Determining the value of an engine at different phases of its life-cycle requires consideration of a variety of factors, particularly engine maintenance value and engine core value. Depending on the phase of the engine's life, options to the owner include repair or overhaul to put value back into the asset; or, alternatively, green-time sale, tear-down and part-out of used serviceable material in order to extract remaining value from the engine. Maintenance value accounts for the value of life-limited parts (LLPs) and the value associated with the on-wing time before requiring a performance restoration.
Core value, on the other hand, is the value of nonLLPs and the engine data plate. Ensuring back to-birth traceability is of paramount importance for owners, lessors and lessees. Any gaps or issues in documentation can have a significant impact on the residual value of the engine and, in some instances, can render the engine worthless. Owners and lessors must ensure records are kept otherwise difficulties may arise in future sales or leases. Lessees must retain records otherwise they may be required to pay a premium to replace any parts that are unaccounted for during or at the end of lease.
Other influences on value include macroeconomic factors, such as oil price, reputation for reliability, age, entry-into-service delays, exclusivity, restrictive maintenance programs, and supply and demand. Two factors that have a similar effect are new aircraft program delays and the impact of low fuel prices. Low fuel prices have driven new aircraft delivery deferrals as the capital expenditure cannot be justified for minimal return through efficiencies afforded by the new aircraft. The effect of program delays, although similar to low fuel prices, differs in that the choice of a delivery deferral is out of the operators' hands. The aircraft is simply not ready to be delivered.Both factors mean existing aircraft fleets remain in service for a longer period, which postpones the retirement of that fleet in future. This can tighten the supply of parts and spares but can also delay the effects new technology may have on the market. Maintenance across the phases of an engine life-cycle is important to preserve current and future engine value. Engine life and value can be restored by refurbishing and replacing all LLPs with new parts.
However, the value of an engine is tied closely to the performance of the host aircraft family; therefore, as the family approaches the end of its economic life, so too does the engine. This can be seen in Figure 1, where the market value of the CFM56-5B4/3 - fitted to the A320ceo - steadily declines towards the end of the next decade and into the 2030s. The decline in value coincides with the retirement of many older A320ceo models. At this point, restoring or overhauling the engine may become an economically non viable proposition and the engine may be sold as a green-time engine or to part- out specialists to salvage any USM.
Through an engine's life, the condition of the LLPs and the maintenance status of the engine will also affect the value. For valuation purposes we refer to a theoretical middle point called the half-life value, where both LLP and maintenance remaining will be equal to 50%. When an engine has more than 50% for either LLP or maintenance remaining then there is a positive adjustment from half-life; conversely, there will be a negative adjustment for less than 50% life remaining. Once an engine reaches about 20% life remaining, this has a significant effect on the value of the engine. The engine can be maintained at this point or, depending on the age and the cost of maintaining the engine, there may be opportunities to sell or lease, for example, as a green-time engine or even for parts.
LLPs are any part within an engine that have a mandatory replacement limit. This limit is the life limit of the part, which is most commonly presented in cycles. These parts are commonly rotating parts, but there are also static LLPs (typically module cases). An LLP when first designed will have an ultimate life and a Chapter 5 life limit set by the OEM's authorising body, usually EASA and the FAA. The Chapter 5 limits will normally be less then or the same as the ultimate life. These Chapter 5 limits can be changed during an LLP's life, if accompanied by a part number change or a service bulletin (SB).
The LLP modules within an engine are the low-pressure compressor (LPC), high-pressure compressor (HPC), high-pressure turbine (HPT) and the low-pressere turbine (LPT). Some engine types will also have an intermediatepressure compressor (IPC) and intermediatepressure turbine (IPT); this is common in RollsRoyce engines. The number of parts within a module is also dependent on the engine type, even from the same OEM. For example; the General Electric CF6-80C2 has four LLPs in the LPC and the General Electric CF34 has two LLPs in the LPC.
Remaining LLP life is calculated by the cycles used and the Chapter 5 limits of the LLPs within the engine, and each module and cycle is given a monetary LLP adjustment value derived from the potential usage and the OEM catalogue price for the LLP part. This is then used to calculate how much of the original LLP value remains given the usage. This adjustment is then applied to the half-life value. When an engine ages and modules reach or approach their limits, they may be changed out for modules from other engines. This can result in the separate modules having different usages. This can also apply to the different LLPs within a module that have been changed. This is common in CFM engines which have varying limits on LLPs across modules.
