AAR looks to adapt in a changing engine teardown market
At this year’s MRO Network: Engine Leasing, Trading and Finance conference, James Pozzi spoke to AAR’s director of commercial sales Christophe Giraud about the current state of the engine teardown market and how the aftermarket specialist is adapting to increased competition.
You sat on a panel focused on engine part-outs at ELTF, which covered a number of issues about the industry’s current state. What did you take away from this discussion?
What I took away was that the market is definitely changing and at a very quick rate. But it is also difficult to make accurate long-term forecasts, because right now, the part-out market is still very much centred on legacy engines, like the CFM56, -3, -5a, CF68C2 and the 5C. As a result, our business is based on traditional engines. More recently, we’ve also began to expand our business on some of the more modern engine types such as the V25-A5, which should generate further growth. At this stage, it still isn’t fully clear what exactly the OEMs are planning to do with the next-generation engines and whether they will let some independent shops repair them. With this in mind, AAR is going to have to think about reinventing our business model towards these engines. There’s certainly plenty of future but we will need to adapt our model and perhaps focus more on niche markets, such as engine trading and the leasing of green time engines. There’s also the possibility of engine management in our thoughts.
What has been the thinking behind AAR diversifying its engine services?
The engine division of AAR is no longer one that simply trades material; we now want to be offering full support and going beyond selling parts. We want to offer a fully integrated service solution as we know there are newcomers in the market who have been very aggressive in terms of their pricing. Of course, AAR will always try to match its competitors on price but our priority is really to offer long-term solution to the MROs and airlines we work with because it’s important for an airline or a lessor to have a partner instead of someone who simply knocks on the door and says they have a good deal. I understand why an airline or a lessor would take such a deal but it’s still important to have a trusted long-term partner who is constantly there to support their needs.
You speak of competitors and their aggressive engine pricing. Has this occurred in certain regions such as China or has it been a more common occurrence globally?
It hasn’t come from China specifically, it’s also coming from our traditional competitors. On some of the more mature engine types, a number of our competitors decided to have an exit strategy and right now their priority is to get rid of their current inventory and they do that by offering some extremely aggressive pricing. I say this without judgement, because AAR can never rule out doing this either. But what we are looking at other inventory as an asset. As much as stock can become a liability when it becomes too old, inventory will always remain an asset for us. We are not sentimental about it and we know we need to sell it, and will price accordingly, but we will never harm the market and contribute to a drop unless necessary. Like most companies, we want a steady engine market.
Are AAR anticipating when they will get a better indication as to whether these will be viable avenues?
It will certainly take time. Until we have the appearance of an independent shop, we won’t know. Even if the day comes that we know AAR will be approved for these new engines, there will be other factors to consider, such as how many parts we can scrap, how many we will be replaced and whether the OEM will develop some repairs for the parts – this could take between five and ten years after the appearance of the engines on the market. At this stage, no one has a crystal ball so no one can be confident that there will be a ready-made market for us. But do I personally think we will be able to get a market share? Absolutely. Mainly because it could be possible that the OEMs won’t have the capability to serve the entire market without the help of independent shops and the likes of AAR.
There’s been a lot of talk about change in the part-out market in recent years, with some even speculating about a significant downturn as recently as 2014. What has driven some of these changes?
I’d again state competition as one of the main negative factors; there’s a lot of it and new competitors are always appearing. It also still remains difficult to find some good assets for part-out on some of the main engine platforms. For an engine like the V25, when an operators wants to sell them and they are serviceable, another operator such as an airline or a lessor are going to buy it as a spare to fly it. Also, there’s always noticeable differences between the engine’s book value and the market value. Most of the time of the airlines are very sentimental about the price of their assets, and I’d like this to selling a house – you put your heart into it. As a result, sometimes the book value doesn’t make sense for us based on the market value we can get. There’s also industry-wide factors such as oil prices reaching their lowest price levels for many years, which has resulted in less retirements of aircraft now than two to three years ago.
Are there still favourable opportunities in the world of engine teardowns?
Despite the aformentioned challenges, there’s still lots of good news. The engine market has proven itself to be an industry that can make money and remains integral to the airline business. For AAR, I’m confident this will continue due to our efforts to diversify over the past decade. Part-outs have changed, despite most of the business still being about buying assets, tearing down assets and selling parts. We’ve seen a constant increase in requirements from customers who want to do engine exchanges, buy serviceable engines and sell unserviceable assets to AAR. It’s still viewed as a more financially beneficial option to avoid the shop visit. Some of our competitors are more recently tearing down new engines, although AAR has never done it. When a company tears down a new engine, they will get a premium price for the more desirable parts. However, some of the slow moving parts will mean competing against the whole market, even if the materials are new.
Which engine types are proving particularly popular for teardowns?
A constant flow of V25-A5, and CFM-5B and -7B turbofan engine types would prove very popular. In the future, more GE90 engine family types could one day become more in demand and that could really make an impact. But the GE90 is still a market that AAR has yet to touch and while by no means unattractive, we still need more information to make sure that it represents the next-generation for the used engines market.