Aircraft OEM: Controlling the Aftermarket

I just want to return to the point you made about this oversupply of aircraft that we’re going to see. Airlines will cancel their orders, we’re going to see, typically, the older aircraft that you mentioned, be retired, so we’re going to see more younger aircraft in the industry. What impact is this oversupply of aircraft going to have on the pricing of planes and their residual value?

I think, what I could tell you is, the pricing is going to be win-win position. If anyone wants to replace their aircraft, because of early retirement – you are not flying, so you don’t need these aircraft, but you have to keep operating – so what could possibly be done is, maybe, some reasonable discounts on new aircraft sales, by getting the used aircraft, in trade. That way, first of all, you get rid of your backlog; there are too many parked aircraft. You are asking to get their five used Boeing 737 NG aircraft, you take them in and you give them, maybe, four or six MAX aircraft. That way, you don’t let the third-party business, come for your parts of your spare parts program. This is the only way. You can sell the engine or the aircraft once. But if you cannot control the servicing of that, then you won’t be in the game. There will be a lot of opportunistic people now, too many banks, investors, leasing firms, maybe, who would like to purchase these early-retired aircraft, because there is a good time on that, less flown hours, good landing gear, AP is good, engines are good. They good pay to get them and maybe scrub them out or pump them out and then sell them to the airlines, for spare parts.

So the OEM has no control over that. The only way for OEMs to take control and to keep their current aircraft in a value position, is to control the other aircraft, so they’re going to get them. Also the engine side, as well. They will get them in, replace them with the newer aircraft, give them a certain discount. It’s the same thing when you want to go and trade in your car. You always get more money than trying to sell outside, because there are trade-in options. This is the same thing. Otherwise, the control of the spare parts will not be on the OEM side.

You’re saying the OEMs will go to the airlines or go to the market and say, right, let me retire these old aircraft you have; I’ll give you the new aircraft we’ve manufactured and then I have the old aircraft and I keep the spare parts and the servicing revenue, when I then sell that on to someone else?

Exactly. Especially for engine OEMs, there are too many MROs, other than operated by OEMs. In Turkey, there is the Turkish Engine Center. 51% belongs to Pratt & Whitney; 49% belongs to Turkish Airlines. So Turkish Airlines, a couple of years ago, ordered 200 GTF engines, which were already attached to a market service contract and also, certain discounts on V2500 engines, part material. They discovered part material agreements. That means, if Turkish Airlines is going to replace any part on their V2500 engines, which are powered the A320 classic engine options, CEO aircraft, any part, Turkish Airlines will not go outside and look for used parts. They will get 15% to 20% or some other percentage, discounted, brand new parts, from the OEM. Think about the value of that. They are selling the contract, they are selling the engines, but also they are selling the service with them. In order to sell the service, you have to control the material itself.