As Engine OEMs Seek to Increase Their Presence in the Aftermarket, IBA Takes a Balanced View of this Sensitive Topic

It is evident that aircraft engine OEMs are pushing for greater control of the aftermarket. As new engines have been developed, particularly for the narrow body sector, OEMs have sought to lock operators and lessors into aftercare program, with LEAP capturing 60 percent and GTF securing by all accounts over 90 percent of the market respectively.

“Historically, this has been a widebody discussion,” says David Archer, Senior Analyst at aviation consulting firm, IBA Group. “The open secondary market delivered several benefits: residual values remained strong, liquidity in engine assets stimulated the ability to trade, owner/operators could choose how they maintained their engines, short build program matched engines’ remaining life, used materials and even PMA parts in mature markets generated cost savings.

“Importantly, lessor control of maintenance reserves was sustained.”

It is IBA’s experience that an open market has always had a positive impact on fleet longevity, and competition is able to flourish which helps control the costs of maintenance and parts. Owner/operators have enjoyed flexibility and supported independent engine MROs. Now, with the narrow body market showing significant gains over wide body aircraft in terms of new orders and in-service aircraft, the picture is different and the interests represented in the market have also changed.

That is not to say it is all doom and gloom, IBA point out that the recent CFM and IATA pro-competitive agreement shows a new approach and showcases the way forwards for manufacturers, even in relation to new engine models. As David Archer explains: “Originally there was a potential downside to this initiative as it only focused on the older CFM56 engine type, but CFM has stated that it will apply to the LEAP too and it is starting to look at its allocation of independent repair shop approvals. The scope of this agreement covers used materials, DER and PMA. Warranties will be honoured on engines with non-CFM parts and fees for the use of shop manuals will be waived.”

“Further an OEM controlled aftermarket offers reduced operator risk – this has been key during the recent GTF/Trent1000 difficulties” says David Archer. “OEMs absorb associated costs and the negative impact is minimised by offset risks. Operators enjoy peace of mind, especially with new technologies, and this has great appeal. However, there are drawbacks as fleets mature. OEM focus has always been on innovation and new product development – the quantum leaps in aircraft and engine design to deliver cost-efficiencies and reduce environmental impact are indicative of their success. It is what they are good at. Whether or not this same drive will promote an innovative and open aftermarket designed to benefit the owner/operator is to be seen in the narrowbody market.”

It is easy to forget that the A380 has been in service for over a decade and in this time the market has shifted massively in favor of narrow body aircraft. Quad engine planes are no longer the way forward due to the high operating costs and since Airbus’ announcement to cease production IBA has been examining the impact on the in-service A380 engines.

“We believe that people may be unaware of some key points” says David Archer. “Firstly, these engines are not applicable to any other aircraft family, they are unique to the A380 infrastructure. They cannot be swapped because of the prohibitive costs and they have minimal to no parts commonality with any other engine family.”

According to IBA, the key trend to look out for is what will happen at lease ends. So far operators have adopted different tactics. Singapore Airlines has scrapped their aircraft, Lufthansa is selling six of their fourteen aircraft back to Airbus and it looks as if Malaysia Airlines will follow suit. Air France is returning half of its fleet to the lessor, five aircraft, at lease end in 2020. Operators suggesting a twelve-year operating life before retirement has a huge potential impact on the future alongside retirements and other events.

On a more positive note, IBA observes that Air France will be spending Euro 45m each on refitting their remaining five A380s, the Lufthansa sale is indicative of Airbus’ continued robust support for a secondary market, Hi-Fly’s wet-lease model is a fast way to boost short term capacity and they are seeking a second airframe, and BA is considering second hand aircraft to solve congestion issues at LHR.

“There is some potential for an aftermarket for engines” concludes Archer. “But every aircraft represents four engines in a relatively small and niche fleet, so options are limited. Rolls Royce leasing Singapore Airlines’ engines will not be an option for all. Looking ahead, IBA’s view is a conservative one on engines and parts. We’ll be considering the impact of likely changes in residual values and depreciation.”