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Airlines

Age concerns

Keith Mwanalushi reports on the end of life aircraft management business and the solutions available for aviation assets
 

Managing an aircraft fleet can be a complex undertaking. Anything from a handful to several hundred aircraft requires specialist knowledge of asset management. But as the fleet reaches maturity, airlines and aircraft owners need to make carefully strategic decisions that will maximise the realisable value of their assets.

 

“The first thing to consider is the ownership structure of the fleet,” tells Auvinash Narayen, Head of Acquisitions and Leasing at AerFin. “If the fleet is leased, then considerations will be pursuant to the contractual status of the lease agreement between the lessor and the asset owner. In this situation, asset owners will often, in advance, go to a competitive tender on the market, with end of life solution providers such as AerFin then offering exit solutions for the lessor.”

 

If the asset is owned by the operator, Narayen explains that the operator will typically review various operations such as consigning the asset, sale and leaseback as well as outright sale. “Typically, if it’s a larger fleet phase-out, an operator would prefer to work in partnership with a single end-of-solutions entity due to the airline having limited resources, along with the ease of working with a single provider.”

 

AerFin has also found this to be a successful strategy, namely on recent fleet phase-out agreements with the 15 Embraer E170 aircraft acquired from Saudi Arabian Airlines.

 

“Aircraft retirements are highly cyclical and dependent on several economic variables, such as: passenger demand, fleet age, competition and fuel price.” Narayen reminds that the price of fuel has historically had a significant impact on the economic life of an aircraft. “Oil pricing is still low, and this had a causal effect on aircraft retirement rates, with older aircraft’s economical life being extended by up to 24 months.”

 

As Alistair Dibisceglia, Head of Trading and Leasing at Vallair points out, one of the main considerations to keep older mature aircraft in the fleet is managing the operational cost. “The most important consideration is to manage the bottom line because that will make the difference.”

Dibisceglia says Vallair’s multi-faceted business model is geared up to maximise the life of aircraft, engines and parts throughout their entire lifecycle and beyond. “We are well placed to find the right solution for every given situation through a deep experience of managing mature assets: from trading; leasing; teardown and cargo conversions; to engine teardown and repair services; to competitive parts solutions; aerostructure repairs, MRO and paint,” he states.

 

In March, AerFin launched the E-Jet Equipment logistics facility in Atlanta, Georgia close to Atlanta Hartsfield-Jackson International Airport.

The facility will initially cover more than 200 E-jet rotable part numbers including actuators, valves, electronics and lighting as well as a large selection of high demand component LRUs (line-replaceable unit). According to the company, this store demonstrates AerFin’s commitment to support the E-Jet platform operators in US, Canada and Latin America.

 

For the oldest Embraer E-Jets still in service, they currently represent an interesting aftermarket proposition: “The level of aftermarket expenditure is highly related to how and where the aircraft has been operated,” Narayen says. “Aircraft that have a higher average utilisation or lower flight hours: flight cycle ratio, will have a higher maintenance expense due to LLP (life limited parts) limits on major assets and engine components.”

Secondly, he observes that aircraft operated in harsher operational environments such as China and India will also typically be exposed to higher maintenance expenditure due to the wear that these adverse conditions have on the aircraft’s components.

 

Another consideration are factors such as the aircraft’s ownership structure and conditions. Narayen says if an airline is looking to prolong the operation of the aircraft, then significant investment will be required in AD/SB component modifications. In addition, if the aircraft is owned by a lessor, then lease return conditions will also have an impact on aftermarket expenditure. “For instance, after the lease has expired, the lessor may wish to save the maintenance reserves and sell down the asset to an end-of-life solutions specialist such as AerFin, who will then harvest the high demand components from the asset, re-certify and re-issue the components into the supply chain.”

 

Cliff Topham, Senior VP Sales and Business Development at Werner Aero Services tells this publication that the first generation E-jets, E170 and E190 have a reputation for high costs associated with engine visits. “Recently we are seeing some relief from the engine manufacturer with some cost efficiencies being offered to the market – but these are still the most significant expenditures,” he notes.

 

At AerSale, they are experiencing robust demand across the spectrum of commercial aircraft variants. “There are the obvious narrowbody darlings, the 737NGs and later-model A320s for leasing, engines, parts, and MRO,” states Craig Wright, AerSale President.

