{audio:0:00:01} Gokhan, can you just lay out how you’re looking at the chaos that’s unfolding in the aircraft and airline industry today?

{audio:0:00:11} As you know, there is the coronavirus right now, which is affecting the whole commercial airline industry. What I mean by that is the cargo operators and the passenger operators. I exclude business jet operators, so these are not the subject of the conversation today. As of today, what we know is, there is $250 billion lost already, in the aviation industry. You can see Delta is grounding aircraft and they are now using around 13 different airports, all over the US, to park and to use some of their wide-body aircrafts for cargo operators. Also, you can see EasyJet, for example, one of the low-cost carriers, are grounding all of their aircraft. This means, the impact from coronavirus is not only affecting flag carriers, like Turkish Airlines, British Airways, Delta. But it is also affecting the low-cost carrier business, as well.

{audio:0:01:20} The low-cost carrier models usually have one type of aircraft, which are usually narrow bodies, A320s or 737s. Their business model is to carry passengers for as low a cost as possible and make a quick turnaround time. That means they fly from, let’s say, Istanbul to Ankara, a two-hour flight and then they only have 45 minutes turnaround time. They unload the passengers; they load passengers and then they fly back again. With that business model, they have to use brand new aircraft. When you look at the fleets of low-cost carriers, they are not older than six years old. Right now, these brand-new aircraft are already grounded. All low-cost carriers, which includes EasyJet, Ryanair, Pegasus Airlines, Spirit Airways, Northwest Airlines, have the cash available to only continue for three months, on average. That means if any airline, any low-cost carrier, may be able to go on for six months, without flying, and the other low-cost carriers can continue for maybe only two months. So this virus is game changing.

{audio:0:02:52} When I look at the market today and think about the future, we are hearing about a lot of cancellation orders, from the OEMs. I’m going to share a couple of numbers with you. In the news, the Avolon leasing company have just cancelled 75 737 MAX orders. But the point is that there is a walk away for the airlines. The typical wording in all OEM and airlines contracts includes that a customer will be able to walk away from orders, without penalty, due to material adverse change clauses that kick in, if the plane maker fails to deliver within a year of the delivery date.

{audio:0:04:01} MAX is not an aircraft that is flying. We already know that it has been grounded for almost a year now. Any airline now, if the aircraft is not delivered in one year, they can say, you know what, there is no penalty and I can walk away. But right now, it is not the only case. Because MAX is not flying, because other aircraft are not flying also, airlines will start cancelling their own orders. When you look at the history, you can see a lot of over-ordered numbers. We can speak about flydubai, for example. I think they already have 234 orders from Boeing. Right now, they are not willing to take any of them, because their order was already 200 more than they were supposed to get. Flydubai is a low market; they don’t need 234 aircraft. Or Malaysia, Lion Air, Air Asia, they don’t need these aircraft.

{audio:0:05:10} Think about that. Right now, we are in the position where OEMs are over-producing aircraft, but now there are no customers to sell them to, which will possibly affect the future of the early-retirement aircraft. Speaking about EasyJet or Ryanair or the low-cost carrier business model, when you look at them, their air fleet is already younger. Now five and six-year-old aircraft are parked. The hotels are already empty. There is no hotel now that is accepting any clients. This is a different road now, we are facing. It’s a challenging industry now. I don’t know how it will come back but, of course, we need these OEMs in our industry. From my side, what I would say is, OEMs must still surround the market. Yes, there are a lot of aircraft parked outside, without customers. But I think the plan is going to be, for engine OEMs and aircraft OEMs, to let these aircraft that are already in the air, which are maybe 10 or 16 years old, to be retired and call it early retirement. They’re going to be retired and maybe they will be purchased by the OEMs, as trade-in options. That can happen. You give them unserviceable parts, which is called an exchange and then you get serviceable parts.

{audio:0:06:46} A couple of years ago, CFM was using that model, for their CFM56-3C aircraft, which powers 737 classic aircraft. They said, okay, if you let outside investors purchase this aircraft, then they will control the market, for parts. So what they did was, they called the CFM56-3C operators, when the engine was due for overhaul and said, bring me your engines. I will give you another green-time engine. They would get a usable engine, from their line and they would give a serviceable, green-time engine to the airline. We might see the same business model now, for aircraft in the future, because there are already too many aircraft parked, not flying. Also there are too many aircraft already produced and waiting, in a parked line, not flying. That’s why it’s going to change.

