{audio:0:00:00} Paul, a pleasure to have you with us today. Can you start by providing some context to the disruption that you are seeing today, in that engine supply chain?

{audio:0:00:13} There are two sources of disruption that we’re seeing at the moment. One started over a year ago, when the 737 MAX was grounded and CFMI, Safran and GE stopped the supply of parts into building engines. That’s created quite a lot of disruption, as you can imagine, for the whole supply chain, with something like 100 engines a month being produced, for that aircraft. Since then, of course, Covid-19 has raised its ugly head and people can no longer fly. Planes are no longer in the air, so airplane engines are not turning. All of a sudden, engines are not wearing out and counting their hours. If engines are not being used, they don’t need overhaul. People can’t take new aircraft, so we’re seeing a second wave of demand reduction, coming from new aircraft not being delivered and from the after- market world, suddenly not wanting the spares or the overhauls that they had anticipated.

{audio:0:01:26} What second-order impact is that having on both of those two spaces of disruption?

{audio:0:01:35} On the 737, there is no production. We’ve gone from 100 engines a month, to nothing, so that’s a very big first-order impact. That affects, of course, the engine manufacturers and partners, Safran and GE and their supply chain directly and the supply chain to the supply chain and so forth. Then, for the other engines, those airplanes are still in production, though production has been heavily reduced. We’re still seeing demand for LEAP-1A engines on the 320 family, Trent XWB on the 350. The Dreamliner has stopped, temporarily, so the volume of Trent 1000 and GEnx engines has been reduced; the manufacturers haven’t stopped those lines yet, because there is a restart, not too far away.

{audio:0:02:36} But clearly, the demand for those engines has been reduced significantly. So the whole supply chain is suddenly having to slow down and we’ve got a large amount of work in place that we’ve got to negotiate with our customers and their customers, ultimately, the airframers. What do we do with the stuff that’s in work, for many more engines than they need today?

{audio:0:02:57} How does that negotiation, typically, go?

{audio:0:03:01} Unfortunately, there isn’t a uniform approach. There are so many people involved that the OEMs are not able to organize it all, with everybody, in parallel. Some people are negotiating, proactively, with their customers, to negotiate how to take the work that they’ve already got and how to absorb the work that’s coming in. Others who are not being so proactive are finding out the hard way, that what they’ve just built won’t be accepted. Today, we work in a digital supply chain so the demand for our components comes, digitally, from our customer. It’s known as the supply signal. We’re seeing that changing, overnight. It changes as suppliers go back to the OEMs and disagree with the change and propose an alternative change and, little by little, it’s negotiated.

{audio:0:04:12} Again, it does depend very much on the relationship between the supplier and the customer.

{audio:0:04:18} How are you looking at the level of oversupply that you are, potentially, seeing in the market, with the drop in demand and the aircraft production and engine production having to adapt to that? Also, how is that level of oversupply impacting on the pricing of parts and components?

{audio:0:04:39} At this point in time, the pricing of new components is fixed by contract. That’s not changing. However, once you get out into the open world, clearly, there’s going to be an oversupply of parts and in such a situation, where there is reduction in demand, an oversupply of parts, by the good old-fashioned law of supply and demand, the price will fall, for those who are prepared to sell.

{audio:0:05:06} What typically happens, in terms of pricing dynamics? What is the level of pricing change that you have seen, in the past, or even today?

{audio:0:05:17} There is little pricing change, officially, because what tends to happen is, people negotiate a push out of the work or a deferral of order. There might be some local negotiations if, for example, an operator has an engine that they had scheduled for overhaul and it’s coming up to the time when it should be delivered to the engine shop, one can imagine a negotiation so that it does actually get delivered, even though the operator doesn’t really need the overhaul now, because his plane isn’t flying. There will be a negotiation there, just so that the overhaul shop can keep his staff employed.

{audio:0:06:09} I guess it starts at the operator level, where the airline is deferring orders, they are not flying, so there’s no requirement for these parts or engines or aircraft. What are the second-order impacts on the supply chain? As you said, furloughing employees, restructuring suppliers. Would this have structural impacts on when demand does pick up and the supply chain maybe be very slow to react, to actually recover?

