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Chromalloy, FTAI, and CFM-56 PMA Parts

In 2021, FTAI Aviation, the $17bn market cap aircraft engine lessor and maintenance provider, partnered with Chromalloy, the leading engine DER Repair and PMA player globally, to design and approve CFM-56 hot section PMAs. Last month, Chromalloy received FAA-approval for a HPT Stage 1 vane PMA. 

HPT vanes and blades sit in the hot section of a CFM-56 and are the most expensive parts in a full engine restoration. Such air foils make up ~58% of the shop visit cost:

Stage 1 vanes and blades typically see the most wear-and-tear because it's the first area to encounter hot gas from the combuster:

In the hot section, the nozzle guide vanes require regular repair because they are the first to encounter the hot gas from the combustor. Due to corrosion and foreign object damage (FOD), those first stage vanes receive a lot of wear and tear. The stage one blade on the HPT, which is the first blade the air sees after the vane, also experiences significant wear. The tip of the blade sees the most wear because it grinds into the shroud as it expands and contracts during engine start and stop cycles. - Former Chromalloy Executive

Chromalloy’s recently approved HPT Vane is selling for 25% of the cost of GEs new part:

So you're talking about the approved one. That line sells for about, I think it's around $20,000, and Chromalloy sells it for around $5,000.- Former Chromalloy Executive

But airlines may not be immediately adopting Chromalloy / FTAIs vane or blade PMAs. After 20,000 cycles, at the first shop visit, airlines typically repair rather than replace OEM parts with PMAs. After 30,000 cycles, at the second shop visit, hot section parts can’t typically be repaired thus PMA becomes a cheaper alternative relative to a $20k new HPT blade from GE, for example. 

After 20,000 cycles, usually, you'd see about 80% basic repair. After the second time through, then you reach 30,000 cycles, then you're starting to see 40% require PMA. - Former Chromalloy Executive

Only larger airlines who are not scared by GE seem to be willing to adopt hot section PMAs:

When discussing an airline, how large is it? Some airlines, like American Airlines, are large enough not to worry about OEM warranties. They manage the engine parts themselves. Smaller airlines, however, depend on OEM support. For instance, if GE, as an OEM, says they won't support engines with non-OEM parts, smaller airlines might avoid PMAs. It took years for countries like Japan or China to accept PMAs because it's easier to stick with OEM parts. Many airlines were pushed towards PMAs due to Covid-19. - Former Chromalloy Executive

Also, only ~50% of CFM-56s have yet to complete one shop visit. Most airlines may need to run 15-20,000 cycles before considering PMAs over repairing airfoils.

FTAI continues to sit in a fascinating position sourcing USM from AAR and PMAs from Chromalloy at market-leading prices. Over time, the company expects to earn $1m EBITDA per module, of which 50% is driven by its Chromalloy PMAs. Although it may take longer than expected for FTAIs PMA revenue to move the needle, the long tail of CFM-56 aftermarket shop visits may provide annuity-like revenue for 5-10 years. 

Rolex and Luxury Grey Market Watches

This interview is part of our Q4 project to understand how luxury inventory flows from Italy to grey markets across China and Southeast Asia. Grey or parallel markets are unauthorised distribution channels that do not directly deal with the brand. Such channels are a necessary evil: luxury brands use the grey market to sell overstock but run the risk of destroying brand equity. 

A former LVMH executive estimates ~15-20% of the luxury watch market is sold via grey channels. Over 66% of Patek Philippe volume seems to be sold via such channels whereas Rolex is more controlled. 

I think two-thirds of the production of Patek was going into the gray market. The watches were easy to resell at above retail value. AP and Rolex were also involved, but Rolex was very difficult because it's heavily controlled. Rolex understood this very early on, so it's very difficult to get your hands on. But Patek, AP, and Richard Mille were primary targets for these kinds of activities. A recurring deal, for example, involved a dealer in Hamburg getting a big allocation, bigger than the local market needs, and wanting to get rid of the watches discreetly. - Former Luxury Watches Distributor, LVMH, & Cartier Executive

The size of the grey market is also a function of production and inventory forecasting. European watch dealers receive stock allocations far ahead of season. As always, forecasts are incorrect and dealers are left with too much stock. This overstock is then resold into APAC via the grey market:

It seems wrong, but in many cases, watch brands work with allocations. You can't buy what you need or want because the allocation is set usually years in advance. There are cases where, for example, a dealer in the Philippines was doing better than expected, so his allocation was short, and he needed more watches. It was ideal because you would sell your Omegas into Omega's own distribution network. Omega would know about it, but they couldn't trace it because it was sold through their own boutiques, making it undetectable. - Former Luxury Watches Distributor, LVMH, & Cartier Executive

There is also a sense of “Winter is here” in the Chinese luxury market:

The appetite for watches has dwindled, partly because brands had to cut their marketing expenses. Everyone was heavily investing in marketing in China, with numerous events and gatherings that helped connect with people and excite them about new models. Now, that's all gone. Brands like Audemars Piguet still do a little marketing, and Rolex focuses on advertising, but even their budgets have been cut significantly. It's a challenging time, as many have said, "Winter is here." - Former Luxury Watches Distributor, LVMH, & Cartier Executive

We plan to share our learnings on the luxury grey market distribution channel later this month.