{audio:0:07:52} What we can say is, what could be the next step? Maybe exchange options or buying the aircraft with trade-in options, etc. I think, in the near future, we might see some of the aircraft, regional jets, might come into the game, because they still are still powered by engines, like GTF, for example, or Embraer E195 engines and Airbus A220 engines, still longer nautical miles, quiet engines and the cabin carries less passengers. Maybe 120, 125, 140 passengers. Isolation is going to be one of the major subjects, for all of us, today. Even today, if I see an announcement in the paper, saying that, you know what, coronavirus, there is no danger now; you can fly to Italy. You wouldn’t fly to Italy tomorrow. Would you? I would not, either, because of the isolation. This isolation is going to affect the regional jet market, in a positive way and possibly, the business jet market, in a positive way.

{audio:0:09:09} Speaking about the narrow-body aircraft, I don’t know how optimistic we can be. We also think about the wide-body aircraft, like 777 and 787 and we know that Boeing is the number one. That is the biggest plane in the industry. Think about that now. They are not only affected by 737 MAX issues, but also all the intercontinental flights, where wide-bodies are flying, and are all cancelled now. A typical airline average is around $20 billion, in traffic. Next year, we can already see that, in the numbers, Boeing and Airbus are going to cut around maybe 30% to 40% of their production of new aircraft and possibly, for wide-body aircraft, it is going to be a lot more. Some people say, especially financial analysis firms, declare that there is going to be about 53% of wide-body production cuts in Boeing. Airbus will have some cuts. But Airbus never had as many wide-body orders as Boeing. It’s going to be different and challenging now. Let’s see what happens.

{audio:0:10:52} 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?

{audio:0:11:23} 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.

{audio:0:13:13} 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.

{audio:0:14:04} 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?

{audio:0:14:24} 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.

{audio:0:15:50} In today’s world, I think we have around 18,000 commercial aircraft. If excluding cargo aircraft, of which there are around 3,000 or 4,000, we already have 14,000 aircraft flying. But right now, 95% of them are not flying. This 5% is already used as additional for cargo. There are some passenger aircraft, used by Delta and Turkish Airlines, which are being used for cargo, right now. If these aircraft don’t fly, what’s going to happen in the next couple of years? How many low-cost carriers do you think can survive like that?

{audio:0:16:34} Take the example of Turkish Airlines. You mentioned that they’ve ordered 200 GTF engines. What is the contract structure, when they purchase those engines? Clearly, they don’t need them all right now. Can they give them back? What can they do?

{audio:0:16:53} For Turkish Airlines, they’ve already got a couple of deliveries of the aircraft. If you are buying 737 MAX aircraft, there is no option. You have to buy a LEAP engine; a LEAP-1B engine. But if you are a client of Airbus, you have the option. For the Airbus NEO, new engine option, you could get either a LEAP-1A engine or a GTF engine. If your engine sells, your position, for the airline, is only for when the airline is buying Airbus aircraft. Let’s say that you know a company is already purchasing Airbus orders and you are just kicking in, against the LEAP engine, what you should do is, first of all, you have to know what is the current order; how many do they need? What is the delivery time, in years? They ordered them a couple of years ago, but they have only got 10 or 12 of them right now. There are still, I think, around 180 more to be delivered to them. If this corona impact continues, if today is the first day of the new GTF engine, with the aircraft, for Turkish Airlines, one year later, if this engine, with the aircraft, is not delivered, then according to the contract, the airline has a right to walk away, without paying any penalty. That’s why this is critical timing. Of course, it depends on the purchase time. You always have to keep around 10% as your spare engines. You order 200 engines, basically, you could say, 18 or 20 of them are the spare engines. Spare engines mean, a type of engine that is not delivered with the aircraft. They are delivered separately. The aircraft can be delivered with the engine, next year, but in the same month, you could also get one or two more engines, from the OEM, as your spare engines.

{audio:0:19:07} Right now, I don’t know how this contract would work, because the delay is not only due to the engine itself, but there is also delay due to the airline OEM. But is it going to be called force majeure? There will be a lot of lawyers who will be busy.

{audio:0:19:34} What do you think is going to happen? Do you think that these airlines will just wait until that year finishes, before they start cancelling these orders?