{audio:0:06:41} There are clearly going to be some impacts and we’re starting to see impacts now. Over the last five or six years, the pressure on the supply chain – particularly for the narrow-body engines, the CFM56, the LEAP, in particular and, to some extent, the geared turbofan – has all been about reducing cost. Suppliers have invested in new equipment, ramped up capacity, in order to produce the components in the most efficient way possible, and at the capacity that is required. It’s still early days in these programs. A lot of this investment hasn’t been paid off yet. We’re in the rather difficult situation where there are people out there who are going to find themselves financially challenged, as organizations.

{audio:0:07:39} A large proportion of the industry is going to have to reach for refinancing, to some extent or other. Some of those who are more exposed than others, may not make it out of this crisis. Right now, it’s not going to have an impact. When production starts up, initially, it won’t have an impact, because on the LEAP and on Pratt & Whitney’s programs, the supply chain is now multi-source. Whereas, 10 or 15 years ago, most of the supply chain was single source. If you lose one, you’ve probably got somebody else who can keep supplying the parts.

{audio:0:08:27} There are two problems in that. One is that there will a lot of pressure to come back up to the high levels of production, as soon as possible, because both Airbus and Boeing have very long order books. If you’re missing half of your supply capacity, you won’t be able to get back up to those volumes. Secondly, the supply chain is a very long supply chain. If you’re not careful, you might have smaller suppliers, partway down the chain, at different places and if too many of them go under, the supply chain becomes too delicate and isn’t able to ramp back up. We will see problems where there’s too much of a delay. Somebody has no stock left, somebody has no staff left, someone has got no consumables left and getting everything back in, to support the rate, is going to be a real challenge.

{audio:0:09:25} When things start flying again, when aircraft deliveries start happening again, it’s not going to be a huge problem straightaway, but I think, in 12 months’ time, we’re going to be in a tricky situation.

{audio:0:09:39} You mentioned the pressures in the narrow-body supply chain, over the last five or six years. Who has been driving that and what has really been the impact on the fragility of the chain?

{audio:0:09:52} Clearly, the end customer, the operators have been driving it. The competition between Boeing and Airbus has been very ferocious. The engines on the 320neo and on the 737 MAX are the most advanced engines that have been produced today. There is a lot of technology that wasn’t in the previous engines. That technology is significantly more expensive and has put a huge pressure on the supply chain, to reduce the cost of those parts. It’s that pressure from the end user and from Airbus and Boeing, in order to sell aircraft, that has forced the supply chain to reduce margins and invest in new equipment. That’s made certain elements of the supply chain less robust than they were previously.

{audio:0:10:52} What are the two or three major questions you are asking yourself today, with the Covid-19 situation?

{audio:0:11:05} There’s a lot of work being done to try and understand how this is going to play out. In my mind, what I’m asking myself is, first of all, what’s the impact going to be on the industry? How many businesses are going to be left? Let’s go back a step. How long is it going to take, before we’re able to start delivering a serial production rate, even a low one? That’s the first part. How long is it going to be before airlines are going to take airplanes, Boeing and Airbus are going to be manufacturing aircraft and the engine manufacturers are going to be delivering engines?

{audio:0:11:53} Secondly, that delay has an impact on how much of the supply chain is going to remain effective. The longer the delay in getting production back up, the greater the pain and the damage to the supply chain. There’s lots of different ways that the supply chain is working to protect itself, but there will be a fallout. The longer we go on, the greater the fallout.

{audio:0:12:23} The other thing is, the aerospace industry is an attractive industry; it always has been an attractive industry. High tech, good future, it’s been a great industry to work in. It has attracted young talent and people have gone through education, in order to make the parts, with the technology, with the new machines, the new materials that go into our aircraft. The longer the industry is in suspense, in recession, the greater the impact on the interest of young people to join the industry. I’m concerned that, if we’re not careful, we’re going to find ourselves, once we start recovering, and we need young people to join back in, to replace those people that have left for retirement or who’ve had to leave the industry, because there is not enough work to pay everybody and they’ve gone off and converted to other activities and transferred to other industries, trying to refill those places, that we are going to find ourselves with a human resources problem, without the people to make the parts.

{audio:0:13:34} Can we shift gears a bit and really dive into the CFM56 and, specifically, a shop visit and how a shop visit works? Can we walk through the process, from start to finish? When the engine is due a shop visit, what is the process from there?

{audio:0:13:56} It starts before the engine arrives and that is an agreement between the engine owner and the engine overhaul shop, as to what is the scope of work to be done on the engine. Different airlines have different approaches. Some people take the standard OEMs work scope and just ask them the engine shop to apply the recipe, if you like, with any additional modifications that they want incorporated, at the time. Others have very specific work scopes; an evolution of what the OEMs have prepared.

