Jetrader - Fall 2014 - (Page 35)

Engine Support Plans Shift Market Dramatic changes in the engine aftermarket causing major concerns for aircraft investors T The following is an extract from a whitepaper written by Stratos. The era of independent engine servicers having a free-for-all in disassembling and maintaining engines appears to be coming to an abrupt end with profound implications for aircraft investors. Engine original equipment manufacturers (OEMs) are rapidly gaining market share with their all-inclusive support packages. The complexities of these packages combined with their tightening grip on all areas of the aftermarket will, in our view, result in the collapse of those second-tier investors and independent maintenance, repair and overhaul (MRO) companies who don't adequately adapt their business models to meet these challenges. Engine Values Engine values are extremely important for aircraft investors because for any given aircraft, the relative value of the installed engines increases from about 20 percent of the total value at new to 90-100 percent at age 20-25. The cost of maintaining engines is heavily stacked toward the second decade of an engine's life, so investors are very sensitive to the cost burden of maintaining mature engines: the forecast of intrinsic maintenance value is a key element in an investor's evaluation of residual values during the life of the aircraft. If current trends continue, the value of certain engines may be depleted to close to zero at any point after 12 years old, making the negotiations with lessee's concerning compensation payments for usage one of the only avenues to recover some loss in residual value. a collateral against future maintenance cost obligations during the entire life cycle of 20 years or so, referred to as lifebased rates. In this way, investors protect the asset value against the risk of lessee default and eliminate any requirement to subsidize engines transferring from one lessee to another by keeping the engine synthetically at full life throughout its operating lifetime. This sensible market practice has been receding over the past few years, affected by the shift by many airlines from traditional time and material maintenance contracts to all-inclusive engine service agreements. Maintenance Reserves Concurrently, engine OEMs are moving to control more of the aftermarket and are Continued on page 37 Traditionally, investors have collected engine maintenance reserves as OEM Programs Jetrader  *  Fall 2014 35

Table of Contents for the Digital Edition of Jetrader - Fall 2014

A Message from the President
Reach for the Stars
Beauty Contest
Boeing’s Current Market Outlook for 2014
Aircraft Recyclers Debate the Coming ‘Tsunami’ of Retired Aircraft
Engine Support Plans Shift Market
The Second Life of Aircraft: Does It Still Exist?
Restructuring Aircraft Leases in Bankruptcy
Aviation History
Aircraft Appraisals
ISTAT Foundation
Advertiser Index

Jetrader - Fall 2014