{audio:0:19:45} I think my answer today will be different from if you ask me in a month. Right now, this pandemic is all around the world and most of the airlines are even cancelling domestic flights. EasyJet is not really flying now. They have grounded most of their aircraft. Maybe they are using them for cargo or something else, but there are no passengers. The bail-out plan depends on the countries, of course. We know that Japan, just recently, announced that they are putting out about $1 trillion, $988 billion, and most of that will go to airlines. The Turkish government is putting some money in. The UK has invested a lot of money in that. The US is putting around $2 trillion, to save the companies. Yes, the Turkish government might save Turkish Airlines, but I don’t know how generous they are going to be in saving low-cost carriers. In the end, there will be a lot of aircraft available for sale.

{audio:0:21:09} There is, maybe, one other thing that could be done, but it would need quite a lot of support from the government, banks and leasing firms. There is a deal structure, in the airline industry, which is sell and leaseback. These orders might not all be cancelled. Maybe 20% of them could be saved by selling the aircraft that hasn’t been purchased yet, to the leasing company and lease it back from them. That will create some cashflow for the airlines. But of course, how many of them can manage that structure? How many banks will let low-cost carriers take advantage of this model, I don’t know.

{audio:0:21:55} What I would say is, in a couple of months we are going to see a couple of, sorry to say it, but bankruptcies. We have to face that. Probably, with these aircraft waiting on the ground, we might see this even with established airlines or it could be low-cost carriers. I don’t think there will be any new orders, with this ongoing position, in the airline industry. Of course, as I said, we first have to get ourselves out of this isolation. We have to work it out. When we work it out, you are going to go onto the internet and try to schedule your next trip, to the US, Germany, Turkey. In this current time, it is hard to predict what is going to happen.

{audio:0:22:48} But as I said, there are some bail out plans, supported by the government, supported by the banks and leasing and sale and leaseback options, etc. But for small low-cost carriers or only charter operators, they only have less than 40 aircraft in their fleet, there is no bright future, in the near future, I can tell you that.

{audio:0:23:13} When you look at the lessors, the large leasing companies, clearly, they have a huge fleet of aircraft. How do you look at the risk to the leasing companies and just the overall residual value of aircraft, such as A320 NEOs or CEOs, for next year, for example? Do you think it’s going to be pressured?

{audio:0:23:51} As I said, there are too many overordered planes, available in Boeing and Airbus. But Boeing is more challenged than Airbus, because they also sell many wide-body aircraft. I think your question will be related to how effective wide-body airlines will be as strong as they were, in 2019. If this is going to be an open area for them because, as I said, there is around $20 to $30 billion direct income, in the intercontinental lines. Of course, with security, with isolation, and we are all safe and healthy, then with the support of the government, there will be some good plans from the leasing companies. Maybe they will buy the aircraft. When you look at today, let’s look at one aircraft that is worth $100 million. The bank is already paying and the airline is paying the bank. The airline files for bankruptcy and they have already paid $20 million. If the bank is receiving $80 million from a new airline or an operator, then they are good to go, because $20 million has already been paid.

{audio:0:25:17} With that, it is going to be affecting how many aircraft will be deferred or cancelled orders. But saving planes is just that MRO business. In certain aircraft MROs, from the UK to Istanbul, you could see a lot of narrow-body MROs, like A320s, 737 MROs. But if you want to make some income or create revenue on the MRO business, you have to control wide-body aircraft. The reason is because, from Istanbul to UK, when you make a circle, basically, you are covering around six to eight countries. That means around 3,000 narrow-body aircraft, Boeing and Airbuses. From UK to Istanbul, you could see at least 10 or 11 MROs, for narrow-body aircraft. You cannot bring narrow-body aircraft to Istanbul for maintenance, from the UK.

{audio:0:26:25} But if you control the wide-body market, you could bring aircraft from China; you could bring aircraft from India; you could bring aircraft from South Africa; you could bring aircraft from the US. The future is in wide-body. Wide-body is the cash flow for any airlines and the leasing companies. Think about that. For the Boeing aircraft, there are around 36 to 40 business class seats available. When the business class is 100% sold, the remaining economy class is full profit for you. Can you imagine that? You sell only 40 seats, in the business class, in wide-body aircraft. The remain 300 plus seats are 100% profit for you. That’s why your question depends on how the cancellations or deferred orders are going to be done on wide-body aircraft.

{audio:0:27:23} But saving the narrow body is still going to be an ongoing business, because when you look at the production forecast, for the next 20 years, we know that the narrow-body – such as Airbus and 737s – are going to be around 48,000 aircraft, in the world. That is with wide-body, but 75% of the narrow-body is going to be flying in and around us, in Europe, the Middle East and Africa. That means low-cost carriers are still going to be in the market. But the question is now, how are they going to be supported by the leasing companies? We know that EasyJet’s investors, if they don’t cancel the new aircraft ordered from Airbus, they will fire all the board of directors.