{audio:0:14:38} So first of all, there is a negotiation and an agreement for the work scope on the engine. That’s typically for a package of engines, because there will not be one. There will be a series of engines to go through the shop. Then as the engine is scheduled to be removed from the aircraft, there will be an initial communication between the engine owner and the shop, as to exactly the latest status of the engine, as it comes off the aircraft. The engine will be pulled from the wing, replaced with another one, put on a transport trolley and transported to the engine overhaul shop.

{audio:0:15:18} It arrives at the engine overhaul shop. It’s in a very stout bag, or sometimes a box, on a transport stand. It gets wheeled in, they open it up and there’s an initial check, just to make sure it’s the right engine. Engine serial number, engine model and make. Make sure it really does belong to who people say it does. Then the engine overhaul shop will have prepared a set of work instructions for their team, which starts with removal of all the externals. There’s components and there’s parts. Components that function and parts that don’t. A pipe doesn’t function, so they will remove it. An air starter valve functions, it moves, so they will take that off and that will be put in a different category.

{audio:0:16:18} Everything will be removed and it’s looked at as they take it off. If anything looks visibly broken, it’s immediately identified. Each group of parts gets sent to the appropriate part of the shop that is responsible for those groups of parts. Then you’re down to the bare engine, without the components on the outside and the engine is broken into its component modules. There will be a fan module, a compressor module, a combustor module and a couple of turbine modules. Depending on the engine, there may be a few other modules. Each of those modules is then dismantled. Sometimes, there are mini visits, when not all the modules are dismantled. The turbines and the combustor wear faster than the compressors. If it’s the right time to do an overhaul, because the aircraft is not flying very much, but the engine has still got some life left in it, an operator might choose to have a mini visit. That’s part of the negotiation, up front.

{audio:0:17:29} The modules get taken apart and inspected, as they go along. All the components that are dissembled, go off to their respected parts of the shop. Everything is inspected and cleaned where necessary. Parts that are within tolerance and are acceptable, are usually put back in for rebuild. Those that have some kind of wear, there is a determination concerning, when it’s put back in the engine, will that component wear out before the next visit? In other words, do we need to change it now, to avoid an early visit, or not? Once everything has been inspected, typically, there is a review, with the customer. This is what we’ve found; this is what we expect to find. This is the difference. These things are more worn than we expected. These things are less worn than we expected. The review discusses what to do about it.

{audio:0:18:42} Who decides, firstly, between the MRO network and the CFM56’s network? Does the airline operator decide whether it goes to a Safran or a GE network or a third-party network?

{audio:0:19:05} If the operator is the owner, they decide. If the operator is operating a leased aircraft, then it depends on their relationship with the leasing company. They will agree, between them, who is going to do the overhaul.

{audio:0:19:25} Does a lessor, typically, prefer certain OEM networks?

{audio:0:19:30} It depends; it’s also a cultural and regional thing. In the Far East, typically, the airlines want engines overhauled by the OEM’s approved overhaul shop or, when they have them, their own shops. They don’t like to go out of those areas, if they can help it. North America, where there is more flexibility in the market and where people are more used to open competition, where an overhaul shop has a good reputation, it may not be an OEM shop, it may not be the operator’s own shop, there is less concern about going to a third-party.

{audio:0:20:24} You mentioned those parts or components that are worn. How are the contracts structured, in terms of which parts get purchased, whether they’re PMA parts, whether they’re OEM parts?

{audio:0:20:41} Typically, that’s agreed up front, before you get to that question. Some shops use PMA parts, but you always agree with the customer, the source of the parts that you use. In North America, the environment is a little different. PMA parts are parts that are reverse engineered and manufactured by an unapproved source. However, in order for them to be used, the FAA’s organization has to approve that that reverse-engineered part is still okay. There are checks and balances. Their checks are quite rigorous, to say the least. People have to have confidence that a part that is produced by somebody else and has been reversed engineered, is still fit for purpose.

{audio:0:22:42} Here in Europe, it’s a little different, because in the US, you have the FAA that manages it for the whole of the nation; it’s a very large market. The work involved to get a PMA approval, for a part, in North America, is more or less the same work as it is in Europe, but you only need to do it once for the US and have access to all the market. In Europe, it’s still more difficult than that. You have to work with a local authority, to get their approval. The EASA still doesn’t like European-wide approval of PMA. A lot of people are concerned. They would much rather have OEM equipment on their airplane, just to be on the safe side. It’s one less risk.

