Opportunities in the Crosshair

All this happens when OEMs struggle to ramp up production and catch up with the deliveries of new-generation aircraft that have been delayed due to technical challenges and disruptions in the supply chains. MROs are overwhelmed with the flow of orders; at the same time, suffering from a shortage of manpower. Airlines put into operation almost all available capacity and now have to deal with the challenging assets - the ones that were parked for a long time and require extensive maintenance. The market is imbalanced. It affects all players in the field - aircraft owners, dismantling companies, airlines, and MROs.

But this imbalance also creates opportunities? -? the matter is only in recognizing them.?

These days it is quite a common situation when the value of the entire aircraft is less than the sum of the values of its components after dismantling. That makes dismantling the aircraft feasible for supporting existing fleets with parts and components. What other opportunities appeared?

I believe we can locate these opportunities if we look at the market from different angles: from the perspective of aircraft owners, dismantling companies,? MRO, and aircraft operators.?The business will run and flourish when each of these players benefits from participating in the chain of selling aircraft-dismantle it-recertify parts-sell to the operators-support operating and stored capacity.

Let’s start with aircraft owners. They continuously compare three values. The first one is the book value of the aircraft. The book value gradually declines because of depreciation (and in the absence of revenue from the asset, depreciation puts pressure on the profitability of the owner's business).?\

The other important factor is the investment required to bring the aircraft into marketable condition vs. the future cash flows from its leasing. The amount of investment can only grow - due to the piling up of calendar maintenance tasks and inflation affecting maintenance and components cost. On the other hand, out-of-production aircraft gradually become morally obsolete - which applies pressure on lease rates.

The third important parameter is the current market value of the aircraft. It fluctuates depending on the phase of the air traffic market and the supply and demand for the aircraft. Most of the time, market values decline as the aircraft get older.?

In turbulent times, aircraft owners refrain from brisk moves and keep aircraft in their books gradually accumulating losses from depreciation. It is painful? - but less painful than writing off the entire value of stored aircraft in one shot.

The aircraft lessor continuously keeps the aircraft book value and its current market value in the crosshair. If the two values become close and the sell value prevails over the sum of cash flows from the lease plus residual value, the owner makes its move and sells the aircraft.?

For the companies operating in the dismantling business, the purchase price of the aircraft is the starting point for their economic calculations. They need to keep in mind that, in addition to this value, they have to spend time, effort, and money to dismantle the aircraft; inspect, repair, and certify parts; pack and ship them to their warehouses. Only after that, one can expect returns from their investment.? They also need to consider that the sale of some parts will be slow (time value of money); some of them will not be sold at all and should be scrapped later.?

In their profit and loss projections, dismantling companies should anticipate that proceeds from the sale, in addition to covering their investment and all costs, should secure the target profit margin for the company.

Dismantling companies know that large components can move fast? - with the demand driven by the airlines that prepare the aircraft for return to their lessors at the end of the lease term.?

Airlines preparing aircraft for return to the lessor can explore different avenues. The straight and hard way is to purchase new components manufactured by OEM or make a full-scale shop visit of components to achieve required useful life requirements. The smart way is procuring used serviceable components with the required remaining life to match the return condition.? And here dismantling companies enter into the picture with the solutions for the operator.?

One of the key advantages of dismantling companies is that they can offer components with a spectrum of remaining useful life. If we speak about large components (like APU or LDG), quite often the operator does not need to restore their full life, especially if it is not required under the return conditions. The same applies to their own aircraft approaching the limit of service life (like remaining hours or cycles till DSG, heavy checks at the end of useful life, etc.). This approach, for instance, allows not sending LDG to the shop for an overhaul but acquiring a mid-life LDG that will match the requirements of redelivery condition or remaining life till the retirement of the Aircraft.?

Conventional leases prescribe that the components installed on the aircraft should have no more utilized hours and cycles than those removed.

Operators have limited options for procuring components that match these requirements. They can try to purchase new components from the OEMs - prohibitively expensive and with a lot of uncertainty in lead time.?

They can send their components for repair and overhaul to MROs - and face extensive and unnecessary non-routine workscope and a long lead time due to limitations in the supply chain.

The best solution is the exchange or purchase of used serviceable components with the desired useful life.?

Let’s look now at the MRO’s drivers and opportunities. MROs perform repair and overhaul of components as per the repair manuals and are not motivated to maintain customer costs low. We see some signs of flexibility and a responsive approach from the MROs specialized in Engine repair and overhaul. They realized that with airlines struggling with funding, they risk shortening their customer base. The problem is not visible now when the MROs are short of manpower and cannot realize their full potential. In addition, around 20 % of pre-pandemic fleets are on the ground (and many of them with deferred maintenance). With air traffic ramping up, airlines are forced to perform deferred maintenance and they try to minimize the cost. MROs must be ready for it and propose economic maintenance solutions, cooperating with the customers rather than exhausting airlines’ scarce working capital.?

Even in uncertain times, market players can find ways to make their services in demand, and grow their market share.?

I hope you found something useful in this article and other pieces published in 2022.

I want to wish you all a Merry Christmas and a Happy New Year!

Look forward to seeing you in Dublin and at the other industry events in 2023.

Let 2023 be a year of success and growth for our beloved aviation!