{audio:0:28:14} This is an unknown position. If you were about to sell an aircraft about two months ago, the aircraft was around $20 million. Right now, we don’t know if it is $2 million or $25 million. It is that market. But if aviation stops, the whole world stops. In that case, once we are back to normal, which I don’t know what normal means now, we’ll see how this is going to redefined. Your question is subject to deferred or cancelled orders. If there is cancellation, then we have a serious problem. But I still believe that the airline business is going to be the first business that is going to be bailed out or saved by the government and by the banks.

{audio:0:29:13} Can you just provide a short history of the narrow-body market?

{audio:0:29:18} As of today, when you look at the world, we had three aircraft manufacturers, before McDonnell Douglas was purchased by Boeing, many years ago. Right now, we have Airbus and we have Boeing and, we don’t have it yet, but we hope it’s going to fly, we have the COMAC Chinese aircraft. Airbus was surrounding the market, especially the European market, and they had A319, A320, A321. They call it the A320 family. Versus Boeing, who had the 737 Classic and NG options. The A320s were powered by two different engine types. One was the V2500 engines, produced by Pratt & Whitney and one was CFM56-5B engines, produced by Safran and GE.

{audio:0:30:32} On the other side, the Boeing was only powered by CFM56-7B. CFM56-3Cs were used for 737 Classics, but they don’t produce them anymore and, of course, 737 NGs. But because of the modernization and the new technology, new methods kicked in, in the aviation, passenger style in the aircraft changed. Right now, we have had a few design changes, on 737s and A320s. A320 is now called NEO. The main difference is the engine options, which is the new engine option, that is powered by LEAP 1A engines, versus the 737 MAX. The 737 MAX is powered by LEAP 1B engines.

{audio:0:31:42} These engine types are the main drivers of this redesign of the aircrafts. Physically, there is no big change. Maybe a couple of design changes, but not many. When you look at the market, these narrow-body aircraft are already surrounding the market. As I said, around 75% of all narrow-body businesses will be around this region and when you look 20 years forward, from today, we will see around 75% of narrow-bodies flying around, because this is the greatest business model for OEMs. You could hold up to 189 passengers, based on your inside design, and then you could fly up to four or five hours. It is also cost-effective; very much a low-cost format. I think the full consumption is now, with these new technologies, around 15% to 16%. Quiet engines, still going around 3,000 to 4,000 nautical miles. That means that you are surrounding the market.

{audio:0:33:03} Basically, in today’s world, you can fly four hours, from Istanbul to the UK, like I said, make a circle and you are visiting six to eight countries, so you don’t need any wide-body aircraft, in that geography, unless you are flying intercontinental. That’s why the narrow-body business will continue, no matter what’s going on right now. But of course, the major driver in that is the new technologies in engines.

{audio:0:33:38} I’ll talk a bit about these new technologies in engines and what the main differences are between them; between GTF and LEAP engines. Then I can tell you what the main kick-in items to sell the engines are. One of the main differences between LEAP engines and GTF engines, is the design. GTF, geared turbofan engines, was designed by Pratt & Whitney and they changed the gearbox. But the main similarity between those two engines are the larger fans. The larger fans let you create more bypass ratio and makes you go further and quieter. But the GTF, as I said, they created geared turbofan and did the redesign of the engine. That’s why they call it the engine in this new era.

{audio:0:34:44} However, when you look at the CFM LEAP engines, 1A or 1B – it doesn’t matter, as they are the same – they haven’t changed the design. They have used different materials. They started to use composite materials and this engine can be operated in higher temperatures. That’s why it has more stages than GTF engines. GTF had some issues, in the beginning, because of the new design technology, but when you compare apple to apple, these are good engines. Yes, GTF had some introductory issues, maybe, but they are still on going and Pratt & Whitney is working hard to sort them out, no question about that. When you look at it, CFM has always sold more than PW engines, Pratt & Whitney engines. There’s a simple answer to that. CFM powers more aircraft than GTF does, other than regional jets, like Emirates or the C series, which is now on the A320s. Other than an A320, there is no platform that GTF is really powering now. For the LEAP engine, there is Airbus and there is Boeing 737 MAX. That’s why, I think, they sold around 20,000, perhaps. The last time I checked the number, they were at around 17,000 sold engines. But after that, they made an announcement that Air Asia, Indigo, they were GTF customers and now they’ve decided to go with LEAP engines. So the LEAP engines are surrounding the market, because they control more aircraft.