When calculating the maintenance remaining on an engine, OEM mean time between overhauls (MTBO) data is essential. The OEM gives a range for the MTBO, which with the flight hour to flight cycle ratio, is used to calculate the interval in cycles.
When an OEM publishes their average MTBO, they separate the intervals out into engine models and then into thrust rating, some of which overlap. This is due to the difference between the engines and the effects of the different thrust ratings on the hardware. Within an engine model, it is expected that the lower thrust ratings will have higher time between overhaul due to less hardware distress over the same period of time.
The derate on the engine will also affect the intervals between the shop visits as the higher the derate the lower the thrust. Therefore, as with a lower thrust rating, there will be less deterioration affecting the engine hardware, thus allowing longer maintenance intervals.
The region of operation of an engine is important due to the effect of the environment on the engine. International Aero Engines supply recommendations on this effect. The reason that certain regions affect the MTBO is due to the added stress put on the hardware due to the environment. For example, the Middle East lowers the MTBO due to more thrust having to be used to achieve the same amount lift as somewhere cooler, due to the air density.
For an engine in service another factor to be taken into account is the LLP limiter; this is the lowest LLP life remaining in the stack. This affects the maintenance remaining as the engine will have to go in for a shop visit to replace this part should it become due. The limiter is therefore the maximum amount of cycles before the engine has to have a shop visit. So, even if the maintenance interval is higher, the limiter is used to calculate the maintenance remaining as it will be the primary maintenance driver.
An engine may have 100% maintenance remaining, but, unless a full LLP replacement is carried out, the engine does not return to full life. When making a total maintenance adjustment the performance restoration carried out in shop and the LLP stack remaining are separated. As such despite the engine having 100% of is shop visit maintenance remaining the engine cannot achieve full-life value unless the LLP stack is fully replaced. Depending on the workscope, the engine will regain some of the maintenance utility. A generic example of how this relationship affects value over the life of an engine can be seen in Figure 2.
Eventually the cost of a shop visit and/or LLP change will be more than the value of the engine. When this happens it may be cheaper to sell the engine for part-out and buy or lease a green-time engine. A green-time engine is an engine which has a limited LLP life and maintenance remaining after being removed from service. This is a popular option for operators who have a specific operational window for an aircraft, and they are able to lease in an engine suitable for this desired time period without having to be concerned about performing maintenance. In this situation, the operator will pay a lease rate plus maintenance reserve, often referred to as an all-inclusive lease.
A prevalent example is the CFM56-5C engine fitted to A340-200s and A340-300s. Many operators are trending towards twinengine aircraft fleets as they can match distance and capacity on similar routes but offer a significant reduction in engine maintenance cost. Legacy carriers like Cathay Pacific have already retired their entire passenger fleet of A340 and 747 aircraft in favour of the A330, A350 and 777. Increasing numbers of parked and retired A340s have released a surplus of CFM56-5C engines for sale or lease. This gives existing operators, or secondary and tertiary operators on short-term A340 leases, the opportunity to identify green-time engines for sale to maximise the remaining maintenance value in the engine. This has caused a strengthening of the CFM56- 5C market, particularly for the higher thrust CFM56-5C4 variant.
CFM56-5C engines also lend themselves to part-out scenarios as they share a high degree of commonality with the CFM56-5B variant used on the A320ceo family. Operators will have identified optimal workscopes to fit their strategies, whether that is to utilise full LLP life or replace LLPs early to minimise shop visits. Low-cycle USM can be sold and fitted to other engines to bridge the gap between light and heavy shop visits.
Widebody aircraft engines such as the Trent series and GE90s have maintenance programs that are heavily influenced by Rolls-Royce and General Electric (GE). Valuing engines under these maintenance programs is becoming increasingly difficult as there is less transparency. OEMs are continuing to increase their presence in the aftermarket, which makes green-time leasing, part-outs and sourcing spare engines more challenging.
This will become evident in the coming years as a growing number of GE90-115B engines used on the 777-300ER approach maturity. The GE90-115B engine program spans 13 to 14 years since entry into service and deliveries are continuing today. The challenge over the next decade is to provide enough parts and spares to service the engine fleet as they enter a mix of first, second and third shop visits. An increase in demand will cause a tightening in value and lessees may see an artificial rise in the short-term lease rates of the engine.
