen any increased demand for legacy engine MRO services due to lower fuel prices, or additional utilization and retirement delays of older aircraft,” says Scott Brensike, general manager-mature fleet solutions, at GE Aviation. Still, he concedes that market trends could change if low fuel prices are sustained for at least the next 12 months. At the same, fuel-hedging issues come into play.

“Fuel prices have been low just since October 2014, which is still within the average period when current airline fuel-hedging contracts have been in effect,” Brensike says. “Since many airlines have hedging contracts in place, that has deferred their ability to benefit from any savings on fuel. There is a lot of variability with fuel-hedging strategies that will determine when that will happen.”

If low fuel prices should continue for the long term, says Brensike, it is possible airlines will decide “to go into greater depths of overhauls and shop visits.” In that regard, he cites the CFM56-3, the CF34-3, and the CF6 as the most likely GE powerplants to generate demand for MRO services due to continued operation of older aircraft. For the CF6, however, the uptick in the air cargo market may be what will drive maintenance events for the near term. “We have seen what seems to be strong growth in air cargo services over the past 18 months. That segment of the CF6 market, in fact, has shown some positive underlying trends.”

Not everyone is betting on low fuel prices to be of long-enough duration to affect fleet and maintenance planning.

“The lower fuel prices have had little impact on our plans, as we don’t expect oil prices to remain at these [current] levels for a significant amount of time; or at least long enough to substantiate longer-term decisions and investments such as fleet acquisition and modification strategies, which can span years,” says Trevor Stedke, vice president-technical services at Southwest Airlines.

For example, Southwest has been active over the past 24 months—well before the downturn in fuel prices—in the used 737-700 market, through both purchase and leasing arrangements. According to Jon Stephens, the carrier’s director of fleet transactions, the main reason has been augmentation of the airline’s orders for new aircraft from Boeing. Specifically, Southwest added 22 737-700s in 2014, with commitments for another 16 this year, and four in 2016.

While low fuel prices can’t hurt, there are those who caution not to expect them to generate a MRO market bonanza. Statistics compiled by ICF International predict a $64.7 billion global MRO market for this year, up slightly from the $62.1 billion in 2014. “Sustained fuel prices would have to be present for longer than a year before airlines start making changes to their fleet plans,” says ICF’s Richard Brown. “Most energy experts expect fuel prices to increase rather than stay low.”

Troy Jonas, vice president, global sales and marketing- aircraft engineering services, for AAR Corp in Indianapolis, thinks that even if fuel prices remain low, “we do not believe they will substantially move the dial for MRO services, beyond where it already is,” he says. “However, we continue to anticipate an expanding MRO market.”

On the other hand, Jonas reports that AAR is witnessing at least some operators recommissioning older aircraft. “At least a handful of 757s have come out of storage within the past 12 months, now that they have become more economical to operate.” He adds that older wide-bodied aircraft, particularly the A340, 736 and A330, as well as some 777-200s are also generating activity at AAR.

Lower fuel costs also may be breathing new life into the 50-seat CRJ 200, which many industry observers believed would go away under sustained high fuel-pricing.

“From a strategy standpoint, we see a continued need for those aircraft,” says Todd Sywake, vice president-business development and customer programs for StandardAero in Winnipeg, Canada.  “Lower fuel costs are making them more economically viable, and some are coming back into service with the regional airlines, providing at least a short-term capacity solution.” StandardAero maintains the GE CF34 powerplants, as well as the Honeywell 36-150 APUs on the aircraft.

Sywake adds that StandardAero is in discussions with operators in North America and Europe to provide MRO services, as some of the legacy regional jets come out of storage. “We can see at least an incremental increase in our MRO business, as those airplanes fly for another one to two, even three to four years,” he says. 

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