{audio:0:36:59} When talking about selling the engines if, as I said, the client is already buying 737 MAX, there is nothing that GTF can really do.

{audio:0:37:19} When you’re selling an aircraft engine, can you sell to both a lessor or an airline?

{audio:0:37:29} Yes, you can. The lessors and airlines are your main customers. Basically, there are no other customers. But it has to be aligned with the aircraft OEM. Maybe you want two or three engines, in your region. An engine won’t fly without an airframe, so that’s why you have to work with the aircraft sales person, but you have to know your client. This is the key point. You have to be speaking the same language and you have to be present, at any exhibition, in your region. You have to attend any conferences and you have to keep track of your clients. This is the only way to be successful in your business. Everybody is there; everybody goes to the conferences. Everybody tries to shake hands, exchange business cards. But if you don’t know who your customer is, you can’t do anything. You have to know what your customer’s attitude is, what they are like and what kind of family they have. You have to control it. You have to pick up the phone to have a chat. Ask them how they are doing. Believe it or not, I have been in that business for almost 14 years and, I must admit, forget about emails; forget about phone calls. Yes, they are required, but any phone calls must result in a face to face meeting. The reason for phone calls and emails is not to sell something, but to organize the face to face meeting.

{audio:0:39:34} Any face to face meeting, it will not be forgotten in the future and they are in and will get something from the client.

{audio:0:39:49} Let’s take an example. Say you’re working with Pratt & Whitney and you’re selling these engines. Let’s say that you are selling to an airline. What is the process, from start to finish, and what strategies did you use, to sell those engines?

{audio:0:40:04} First of all, we know that there is an order or a purchase from Airbus, for example and I know that they are going to select their engine. First of all, we have to have a kick-off meeting. You have to align, because this is not a one-man show. What you do is, you set the meeting, because you are the sales guy, the sales director, whatever your job is. You are in charge. Everybody is going to be affected by your updates. This is RFQ, records for quotation. Before you submit anything, we have to understand the questions. What are the questions my technical team might ask me? What are the questions my operations team might ask me? What are the questions my contract team might ask me, whether it’s going to be an FHA contract or not? I have to know what I will be leading, for the next year, to sell these engines. If there is any question or I have a concern, I pick up the phone and talk to the person who has sent the RFQ. Or I fly to see them and show them respect. “Thank you very much; I have a couple of comments or questions, to better understand what the issues are. Could you please update me?” You take your notes and then you have your first kick-off meeting, to show the opportunities to your colleagues or team.

{audio:0:42:00} You lead the team, because you are the sales director. You have to educate them – the operations manager, the legal manager, the contract manager. You have to educate them as to what you are getting into. You send your team and this is called the kick-off meeting. Then you have to work with your OEM department. What is their deadline? Let’s say, on the RFQ, for example, each customer asks for 100 deliveries, in five years. Is that doable? We have to respond correctly. We cannot just say, yes, yes, we can do it and then go and try to convince your operations. For the OEM side, the airline or the customer must go with your directions. We cannot go with their directions; that is very important. If you let your OEM follow their requirements, then there is no OEM left, because each customer will have different requirements. That’s why we have to make sure that we understand their RFQ correctly, we deliver correctly, that we take the right message from in-house and deliver to them.

{audio:0:43:31} The first round has ended. We prepare the quote and we send it. Maybe not 100% is accepted or we cannot accept 100%. Then, of course, there is usually three or four months, where you have to make sure that you are going to follow up with the client. Sometimes you will fly to them and say, I’m coming to the UK, to visit a customer; are you free so we can meet? Maybe you will not go and see another client, but if you just tell them you are going just to see them, they will say, no, there is no need to come. We have to put all that in a balance. You are going to see some other clients, as well, but the main focus is going to be with them.

{audio:0:44:23} When you get face to face with the airline customer, what is your pitch, to sell the engine?

{audio:0:44:30} The first question, after sending out your response to the RFQ is, have you had a chance to read it? Is there anything that I can answer in it? Is there something that looks great to you? We have to make sure that you respond, item by item. Maybe you fly five or six hours to meet with the customer and you only have two or three hours, to convince them. You have to make sure that you let them understand your response correctly, so they can compare apple to apple.