A similar issue will arise in the narrowbody market for the A320ceo, powered by CFM56-5B and IAE V2500-A5 engines, and the CFM56- 7B-powered 737NG family. These engines are approaching maturity but have a large backlog and production is expected to continue into the early part of the next decade. Demand for spares and parts over the next 10 to 15 years will increase as the engine fleet enter into a mix of first, second and third shop visits - causing engine values to peak.
The CFM56-7B superseded the CFM56-3 engine that powered the 737 Classics. The more reliable and fuel efficient CFM56-7B, coupled with an economic downturn, had a dramatic impact on CFM56-3 engine value and caused operators to park or retire many 737 Classic aircraft. However, current low oil prices has seen a resurgence in demand for mature engines as operators seek to utilise the remaining green-time available. In particular, freighter variants of the 737 Classics that operate one or two cycles per day can benefit enormously from the green-time as lease rates and fuel prices remain low.
The next generation CFM LEAP family and PW1100G engines are now beginning to enter revenue service. By the middle of the next decade, this fleet of newer engines is expected to overtake the current engine fleet. Figure 1 shows the impact of the CFM LEAP-1A26 on the CFM56-5B4/3, both fitted to the A320.
The advent of the CFM LEAP-1A26 coupled with the retirement of the CFM56- 5B4/3 fleet will cause the value of the latter to decline.
Lease rates may remain steady in the near term as the engine undertakes shop visits and performance restorations, but, towards the end of the next decade, market value and lease rates are expected to soften.
By the 2030s, the A320neo will start to enter the secondary market and reach a wider operating base, further exacerbating the decline in lease rates and engine values of the CFM56-5B fleet. This trend is likely to be similar for the CFM56-7B fleet as the CFM LEAP-1B fleet grows.
Although the introduction of new technology had a detrimental impact on the CFM56-3, it did not cause an immediate decline in value until the A320ceo and 737NG had fleets comparable in size to the 737 Classic. As the CFM LEAP-1A and PW1100G powered A320neo and CFM LEAP-1B powered 737MAX fleets grow, might history repeat itself?
Both the A320ceo and 737NG have healthy production backlogs and significantly larger fleets than their predecessors so it is uncertain whether their decline in value will be as dramatic and as sudden as previously witnessed. However, with current geopolitical and economic instability, a rapidly changing market would be unsurprising.
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IBA's Engine Market Update is designed specifically around the business needs of Investors, Lessors, Operators and Financiers looking to understand the performance of the Engine market and the flight path to recovery. This session provides valuable insight to help the aviation community identify market opportunities, structure deals and mitigate risk in the wake of COVID-19. IBA's Phil Seymour, President and Head of Advisory, David Archer, Senior Engine Analyst and Jamie Davey, Engine Analyst, share their insight on: Engine value resilience and the flight path to recovery Shop Visit Forecast modelling and the impact on the aftermarket, values and lease rates How have OEMs been supporting the industry Fleet trends of the most popular engine types during COVID-19 Engine performance - Value and Lease Rate update The slide deck is available to download here. If you have further questions please contact: David Archer
How do we approach our values? Our large team of engine and aircraft analysts and 6 ISTAT qualified appraiser's specialise in a broad range of aviation assets including commercial jets, engines, helicopters, business jets and landing slots. David Archer, IBA's Senior Engine analyst, talks through IBA's approach to engine valuations, why they are an attractive investment and what factors influence their value. Click here to listen to the short webcast. If you have further questions, comments or feedback please contact: David Archer
Our engine analysts have been investigating recent concerns of spare engine and parts shortages for three commonly traded engines, the V2500-A5, CFM56-7B and -5B. Our findings suggest that the engine lease market will not be able to support the 25-35% increase in shop visit rates forecast for CFM56-7B and -5B engines and continuing strong demand for V2500's in the period 2019-2024. There is currently very limited availability of spares and unless more spare engines are generated by retirements and aircraft teardowns, or airline held spare stock absorbs some of the demand, IBA expect engine inductions and longer TATs will create a log jam further intensified by the impact of compound shop visits i.e. first run, second run and third run overlapping.
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