LEAP vs CFM56 Aftermarket

So there’s higher aftermarket revenue potential for CFM to earn on the LEAP, than the CFM56?

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.

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.

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.

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?

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.

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.

But effectively, the OEMs are taking back ownership of the intellectual property, in a way?