{audio:0:45:11} The number one thing that is very important is to never cheat your customer and never try to take something from them, that seems unethical to you. If the customer offers to show you the competitor’s offer, can you look at it for me, the answer is no; you can’t do that. It is not ethical; it is not fair. We are in a race, we are in a competition, but we have to be fair. We have to be nice to our competitors, as well. But of course, it is always okay to take a response sheet from the client. Your offer, the competitor’s offer, their expectations. Like I said, this doesn’t work by email. Emails are good; they can send their response by email. But if you go to the client, if you sit with a client, they know that you are showing them respect and that their business is important to you. You don’t say, hey, I sell OEM; you buy it from me or you don’t buy it. You have to show them that you support them and that you are there for them.

{audio:0:46:29} What was the biggest challenge for you, in selling engines to airlines?

{audio:0:46:39} I would say, sometimes, the politics kick in a lot, because there are partnership issues or maybe, be company investment procedures, etc. Maybe there are some offset items because, if you are going to sell an engine to Africa, they will probably ask you for an offset contract. They are going to pay you, let’s say, $500 million for an engine. But then, they are going to ask you to invest $500 million, into their country. This kind of deal could sometimes be a deal stopper. But other than that, if you are in fair market competition, the challenge, I would say is, sometimes, in the end, you are going to speak with the top guy – the CEO, the CFO. The challenge is, if you start directly communicating with the CEO or CFO then, most probably, you are going to lose that deal. Anything that comes to their guys, is going to be attractive. But we don’t need that. We need our message, in the beginning, to be conveyed and delivered to the upper management by, maybe, the engineering manager, so he can have some say, speak to his boss. If you just kick in, directly with his boss, then you’re going to lose that guy and you need that guy. This is the guy who, in the end, is going to prepare his response to the RFQ. Believe me, he can show or hide your positive impacts or your negative impacts.

{audio:0:48:40} He can sell the engine for you?

{audio:0:48:42} Exactly. The chain of command is highly important. Yes, there are some times that you are going to sit with the executive levels. But the case now is, we manage to come to that level, by managing the managers, experts, directors, etc. Your message must get to the upper levels by the employee of the airline.

{audio:0:49:16} That engineering manager or the engine procurement person, what do they care about? What was your pitch to them, that makes them buy the engine?

{audio:0:49:29} Usually, there are two types of power plant manager. One is a CFM lover and one is a GTF lover. If that guy is already in love with CFM, it’s going to be a lot more difficult for you, to convince him to go for GTF. But I would say, one of the biggest challenges is, you will never let yourself be a slow person, when you are sitting with a customer, especially if the customer is a technical guy. This is very important. If your customer is a technical guy – a power plant director, engineer, procurement director, with an engineering history – don’t try to be on the negotiating table. You’re going to lose because, in the end, your client is going to buy something and he’s the decision maker. If you try to show that you know better than he does, then he doesn’t need you; he will not like you.

{audio:0:50:35} The challenge is that I was always like that. Sometimes, I would be told, things that were not 100% correct, but I would say, that’s a great point; you are raising an excellent point. This is good; but let me show you some other things regarding how we can support that. If there is any obligation, if there is something that is pushback for you, you always have to try from another side. Like anybody, especially for technical guys, they are not black and white. Of course, by questioning them, by asking them other technical questions, not judging them, and letting them know you are trying to learn from them, because they seem an expert, you open other gates. You are not only there to end the conversation. You are there to open the conversation.

{audio:0:51:33} So you actually question them and get them speaking about the expertise they have, on the engines?

{audio:0:51:39} Exactly. But there is a good point. They could start feeling comfortable be after 10 minutes, 20 minutes or it could be your second or third visit, but if you don’t quit, you win it. If you don’t stop, you’ll take it; no question about that. Then the balance is, technical points to business points. If you take your client out for lunch, your 10 or 15 minutes will only be about their family or your hobbies – whether he is a sailor or plays basketball, etc. When he starts speaking about his hobbies at lunch, let him finish. You can walk away and you have something that you can talk about, other than technical concerns. At your next meeting with them, invite them for dinner. Dinner is always the door-opener. Talk to them; ask about their family. Not for 15 minutes, but maybe for 25 minutes. Maybe an hour. Then you become friends with your client.

{audio:0:53:09} Believe me, in the business world, but especially in aviation, it’s too small a world. If you can make a friend from your business life, then this friend will go along with you. When I started to run my own company, almost two years ago, the only asset I had was the references, were my friends that I know in the industry. This is exactly the same thing. Be polite, be open, questioning and find the balance. Never step into their grey area. They could love a CFM engine, they could love a GTF engine. Never step into that, unless they let you question it. But the questions might not be black or white questions. If you ask them straight questions, you’re going to lose that.