{audio:0:27:34} The only airlines that really are prepared to accept PMA parts are those where they’ve got a solid engineering organization that is able to review the parts. Some of the main airlines in Europe have big engineering organizations and they tend to accept PMA parts. Some of them even have their own. But outside those big organizations, it’s more difficult. Some of these airlines do overhaul work and maintenance work for other airlines and those other airlines will refuse to use PMA parts.

{audio:0:28:16} How do you think the OEMs and the view of the airlines, around PMA, is changing or evolving?

{audio:0:28:29} A few years ago, there were some notorious accidents, through the use of unauthorized parts, back in the late 70s and early 80s, in Europe. As a result of that, there was a very strong push back on non-OEM parts. It’s taken a long time for the industry to convince the authorities that it depends on the part. It is possible to have a perfectly good, reverse-engineered part. In order to justify that a part is reverse engineered, you need to be able to convince the authorities that you’ve fully understood how that part was designed. In Europe, in particular, the authorities rely on the OEMs to provide the technical justification for the products. The OEMs will not share that data with anybody.

{audio:0:29:38} So if there is a third-party organization who wants to reverse engineer a washer on the engine, you have to use your engineering experience to assess what the criteria are, for that washer, because Rolls Royce and Safran aren’t going to tell you. When you go to the authorities and say, “Right, I’ve redesigned this washer and I want to be able to supply it to the engines, because there’s hundreds of them, per engine and the OEMs are charging a fortune for this washer and I’ve had airlines wanting me to make a cheaper one. I can make a cheaper one.” The authorities are going to ask questions like, are you sure you know what the maximum temperature is that that washer is going to experience? How do you know what that temperature is? In some cases, the supplier has a good engineering judgment and a good justification why. But other times, without the original design data, it’s very difficult to do that.

{audio:0:30:42} In North America, the way the authority works, they work in a slightly different way. There is more delegation given to the engineers and the FAA, than there is in Europe. The FAA offers an alternative way to get parts approved. Because there is a bigger market there and there is a bigger attraction, the third-party suppliers can spend more time doing engineering, to justify the parts. In Europe, the market is smaller and there are more legal justification hurdles to jump through. It’s a more complicated process, to get a PMA approved in Europe and there’s more resistance to using them.

{audio:0:31:31} But the airlines like them because they’re much cheaper than the OEM parts?

{audio:0:31:40} Some airlines just don’t even want to think about the risk. Others, particularly those who have engineering in-house and are able to make the judgment call, to the satisfaction of management, they tend to demand them more. What sometimes happens, though, is for an overhaul shop to turn round to the OEM and say, I’m sorry, but you’re charging a small fortune for this widget here. We think you are overcharging us. OEMs have been challenged on the spare parts prices.

{audio:0:32:22} How does the pricing work in the overhaul MRO network?

{audio:0:32:29} Typically, there are two sets of prices. Firstly, from the OEM, the price is the price. Then there is also the aftermarket. These are parts that have been inspected and are still good for use. They could be brand new, but because they’ve been sitting on a shelf for a while, they won’t be sold at a brand-new price. Then there is a market in spare parts. There are brokers who sell parts, all around the world, who buy old engines – not necessarily such old ones – and strip them for parts.

{audio:0:33:12} Let’s say I’ve got a CFM56 engine on my aircraft. I own the aircraft and I’ve got a contract with the MRO provider that we agree on the overhaul. Do I then have to state whether I would approve of taking PMA parts or OEM parts? As an airline, do I know how much I’m going to pay for each?

{audio:0:33:43} For the work package for an engine, the shop will, typically, say right, there is a standard work package. For that standard work package, this is the price. That price includes the necessary spares, as required. Anything that is out of the work scope, is then presented to the customer. We found this was damaged or worn beyond expectations; this is outside the agreed work package. We need to replace this. We can source you a used one, which has still got enough life on it, at this price. Or I can order one from Safran or Rolls Royce, at this price. What do you want to do?

{audio:0:34:32} As an airline, I would get a big invoice of one package, which is the overhaul, for the engine. Would it have line by line itemization of all those parts?

{audio:0:34:49} Then they would give me an option as to whether it was an Airbus part or the PMA part and I would choose between the two?

