Jetrader - September/October 2010 - 21

The Big Question
What’s to come— narrowbody replacement or re-engine?
By Phil Seymour, President & COO, IBA Group, Ltd.

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Let’s get down to the thrust of it… With 3,250 B737NG delivered and another 2,000 on order, as well as 2,230 A320s delivered and another 1,800 on order, the replacement of those aircraft has led to many a discussion over the past six years. Back in 2004, the theory was that the replacements would be in production from around 2014/2015. In fact, I recall a discussion with one CEO of a major operating lessor who said they would not be placing orders for the 737-800 for delivery after 2009, as he thought that the residual value performance and lease rates of the later-produced -800s would be negatively impacted as the replacements came on line from 2014. Well, how things change! The talk of replacements has taken a back burner, and the focus is on the potential for re-engining at some point—almost certainly not before 2015. So why the hold-up? Is it a problem? Is it a sign of the times? Is it a sign of technological developments not being as advanced as expected? In my opinion, it is based upon a combination of several factors. The airframers state that the value proposition for a replacement aircraft only makes sense if airlines can see a 15 to 20 percent reduction in operating costs. The engine performance is the main driver that provides the potential for double-digit improvements. The airframers can provide improved wing designs and some new material options, but the engine remains the prime focus to deliver the majority of the efficiency improvements. There is a school of thought that the rationale for developing aircraft with different engines is directly linked to the ebb and flow of the tide of fuel price—as fuel prices increased, the desire for more fuel-efficient aircraft increases, and the economics also improve. The environmental argument appears to ebb and flow in a similar fashion. Reducing emissions of CO and NOx is useful in the continued drive to demonstrate that our industry is facing its responsibility to slow global warming.

It is reasonable then to suggest that the engine technology drives the aircraft programs. If we consider the advances made from the late 1960s with the likes of Rolls-Royce Spey engines and Pratt & Whitney JT8D engines, the advances have been huge both in terms of specific fuel consumption, time between overhaul/refurbishment and noise/emissions. (See table on page 22 to show the major steps that have taken place over the years.) Some of us are old enough to remember the smoke trails rather than the vapor trails. To see an aircraft engine these days emitting masses of smoke is indeed a rarity. No doubt the chemists will tell me that the stuff I can’t see today is just as damaging as the smoke, but I am sure you agree it must be an improvement. It appears to me the dilemma is that the rate of improvement is now single digits, so unless the airframers can make strides with the composites that will support an “electric versus pneumatics/hydraulics” argument, then we may as well continue with what we have. So what should we make of this issue? A B737 RE and A320 RE (replacement engine) appears to be an interim measure prior to an all-new aircraft. However if it is the engine that delivers the majority of the improvement, then what improvement will the all-new aircraft have over the re-engined interim measure? There appears to be more practical issues with respect to the B737 than the A320 in terms of physically placing a different (wider inlet) engine on a B737 rather than an A320 due to the lower ground clearance of a B737 compared to the A320.

The Costs of Improvement
How does the prospect of re-engining impact appraisers’ view of residual values of the current fleets? I cannot speak for all appraisers, but my opinion is that the current fleets have benefited from the delay in decision-making. Most appraisal firms Jetrader 21



Table of Contents for the Digital Edition of Jetrader - September/October 2010

Jetrader - September/October 2010
A Message from the President
Contents
Calendar/New
Q&A: Dr. Alan Epstein
Commercial Outlook is Up as Economies Rebound
Crisis, What Crisis?
The Big Question
Funding Fundamentals
Is That a Lawsuit in Your Luggage?
AFRA Sets Ambitious Challenge for Aircraft Recycling Sector
Road to Recovery
Remembering Hafthor Hafsteinsson
License to Fly
Aircraft Appraisals
From the ISTAT Foundation
Aviation History
Advertiser.com/Advertiser Index
Jetrader - September/October 2010 - Jetrader - September/October 2010
Jetrader - September/October 2010 - Cover2
Jetrader - September/October 2010 - A Message from the President
Jetrader - September/October 2010 - 4
Jetrader - September/October 2010 - Contents
Jetrader - September/October 2010 - 6
Jetrader - September/October 2010 - Calendar/New
Jetrader - September/October 2010 - 8
Jetrader - September/October 2010 - Q&A: Dr. Alan Epstein
Jetrader - September/October 2010 - 10
Jetrader - September/October 2010 - 11
Jetrader - September/October 2010 - Commercial Outlook is Up as Economies Rebound
Jetrader - September/October 2010 - 13
Jetrader - September/October 2010 - 14
Jetrader - September/October 2010 - 15
Jetrader - September/October 2010 - Crisis, What Crisis?
Jetrader - September/October 2010 - 17
Jetrader - September/October 2010 - 18
Jetrader - September/October 2010 - 19
Jetrader - September/October 2010 - 20
Jetrader - September/October 2010 - The Big Question
Jetrader - September/October 2010 - 22
Jetrader - September/October 2010 - 23
Jetrader - September/October 2010 - Funding Fundamentals
Jetrader - September/October 2010 - 25
Jetrader - September/October 2010 - 26
Jetrader - September/October 2010 - 27
Jetrader - September/October 2010 - 28
Jetrader - September/October 2010 - Is That a Lawsuit in Your Luggage?
Jetrader - September/October 2010 - 30
Jetrader - September/October 2010 - 31
Jetrader - September/October 2010 - AFRA Sets Ambitious Challenge for Aircraft Recycling Sector
Jetrader - September/October 2010 - 33
Jetrader - September/October 2010 - 34
Jetrader - September/October 2010 - 35
Jetrader - September/October 2010 - Road to Recovery
Jetrader - September/October 2010 - 37
Jetrader - September/October 2010 - 38
Jetrader - September/October 2010 - Remembering Hafthor Hafsteinsson
Jetrader - September/October 2010 - 40
Jetrader - September/October 2010 - 41
Jetrader - September/October 2010 - 42
Jetrader - September/October 2010 - License to Fly
Jetrader - September/October 2010 - 44
Jetrader - September/October 2010 - Aircraft Appraisals
Jetrader - September/October 2010 - 46
Jetrader - September/October 2010 - From the ISTAT Foundation
Jetrader - September/October 2010 - Aviation History
Jetrader - September/October 2010 - 49
Jetrader - September/October 2010 - Advertiser.com/Advertiser Index
Jetrader - September/October 2010 - Cover3
Jetrader - September/October 2010 - Cover4
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