{audio:0:54:13} Talk me through how you approach negotiating on the price of engines. Not only the original equipment, but also the service contracts, where most of the cash is actually made.

{audio:0:54:25} There are two types of engine sales. One is the typical engine sale, where you sell the engine and you walk away. This guy will never see you again. You sell, let’s say, 20 engines to X airline and they say, okay, we don’t want any maintenance contract; we don’t need that. We will take care of our maintenance. Fine. You can show them why they should buy your maintenance contract, but they don’t. This is one type of customer.

{audio:0:55:03} The second type of customer, usually, has more than 40 engines in the fleet. You sell to them and you stay with them, with a maintenance contract. For type number one, they have 20 engines and they don’t see you again. These guys, they go to any MROs. But if you sell them an engine, with a contract, then they become your customers. You are not only the sales director; you are the key contractor now, for the airline and for the OEM, as well. The benefit of that, especially with the new engine technologies now, is that most of the OEMs, LEAP and Pratt & Whitney, start selling this program together, because this is the new future.

{audio:0:56:08} These new engines are usually sold with the attached maintenance contract. What I mean by that is, they pay a certain amount of money to the OEM and then, when it is the time for an engine overhaul, the airline lets the OEM control the maintenance itself. When we sold the engine, we said to the airline, here is our 100-engine deal for you and here is our maintenance contract for you. We are going to charge you a certain amount of money, for your engine, and when the time comes to send your engine to maintenance, we will give you a lease engine and you will fly as if your engine was never in the shop. That way, first of all, the OEM gets the control of the engine, because they receive money, each hour. It could be $800 per hour or $1100 per hour; it depends on the engine. They fly for five years and you already have the money in reserve. Then, based on your turnaround times, based on your capacity, you have the right to send this engine, to any of your shops. You could send the engine to MRO A, MRO B or MRO C. As OEM, you are a partner of those shops and you could feed your other business there, as well, by making your shops happy, giving them cash flow and plus, giving your customer excellent service, without them having to worry about the engine itself, because they already have their spare engine from you, with your assurance.

{audio:0:58:13} The maintenance contract is a gold item, for engine sales. In today’s world, nobody wants to buy an engine without a program. Yes, if they have 10 engines, maybe it’s hard for them to get into the program, because they are going to pay more. But if you have 100 or 200 engines, you cannot survive without a contract. You have to be able to depend on the engines. Also, a maintenance contract is not only called an FHA contract, a flight hour agreement contract. You can also have a material contract, attached to this contract. You could say, you know what, any engine part repair, you will not buy from outside; we’ll sell it to you and we’ll give you a 10% discount on that. This is also a maintenance contract, attached to your FHA contract. Just as I was saying, in the beginning, with Boeing and the OEMs, maybe they are going to do the same thing in the near future. How would that look?

{audio:0:59:20} There are spare parts contracts, FHA contracts and material contracts. Selling a new engine, with an FHA contract, is the most valuable item for the OEMs and, also, most protective for the airlines themselves.

{audio:0:59:44} What have you learned about sales negotiation, throughout your career, selling aircraft engines?

{audio:0:59:54} What I would say is, for engine sales, first of all, you have to know the product and you have to know the culture of the client. You have to believe in that product; you have to believe in the engine. You could sell a GTF engine to India, but there are also some problems that have affected the engines in India. If you don’t know that, you might look stupid, in front of the customer. What I did was, first of all, I have learned how to read more, to follow up more, which is really important, and not to be against your client and not to compete with the technical guy. Five or 10 minutes in, you’ll find yourself arguing with him, instead of trying to sell him something. Don’t try to swim in their pool, unless they let you. Reading is important; knowledge is important and holding your tongue, when speaking to your customer. Yes, you are here to sell, but we have to make sure we are able to buy from you. You cannot just force the customer to buy. They are not stupid. They are engineers, with degrees, after four years at college or university. They are as smart as you are. If you force them, they won’t like it.

{audio:1:01:44} How do you negotiate on price of the cost per hour flight or whatever it may be, for the engine?