{audio:0:34:59} Yes. There is the work package, which is the standard work, this is what we’re going to do and this is what we’re not going to do. Here are things that sometimes happen. So if this happens, this is what it’s going to cost. Anything else will be discussed on a case by case basis.

{audio:0:35:22} What’s your view on the level of pricing of those parts, between the OEM and the PMA? You mentioned that, obviously, there has been reports and discussions, not only around the PMA parts providers ramping up the price of the parts, but also the OEMs overcharging for certain parts.

{audio:0:35:44} The OEMs have a catalogue of spare parts that is published every year. Airlines and engine overhaul shops go through these catalogues, whenever they are published, to see if there are any significant changes. The prices have been established for many years. The opportunity to increase the price of a part is rare. When there is an engine out of production, the OEM can, justifiably, say we’ve got no more of this part on the shelf. We’re going to have to make a bunch of spares, but we’re only going to make 20. A low volume production run is always more expensive and, therefore, the price is now up here.

{audio:0:36:34} The other option is when the engine changes and there is new technology put in the engine, then the OEM can justifiably turn round and say, well, this was a relatively simple part before. Now it’s a much more complicated part. It has, by virtue, a lot more value in it and it’s more expensive to make. Therefore, the spares price is going to be higher. Apart from standard C-class parts, such as nuts, bolts and washers, clamps and the like, pretty much everything else on the engine, is bespoke. An actuator for a CFM LEAP engine is going to be unique to that engine. You won’t find it on a Pratt & Whitney geared turbofan or a Rolls Royce Trent. So you haven’t really got much choice but to pay the price the OEM asks for.

{audio:0:37:28} However, when you look at the LEAP, even as a bystander, if you see an A320neo, with a LEAP-1A on it, parked next to an A320 classic, with a CFM56-5B on it, you open up the engine cowlings and you look at it, you can see that one is more complicated than the other. There’s more wiring and more plumbing on the LEAP than there is on the CFM56. The average person would say, yes, the LEAP must be more expensive because there is more stuff on it.

{audio:0:37:57} So there’s higher aftermarket revenue potential for CFM to earn on the LEAP, than the CFM56?

{audio:0:38:15} That’s a difficult one to answer because it depends. At the time when the LEAP was introduced, the CFM organization promised the operators an engine that was as reliable as its predecessor and the CFM56 has been a very reliable engine, both on the Airbus A320 and on the 737. From the entry into service, it’s going to take four or five years before people really see how much an overhaul costs and people are exposed to which bits wear out and what have you. When the engine was being designed, the design demands on the sub-components were very high, for very high reliability and very long life.

{audio:0:39:21} Where the CFM team will get their revenue from is going through the overhaul. The process of taking it apart, putting it back together again, testing it; not necessarily on the spares. There’s a been shift in the marketplace, in the last 20 years where, instead of buying an engine and then flying it, paying for the fuel and then paying for the overhaul – Rolls Royce was key in bringing this in – airlines now don’t own the engine, but the pay for the use of the engine, on a cost per flight hour basis. In those scenarios, the airline doesn’t pay directly for the maintenance. They just pay for an engine that flies. When the engine reaches its time for an overhaul, the supplier, the engine owner, takes the engine off, gives them another engine, the operator swaps the engine over and they just keep paying per flight hour. They don’t, directly, pay for the maintenance. The cost of the maintenance is built into the cost per hour, of the engine.

{audio:0:40:40} There’s been more and more of that type of arrangement, between the engine manufacturer and the operators. I know, for some engines, a very large majority of the engines were on cost per flight hour basis. For the single-aisle today, on the LEAP, I don’t know what proportion of those engines now are like that. That’s something that would be interesting for me to investigate.

{audio:0:41:13} As you said, Rolls are moving towards that rate per flight hour. The LEAP is also doing that. How does that impact their MRO network? Do you see these OEMs taking back some of the ownership, not only owning the engines, but owning the MRO network?

{audio:0:41:31} Yes and no. The OEMs have their own engine shops, but they certainly don’t have the capacity to overhaul all the engines in the world. They’re doing the obvious thing – they’re licensing other people to do the engine overhauls for them. The alternative shops have to apply for that capability. They are audited, they get the official CFM stamp and they pay a royalty to the CFMI organization, for doing that. That’s throughout the whole MRO activity, from engine overhaul to component repair. The OEMs keep control of the repair procedures and, for someone to use those repair procedures, they have to pay a license. That’s how they get their cut.