 

Wright says there continues to be surprising demand for legacy models (747s, 757s, 767s, A330s, A340s) for aircraft MRO, engines, and parts. While the 777 airframe USM (used serviceable material) has softened significantly, he states there remains good demand for serviceable “green time” engines and certain parts categories (landing, gear, APUs, etc.), which is typical for all aircraft types.

 

“It’s hard to imagine that even at this late date we are running an MD80 heavy modification line (firefighter tanker conversions) out of Goodyear, Arizona,” Wright mentions.

 

The Boeing 757 is at a particularly interesting stage in its career and its worth asking if there are significant opportunities to meet bespoke requirements for existing operators. Topham reckons the 757 still fulfils a unique roll at the US majors although most are now looking at planned phase outs – “The aircraft continues to see a robust market in the freight industry particularly in Asia,” he says.

 

Dibisceglia absolutely agrees with the opportunities the 757 presents: “The 757 is a great asset to move into the freighter business such as what Vallair are doing with our A321 programme. Cargo operations present a great opportunity to extend the life of the airframe and engines.”

Generally, the older a fleet type gets, the more challenging the demand for technical expertise, engineering development, asset risk management, and flexible customer support to meet ever-evolving needs, Wright suggests. “Done well, this requires an ever-expanding base of specialised experts to manage these assets in a rapidly growing organisation. Not surprisingly, in the current tight labour market, it makes recruiting additional professionals and technicians our biggest challenge today.”

 

The mature engines are also seeing significant movement through the repair shops. In early August, specialist aircraft component support provider Bii.aero said it had chosen Chromalloy to repair, overhaul and inspect all CFM56-3 engine material. Bii recently teamed with Dublin-based aircraft and engine leasing firm Rostrum Leasing to market a suite of engine piece parts resulting from the phased tear-down programme of selected 737-300 Classics and CFM56 spare engines formerly operated by Southwest Airlines.

 

According to James Burley, Commercial Manager - Engines at Bii, working with Chromalloy will help preserve a near 99% yield on components that otherwise would be considerably lower. “Consolidating the repairs across such a large quantity of engine parts with one repair source will also enable us to save costs and time throughout the repair process.”

 

Burley said the overhauls, repairs and inspections will primarily take place within Chromalloy facilities in the US (Nevada and Texas), Holland and Thailand. Burley adds: “Certifying engine material with a major repair solution like Chromalloy signifies quality and expertise. Our customers will know they are buying units repaired to the highest standard.”

 

In with the new

 

Transitioning to newer aircraft can be a significant undertaking: “Pre-planning is key when it comes to this,” Dibisceglia advises. He says an aircraft return or phase-out is an intense and convoluted process which needs to start as early as possible. “It involves not only the operator, but also the national aviation authority, MRO, and lessor, if applicable.”

 

 Vallair frequently manages these processes as well as coordinating the aircraft part-out if required states Dibisceglia. “Also, in accordance with Vallair’s core business mission, we would potentially buy the asset to convert it to a freighter. We are the launch customers for the A321 cargo conversion and will be first to market this type.”

 

Interestingly, Latvian carrier airBaltic is in the final process of phasing-out of its 737 Classic fleet replacing them with new Airbus A220s. The airline aims to minimise complexity and benefit from the additional efficiency of the A220-300 aircraft which will be the only jet type operated by airBaltic. The airline will end its 737-300/500 fleet operations in autumn 2019, one year ahead of the original plan.

 

In relation to the transition to newer aircraft, Narayen from AerFin explains that the first consideration that operators have is ensuring that available seat capacity (ASK) is aligned with their fleet and growth strategy. “The airline therefore must ensure that newly introduced aircraft have been successfully integrated and are operationally sound before phasing-out older aircraft. We are frequently witnessing issues of next generation aircraft having significant entry-into-service (EIS) issues, which has left airlines short on capacity.”

 

The second consideration Narayen mentions is that most airlines have limited in-house resource and experience in managing cost and operationally efficient fleet phase-out procedures. “This is why it is important that operators are rigorous in selecting an end-of-life solution partner that meets their operational and financial requirements.”

 

Typically, he says this will be a solution provider with a highly adept technical division, experience of working with the respective aircraft product type as well as significant financial backing. “All of these mentioned factors played a critical role in AerFin’s successful fleet phase-out partnerships with various airlines, including the phase-out of fifteen Embraer E170-LR aircraft from Saudi Arabian Airlines.”


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