Aviation: What a difference a year makes...

As 2015 comes to an end, Richard Mumford, Partner looks back at the fluctuating fortunes of the engine market over the course of the year.

There have long been grumblings in the mature engine market about the ability to own and operate mature Rolls Royce engines in an economical way. Indeed, this was an issue that many believed had significantly affected the viability of a whole aircraft type in the A340-500 and -600. At ISTAT Europe in 2014, Rolls Royce took a defiant stance, claiming to bust a number of “myths” about its practices in the market to an incredulous aviation audience.

Mature engine owners and lessors were becoming increasingly nervous about the trend in the market for a widening number of engine OEMs to require the use of new OEM parts in old engines, which would have a serious impact on the economic viability of mature assets. Winter was truly coming.

Wind forward a year and the first buds of apparent spring are starting to show. Rolls Royce arrived at ISTAT Europe in Prague in an entirely different frame of mind: apologising to the market and surprising the aviation community once again, but this time by setting out a whole new approach to the management of mature assets.

This new approach features a range of packages from total care right through to time and materials, along with a promised increase in licensed independent shops. If implemented effectively, this will be broadly welcomed in the market.

So what is going on? The A340 situation was a bit of a wake-up call. Yes, it has four engines and struggles to compete on seat/km costs with newer aircraft types, but fundamentally the A340 fleet is young enough and good enough to be flown commercially for many years to come.

This is particularly so for low frequency routes in the current oil market. However, the -500 and -600 aircraft are exclusively Rolls powered and it appears that for the mature aircraft leasing market this presented a serious problem. The reason for this is that taking an aircraft out of the back end of a total care package is expensive and keeping it in that programme was largely considered to be unviable, particularly on a mature, four-engined aircraft.

The problem has been that total care packages can be very attractive for the first purchasers of a new engine. This is (in very basic terms) because the aftermarket charges to maintain the engine mitigate margins such that the initial capital cost of purchasing the engine can be reduced. However, once the engine hits the mature asset market, that advantage is lost and the costs of maintaining the engine on a total care plan can become prohibitive.

The European Commission is now taking a look at the engine maintenance market, though it remains to be seen what the scope and veracity of that exercise might be. It is not an investigation, but rather more of a gentle enquiry as to the current state of the market. Fundamentally, it would be good to see broad appeal and viability across the range of ages and manufacturers of aircraft and so the market should embrace and encourage this new approach.

First published in MRO Network, December 2015

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