{audio:0:42:31} It works pretty well. There are plenty of examples of MRO suppliers, either shops or component repair suppliers, who make a good living out of providing a repair service, using the officially approved manuals and procedures. Safran and GE do well out of it, too, and everyone seems to be happy.

{audio:0:43:03} But effectively, the OEMs are taking back ownership of the intellectual property, in a way?

{audio:0:43:08} Yes; absolutely. It’s key. They own the intellectual property and, therefore, they control who can do MRO activity and at what price.

{audio:0:43:20} Potentially, that’s going to reduce the addressable market for PMA then, as well, I assume?

{audio:0:43:27} Yes, indeed it could, because under the engine overhaul contract, signed with the OEMs, the OEMs can put in place clauses that forbid the provider to use PMA parts.

{audio:0:43:42} Do you think CFM would do that for the LEAP, for example?

{audio:0:43:49} If I were in their shoes, I would. There is a certain category of parts which are standard parts, C-class parts, nuts, bolts, washers and other components, which one buys to a standard, from any one of the brokers. Those parts are not controlled by the OEMs.

{audio:0:44:15} So there will always be a portion of that engine – the C-class parts – that can be provided by PMA?

{audio:0:44:26} One interesting discussion there is around those PMA suppliers, such as Heico, is just the pricing architecture for the parts. Clearly, any PMA part is going to be cheaper than the OEM; that’s the offering and the position of the product. How transparent is the pricing, for operators or the MRO network, of those PMA parts? Does the airline have a great idea, understand and accept the actual pricing of the PMA parts?

{audio:0:45:15} The market price of a PMA part falls between two prices. It has to be cheaper than the OEM part but there comes a point when the airline is not prepared to take a PMA part and they would prefer to take a good second-hand part, a good used part. As you get towards the good used part, it is at that point you start thinking as to whether it is worth a PMA part or not. It is a bit variable but, typically, people are not prepared to pay more than about 50% for a good used part, compared to a new part. PMA parts are going to have to be somewhere around there, or a little cheaper.

{audio:0:46:13} That becomes interesting, because if we see an oversupply of aircraft to the market or retired aircraft, higher surplus of parts, we’re going to see an excess of used parts in the market, that is going to put pressure on PMA demand?

{audio:0:46:28} Exactly. Right now, we see, pretty much, 95% of the world’s fleet currently chocked up and taped up in airports and we know that some of those aircraft will never take off again. There was a famous story, this week, of the Air France A380s, which are being taken out of service. I don’t think there is going to be a PMA supplier who wants to try to make a part for a 380 anymore.

{audio:0:46:57} So the airline will just demand that they would rather use the used part, even if it’s marginally more expensive, than the PMA part?

{audio:0:47:06} Typically, yes. It depends on the relationship with the PMA supplier. If an operator is in a situation where they need a spare part, they’ve got access to a good used part, or they’ve got a PMA part offered to them, from an organization that they don’t know, they’re going to go for the second-hand part.

{audio:0:47:31} The other point is, as you mentioned, given that these engines, such as the neo or the LEAP and the GTF, they are more complex, with higher engineering and higher tech, would that be materially harder to reverse engineer, for the PMA suppliers?

{audio:0:47:51} Depending on the component involved, yes, those engines are operating at higher pressures and higher temperatures. The control systems are more complicated, the design engineering that went into the engines is much more advanced than that that went into the predecessors, which are 20 to 25 years older, in technology. The parts have been designed to much higher engineering tolerances and to more challenging environments. That makes it, automatically, more difficult to reverse engineer an alternative.

{audio:0:48:30} 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?

{audio:0:48:49} 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.

{audio:0:49:26} 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.

{audio:0:50:19} 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?

{audio:0:50:34} 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.

{audio:0:51:10} If I just look at the CFM56 that relies on shop visits, to drive aftermarket revenue, they’re in a tricky position, right now.

{audio:0:51:24} 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.

{audio:0:51:47} 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?

{audio:0:52:16} It depends, to some extent. If you had asked me this question six months ago, with the increasing production rates and the long backlog of orders for the engines, there were capacities issues coming in the supply chain, in the MRO supply chain. Even with control by the OEM on the overhaul shops, the overhaul shops will survive. There are questions about whether or not there would be enough capacity in the overhaul shops. In other words, there’s enough work to go round, for everybody, is what I’m trying to say. Some areas are under-supplied, in certain services, so the material has to be flown around the world, to be maintained where the MRO capability exists. The world is a different place, of course. It’s going to take a while to get back up to where were six months ago. Some businesses will not survive. We will see things changing.

