Jetrader - July/August 2012 - 14

Advancements in Engines
Technological improvements push engines into new era
By Dr Stuart Hatcher, Head of Valuations & Risk, IBA Group and David Rushe, Senior Analyst, IBA Group While for most players in this industry, the airframe remains king; there is a growing movement that now believe that the engine is where it is at. Engines have moved a long way from the introduction of the ﬁrst highbypass engines, and OEMs have constantly strived to produce an increasingly quieter, cleaner and more reliable engine that not only satisﬁes the range and burn criteria as set by the airframers (on behalf of the airlines) but also appeases the environmental lobby at the same time. Traditionally, localized environmental concerns (emissions and noise) and range have been the primary drivers for change, but as yields are squeezed further by increasing competition, pricing transparency and a wiser passenger, airlines need to combat the threat of rising cost of fuel if they want to stay in business. It was only a few years ago when we heard both Boeing and Airbus state that they would not develop a new airframe until an engine was developed with double-digit fuel burn improvements and improved reliability, whereas CFM and IAE were not able to conﬁrm a design until they were provided the necessary airframe specs to ﬁt a new engine to. So what changed to trigger the launch of the neo and disrupt what had become a happy 50:50 split and upset the ﬁnancial and leasing community at the same time? The cynical of us would highlight that it was an opportunity for Airbus to prevent the C-Series entering the space and to take advantage of technical issues that Boeing would have in trying to ﬁt a larger bypass engine under the wing of a 737, but there is also the increased pressure from the airline community. Over the past 50 years, technology has addressed many of the concerns made by the industry, but these improvement jumps are getting smaller and smaller now as engineers look for where the next big leap will be. operators of the incoming engine designs? The principal two will be maintenance cost and reliability, both of which are in direct conﬂict with the traditional long-term business model of the engine OEM: sell cheap at the point of airframe delivery and capture the future spare engine, parts, overhaul and upgrade market for the next 25+ years. If you make the engine more reliable and cost effective and still sell the engines cheap, then how do you make a proﬁt? The answer will lie with the further development of the Fleet-Hour-Agreements (FHAs), which end up being a win-win for both airline and OEM, but a sore point for the lessors who prefer cash reserves, and independent parts providers and MROs who will lose market share. There is no doubt that the development of the FHAs will grow in time as it not only offers the airline with generally a cheaper hourly cost, but should the new engines be less than perfect, reliability guarantees safeguard against potential exposure to shock maintenance and AOG situations. FHAs also encourage the OEM to maintain reliability and therefore perform larger scope shop visits with a higher inclusion of new material. From the OEMs perspective, FHAs provide them with a steady income, stem the ﬂow of PMA/DER, and enable them to capture MRO and spare part market share. Apart from losing reserves, the ﬁnancier/lessor does have the comfort that the engine and records will be maintained to OEM standards, be devoid of PMA/DER, be up to date with respect to Ads, and some SBs, and have the comfort that the engine and records be in good order if a default situation occurs. While FHAs have been deemed more appropriate to serve the widebody market, we still envisage that a reasonable market size is open to the narrowbody engine market as well—although to a lesser extent. It works well for widebody engines as the costs and values involved are in another league to most narrowbody engines but for many, FHAs for narrowbody engines will be an alien concept as most operators still prefer to manage how they use their ﬂeet. Certainly the engine lessors would prefer that FHAs remain a minor product for this space, but given the high reliability of new engine designs, it could be many years until we would see the ﬁrst shop visits and any sufﬁcient uptake for leased engines, although I’m sure sale and leasebacks will be in abundance.

Technological Revolution
From the technical point of view, there are a lot of new and exciting developments occurring at the engine OEMs that will undoubtedly lead to a technological revolution whereby we change our thought processes on what makes a good engine. The two main cost considerations for operators choosing engines over the years have been maintenance costs and fuel burn. According to IATA, fuel burn now accounts for more than 30 percent of operator expenses (versus 13 percent in 2003). Volatile fuel prices over the last few years in particular have seen operators demanding up to 15 percent reductions in fuel burn from aircraft and engine combinations. Maintenance cost reductions are very much dependant on improved materials, reduced part count and more efﬁcient air ﬂow in the engine. The graph on the following page illustrates the improvements that have been made in speciﬁc fuel consumption (SFC) and mean time between overhauls (MTBO) in the last 40 years. Signiﬁcant advances were made in terms of fuel burn when the CFM56-3 high bypass turbofan engines were introduced in the 1980s to replace the Turbojet JT8D and Spey models, while MTBOs have continued an upward trend since the 1970s until nowadays when it has become somewhat difﬁcult for the OEMs and MROs to predict removal times of CFM56-5B/-7B and V2500-A5. This has had the effect of temporary levels of oversupply and slightly depressed trading values in the market as the OEMs have produced engines to satisfy spare engine demand that wasn’t realized as engines surpassed ﬁrst run expectations. While CFM and IAE continue to be successful at introducing incremental improvements to

Development of Fleet-Hour-Agreements
Fuel burn is key, but what other factors will be of great concern for the future

14 The ofﬁcial publication of the International Society of Transport Aircraft Trading
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Jetrader - July/August 2012

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