{audio:1:01:52} Let me explain the FHA, flight hour agreement. This depends, very much, on the client’s fleet. If they have 50 GTF engines, the price for maintenance flight hours is going to be a lot more difficult than for other airlines that have 150 GTF engines in the fleet. There is not much to play around with; you just have to submit. But for OEMs, there are some discounts that you could use, based on the quarter of the year, based on what is left from Q1, for example, in Q2. There are some extra margins. If you want to use them, you have to get them approved because the OEM will not let you use all the volume for a customer that is only buying 20 engines, so there is always something in the pipeline, for Q4, for the customers with 200 or 300 engines.

{audio:1:03:09} As I said, we have to deliver the message, correctly, to our OEM. In my region, for example, I might have two campaigns at one time. One campaign is very close to completion, with 20 engine sales. The other campaign is maybe going to be closed at the end of the year, with 150 engine sales. But we are not close to that. We know that this client might also purchase LEAP engines or other engines, as well. If you are not that sure, we cannot use all the volume for the 150-engine sale, so we have to use some of it for the 20-engine sale. In that case, if the 150-engine buyer is wanting a 25% discount from you, when the time comes, you cannot do that; maybe you can only give a 15% or 20% discount. It depends on the timing.

{audio:1:04:13} With Turkish Airlines, we were lucky to use that volume and margin, so we did it. But for other deals, we weren’t as lucky. We used to always force the customer to buy at the exhibition times, because you always want to sign someone up. Get into the newspaper that this and that customer is buying, because you don’t sell the engine itself; you sell the futures of those engines. As I said, over orders at Boeing now. There is a chance that they are going to be delivered to other customers. Let’s say, flydubai orders 20 aircraft, but in that announcement, it says 150 aircraft, plus 70 more in options. Then, as a client, as an operator, as an airline, you say, goodness, MAX is a good aircraft, they’ve got a lot of orders.

{audio:1:05:24} Mitsubishi corporate jet, regional jet aircraft, doesn’t sell any. Why? Because they don’t fly. They haven’t got any orders. But the funny story is, GTF, geared turbofan engine, was first designed for the Mitsubishi corporate jet, regional jet, but it doesn’t fly. If you have orders, over orders or backlog problems, if you have orders for the next eight or 10 years, then airlines already believe in you. They start investing in your aircraft or your engine. This is the same thing. The discount depends on the projects in your pipeline. Sometimes you are flexible, sometimes you are not.

{audio:1:06:06} What is the one question you are asking yourself about this chaos, due to Covid-19, in the whole industry? What are you really focusing on, right now?

{audio:1:06:28} What I’m focusing on is that I’m just watching all the news about the aircraft parked at airports and I’m just thinking about the future of the narrow-body, especially. As I said, there are too many aircraft and I’m focusing on how the OEMs are going to take action on that. These aircraft are not going to stay on the ground, forever. I also focus on some of the low-cost carrier operator business model. They only have around two or three months, on average, cash flow in the banks. This might create new airlines. I don’t know if these type of aircraft are going to be as attractive as they are today.

{audio:1:07:24} Let’s say everything is clear and you won’t go tomorrow, but in six months, you’re going to go to Italy. If you have money, would you get a private jet or would you fly with 190 people all together?

{audio:1:07:45} So you think some of the smaller airlines will go bankrupt and the OEMs, you think, are going to do some kind of spare part exchange program, where they buy back older planes and put new ones in the market?

{audio:1:07:59} Exactly; that’s what I would see. Bankruptcy is not going to be something that we won’t face, that’s for sure. We are going to see some airlines go bankrupt, which will also be some saving plan for the airlines. If they had a contract with Airbus or Boeing, if they cannot buy the aircraft, because they don’t fly then, without facing court, they will just file for bankruptcy. We need these aircraft in the air, not on the ground.

{audio:1:08:35} Gokhan, thank you very much for your time today.

Pratt & Whitney: Selling Aircraft Engines

Disruption and impact in the narrow and widebody aircraft markets

The process of selling aircrafts to both airlines and lessors

How aircraft OEMs negotiate the price of aircraft

The importance of maintenance contracts for aircraft engine OEMs

How pricing is set for engine maintenance contracts

Pratt & Whitney: Selling Aircraft Engines

Former Aftermarket Sales at Pratt & Whitney, EMEA & Founder of Ventum Aviation Services

inpractise.com/articles/pw-selling-aircraft-engines

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Executive Bio

Gokhan Sefa

Former Aftermarket Sales at Pratt & Whitney, EMEA & Founder of Ventum Aviation Services

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Pratt & Whitney: Selling Aircraft Engines(May 7, 2020)

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