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By Lalitya Dhavala, Valuations Manager, Cirium Ascend Consultancy
As winter approaches in the Northern hemisphere, we are once again faced with the prospect of heating our homes and offices, bringing the cost of powering our homes, back into dinner table conversation. However, there’s another conversation in aviation circles, the cost of engines that power the aircraft. Engines have always been the most expensive part of an aircraft, and they’re only getting more so.
A comparison of spare engine Half-Life Market Values for the previous generation CFM56-5B or CFM56-7B series, and the new-generation PW1100G and CFM Leap-1B series of engines as shown in the chart below, indicates a clear divergence of the premium the newer generation engines enjoy. Some of this difference can be attributed to the engines’ position in their lifecycle, new engine values tend to go up a bit, where the market is more influenced by OEM spare part pricing. However, we also have to acknowledge the steep rise in spare engine pricing on the newer generation, due to escalation that OEMs say is driven in turn, by the high inflationary environment we are experiencing. Newer generation engines have also been able to recover all of their value as compared to 2019 levels, whereas the more mature engines continue to lag, and may never come back to pre-pandemic levels.
In addition to the initial acquisition price, maintenance costs are also going up, with recent increases of the LLP pricing from manufacturers being significantly above the general inflation rate. These increases have been applied on both new and previous generation engines. This is having an effect on demand for spare engines, as operators are keen to avoid shop visits, and are seeking green time where available, particularly on the mature engines.
When we examine the ratio of two spare engines value to an aircraft value over the recovery period, we can see these two factors playing a role in the evolution of this ratio- spare engine pricing, and rising maintenance costs. As an example, the chart below shows a comparison of a 2018-build Airbus A320-200 powered by CFM56-5B4/3 PIP engines, and a 2018-build Airbus A320-200 neo powered by the CFM Leap 1B-27 engines in Half-Life, and Full-Life maintenance conditions.
After the loss in value during the pandemic, as travel demand returned, the CFM56-5B4/3 PIP engine value rose quicker than the aircraft as a whole.
The pause in usual engine maintenance activity during the pandemic meant that units that had green time available, were high in demand as a spare engine that could be swapped to meet operational requirements.
At the same time, the cost of the overhaul increased due to limited capacity at engine MROs, and ongoing supply chain issues for material; and the engine OEMs delivered price increases on LLPs. This has resulted in taking the share of two engines’ value above 50% of the aircraft, which is in line with the expectation that as aircraft technology gets older, engines form a larger percentage of the aircraft’s value.
However, this theory is not holding up on the new generation engines, as the share of two engines’ value is already beyond 70% of the aircraft value. This has been a result of the significantly higher pricing at the new end, as well as the above-inflationary increases in maintenance costs. At Full-Life conditions, engine values are beyond even the 80% mark, which brings into question the inherent value of the airframe at such a young age. Due to the widely publicised reliability issues on the PW1100G issues, we are already seeing some examples of A320neos trading solely to get access to an engine pool.
Should this trend continue, part-out activity may also begin at much earlier vintages for the new generation aircraft, as this may be considered more lucrative.
At Cirium Ascend Consultancy, we continue to monitor the ever-shifting dynamics between the spare engine and aircraft values, and as inflation appears to have peaked, it is to be seen the effects this will have on escalation of pricing.
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