Aircraft Aftermarket & Overhaul Disruption

Given the dynamics today, such as the huge oversupply of aircraft, accelerated retirements of aircraft, what is the impact that you see on shop visits, on part supply and part pricing?

The price of new parts is not going to change. The catalogue is going to stay as it is. The aftermarket parts, particularly for the older engines, there is going to be a flood of spares on the market. Second-hand prices are going to fall, without a doubt. The overhaul of engines will depend on the operator of the aircraft and how they anticipate the aircraft are going to be used or how they are going to be able to use the aircraft, in the future and the state of the aircraft they have today.

An operator who has aircraft that have got a year’s life left on an engine, but the airplane hasn’t flown for the last three months, the engine overhaul that they had scheduled for nine months’ time, they’re going to keep pushing it back. However, an operator who has an aircraft that’s probably got a month or two, or three months left, on an engine and the aircraft is due to be handed back to the lease company, they may well opt to put it in engine overhaul anyway, just to get the aircraft back into return to lessor condition. It all depends on how the airline and the operator see the future for their operations.

What’s your view on the shift in the financial model for engine OEMs? As you said, from the parts and material, to the rate per flight hour that we’re seeing on Rolls and the LEAP?

From an operator’s point of view, right now, those who have cost per flight hour financing for their engines are probably very happy, because they’re not paying the finance costs for the engines, because they are not flying. Previously, they might have been a little upset because they might have thought that the cost per flight hour was a little higher than they could have had, had they bought the engine themselves and sorted out their own maintenance, but the situation has changed. Right now, I think any airline would rather have a cost per flight hour, for an engine that’s not flying, than paying for the capital for it.

If I just look at the CFM56 that relies on shop visits, to drive aftermarket revenue, they’re in a tricky position, right now.

Yes. It’s difficult for the OEMs who want to sell spares and get their revenue from the commission for the engine overhaul. It’s difficult for the engine shops, who are not receiving engines to be overhauled and, therefore, are not receiving the check on the return of the engine. It’s difficult for the operator, of course, because they’re not getting people buying tickets.

We’re seeing a continued shift in OEMs taking back the intellectual property of the engines, almost owning more of the MRO network, if I can say that, in terms of licensing and franchising the MRO. How is this going to change the dynamic? As we shift more to LEAP-1B, 1As, for example, how is that going to change the whole structure of the industry?