{audio:0:53:35} I’m just looking at some of the numbers here, from CFM: 40% of engines that are out, have had one shop visit and 45%, roughly, have had no shop visits.

{audio:0:53:49} That’s CFM56 data, I presume?

{audio:0:53:51} Yes. When you look at those with one shop visit, if we have an oversupply of aircraft and, potentially, oversupply of engines, would you retire some of these engines? How does the airline operator think about shop visits, whether you’ve got old or newer engines?

{audio:0:54:16} An engine, typically, has a life of about three shop visits. If you assume five years, for an engine overhaul, after the last visit, the engine is somewhere around 15 years old. You’re not going to put it through a fourth visit. The peak of production for the CFM56 was two years ago. If memory serves, I believe CFMI delivered something like 1,700 engines, in 2017, 2018. That was the peak. So there’s an awful lot of engines out there, which haven’t yet even had an overhaul.

{audio:0:55:12} If we assume that we’re going to be oversupplied with aircraft, for some time, we’re going to see engines not getting to their third overhaul, because there’s plenty of engines to choose from.

{audio:0:55:25} You can upgrade to the LEAP, as well, I assume?

{audio:0:55:30} At the moment, it’s not possible to take a 320 classic and put a LEAP engine on it. You would need to change the pylon and all the plumbing in the pylon. Plus, there are some aircraft systems that would need to change. I think the wing outboard area changes too. Today, Airbus is not offering a kit to upgrade the classic 320 to a 320neo. On the 737, the changes are too big to take a 737 classic and make it into a MAX. Basically, you’re stuck with the engine type that you’ve got on your airplane. The only way to change the engine type is to change the aircraft type.

{audio:0:56:13} All those engines with zero or one shop visit, they’re probably going to get another shop visit? It might be pushed out a bit longer, due to the lack of demand, but they’re going to get the shop visit, at some point in time?

{audio:0:56:28} It’s very unlikely that we’re going to see people scrapping engines that have never got to their first shop visit. We talk about the fact that the fleet is not flying. Up until Christmas, world aviation demand was increasing at something like 5% to 6% a year, year on year, constantly. That’s how Airbus and Boeing ended up with order books that go back eight to 10 years. That allows Airbus and Boeing to increase their production rates. Airbus was at, just about, 60 aircraft a month. Boeing was getting there. All we’re going to see is production rates dropping, because once people start being free to move again, the desire to travel is still going to be there. People are going to be more cautious but once people have experienced travelling, they’re not going to want to give it up. There will still be a demand for travel and the demand will come back up.

{audio:0:57:43} The worst forecast I’ve seen yet and I think the most pessimistic, that was considered by Roland Berger, was something like a 2% increase in passenger traffic, once we get back to normal. That’s still a 2% increase, year on year.

{audio:0:58:03} What are the biggest risks you see to the LEAP program?

{audio:0:58:10} The LEAP program is intrinsically more robust than the CFM, because of the dual source, throughout the supply chain. But the fact that there hasn’t been a LEAP-1 being made in over a year, those suppliers that were dependent on the LEAP-1B, I’m concerned we’re going to see some cracks appearing in the LEAP-1B supply chain that are going to be difficult and expensive to patch over.

{audio:0:58:43} Equipment that hasn’t been used for a year is going to have to be recommissioned. Some businesses will have gone bust. Getting the machine working again is going to take some time.

Safran & CFM56 Engine Overhaul

Former Program Manager at Safran Nacelles

inpractise.com/articles/cfm56-shop-visits

Why is this interview interesting?

Executive Bio

Paul Bewell

Former Program Manager at Safran Nacelles

Interview Transcript

Related Content

Aircraft Aftermarket & Overhaul Disruption

Former Program Manager at Safran Nacelles

Aerospace Environmental Pressures

Former Program Manager at Safran Nacelles

Aircraft Engine Oversupply: Overhaul Disruption

Former Program Manager at Safran Nacelles

Pressures on PMA Growth

Former Program Manager at Safran Nacelles

Audio

Safran & CFM56 Engine Overhaul(May 21, 2020)

PARTNER

Speak to Executive