The Aircraft Harvest: How to Profit from Aircraft Retirement
As operators seek more fuel-efficient and environmentally friendly aircraft utilizing some of the lowest cost large equipment finance options in decades, the retirements of older models are accelerating. Aviation experts are forecasting that around 6,000 to 7,000 commercial aircraft will be replaced in the next 10 years globally. Historically low interest rates, higher fuel costs, and new technologies are all contributing to the increase in aircraft retirements.
Currently, the worldwide commercial air transport fleet stands at approximately 23,000 aircraft, both jet and turboprop powered. With annual air traffic growth at around 5 percent and over 3 billion passengers flying per year, aircraft deliveries will exceed 16,000 in the next 10 years. After aircraft retirements, the global fleet will be over 32,000 aircraft by 2024.
The composition of the retiring aircraft over the next 10 years is forecasted to be approximately 43 percent narrow bodies, 21 percent wide bodies, 28 percent regional jets, and 8 percent turboprops. With the historically high usage of leased aircraft by operators, the ease of replacing older models will certainly continue. So, what happens to all of these aging aircraft that will be pulled from service and parked?
A number of aircraft, approximately 2,000 to 3,000, have simply been abandoned in mostly developing countries. Many of these are scrapped due to the high rate of part cannibalizing and general disrepair of the aircraft. Others are parked in various storage facilities predominantly in the southwest U.S., the climate being optimal to keep corrosion to a minimum.
For most of these aircraft, the engines carry the majority of the residual value and if they remain on-wing, will be pressed back into service at some point. Most of the legacy aircraft such as DC-8’s, DC-9’s, DC-10’s; B707’s, B727’s, older B737’s and B747’s, will not fly again. These first generation aircraft offer very little in terms of a part-out exercise. However, the non-classic Boeing and Airbus models are attractive disassembly prospects and can provide value through component support to operators.
End-of-life solutions
Newcastle Aviation specializes in end-of-life solutions across aircraft platforms by assessing certain types of airframes, engines, and components that we believe will provide maximum value to the marketplace as supply/demand dynamics continue to evolve and the world fleet changes. A number of factors come into play when considering and then processing a particular aircraft for part-out. Besides the geo-political, regulatory and governmental implications associated with the asset’s location, performing the pre-delivery records review and physical inspection must be carefully planned and executed. But before any of this occurs, one critical step will come first. We undertake an in depth demand profile analysis of the asset to obtain a clear picture of the teardown value and optimal exit strategy for the asset.
A typical commercial narrow body aircraft, for example, on a nose to tail disassembly will produce around 2,000 parts (airframe only) depending on how extensive the part-out is. By utilizing OEM illustrated parts catalogs (IPC) and Newcastle Aviation’s proprietary aircraft parts valuation and demand forecast modeling, we are able to hone in on which components will provide the most value to the market at the best return on investment. The 80/20 rule generally applies to any part-out project: 20 percent of the parts typically carry 80 percent of the value and these are the components that garner most of the attention.
Categorizing parts
Besides sophisticated valuation and demand modeling, another key consideration when looking to monetize an aircraft is the dispatch criticality of each component. Parts that are flight critical and have a no-go status are labeled as Category 1 items. Hydraulic components, wheels and brakes, flight deck instrumentation, and navigational equipment are some examples of these kinds of parts. Even if the demand analysis is somewhat weak and market saturation is high, these parts are still good candidates to stock for customer support.
Category 2 parts are critical but are listed in the Master Minimum Equipment List (MMEL) so they have a level of dispatch relief. Category 3 parts cover a broad spectrum of ATA chapters including accessories and flight controls.
Lastly, Category 4 components would typically be interior parts and structural items. Categorizing components helps prioritize the workflow during a part-out and adds an additional level of intelligence when considering what to remove from the aircraft.
Logistics and QC
Logistics and quality control are essential elements to any disassembly project. Where the asset is physically located and its airworthy condition determine the first steps; does the aircraft have to be moved to a part-out facility or can mechanics be dispatched to where it currently is parked. Security of the asset is paramount.
Once ownership has transferred, it is essential that the aircraft is in a safe and secure location and that it is intact as described in the purchase agreement. If the aircraft must be parted-out in a remote location, environmental concerns must also be addressed. Along with this, final hull disposal must be arranged for.
Any components removed from the aircraft must be done so as per the maintenance manual and identified using the aircraft IPC. A parts removal tag is required for each part that lists the exact part number, description, condition, as well as the aircraft serial number, date, and mechanic’s name and license number. A master removal spreadsheet is updated with all the removal activity on a daily basis.
Inventory and repair costs
Another significant aspect of any disassembly project is that once the parts are removed and now reside in a warehouse in as-removed condition, what level of repair dollars should be invested in the inventory on the front end? What parts should repairs be invested in? Which ones should not? What is the exit strategy for both?
Operators often cannot absorb any lead time for a part due to the criticality of the requirement. Thus, a certain amount of investment is made to have parts in stock on an immediate basis. Utilizing the aforementioned demand analysis again provides a solid tool that will pinpoint specific components that need to be inspected, tested, repaired, or overhauled. Also, Category 1 parts that can prevent a flight from dispatching are closely reviewed for repair opportunities. Even if the overall demand is low, these no-go units are prime candidates to invest in. Of course, even with this type of analysis, market demand trends and eventual supply saturation of any component still must be carefully evaluated and managed on an ongoing basis.
Retirement strategies and asset management
Per Steve Hendrickson, CEO at Newcastle Aviation, "Our ability to offer cost-effective materials support and asset management solutions depends on our ability to develop and utilize the most cutting-edge market intelligence and asset valuation tools available today. This is critical to helping our end-user customers reduce and manage their operating and ownership costs throughout the life cycle of their fleets. This includes initial inventory provisioning, economies of scale repair management and spares pooling, asset leasing, inventory sale leasebacks and consignment, as well as working closely with them to design and implement fleet retirement strategies that maximize the return on their end-of-life aircraft, inventory, and related support equipment."
As the world’s commercial fleet continues to be transformed both in size and composition, the number of aircraft retirements is increasing. The average aircraft age has fallen below 24 years and considering the average was almost 30 years as recently as 2008, this is a significant decrease. In addition, with the entry of new aircraft such as the A320NEO and B737MAX, further pressure will be placed on the disposition of the global fleet of existing A320’s and B737NG’s.
Approximately one-third of the world’s fleet resides in North America, Western Europe has 20 percent, Eastern Europe has 5 percent, and China, Asia Pacific, and India combine for about 25 percent. While North America will actually see a decline in its market share, emerging markets will see an increase. More mature aircraft will still find a home in these markets, driving demand for parts. The net result is that the wave of forecasted aircraft retirements presents numerous opportunities for aftermarket suppliers to harvest airframe and engine components and help reduce the cost of ownership and ongoing operating costs for airlines.
Based in Burnsville, MN, Newcastle Aviation specializes in the sale, lease, exchange and procurement of commercial, regional, and general aviation jet, turboprop and helicopter aircraft, engines, landing gears, avionics, hydraulic and pneumatic components, and replacement parts. For more information visit www.newcastleaviation.com.
