Engines by trade
Anca Mihalache, VP Engine Trading explains to Keith Mwanalushi about the engine marketplace in the current environment.
Download a PDF of the article from the October 2020 issue of AviTrader MRO.
In early October, Rotterdam-based APOC Aviation announced the acquisition of three CFM56-5A’s that have been inducted into the company’s engine division launched a year ago. The engine type powers the Airbus A320-family platform.
In a market hit hard by the COVID -19 crisis, Anca Mihalache, VP Engine Trading at APOC Aviation tells AviTrader MRO that prior to March 2020, there was almost no availability of CFM56-5A engines. “We are now seeing some of these assets coming on to the market, and I am aware of a few that are currently in shops being overhauled. However, there is still only a small number of these engines available right now.”
APOC Aviation expect the current levels of availability to remain fairly static in the near future and expect to see some increases through operator sales of A320s and A319s, and when the few engines that are in shops right now are released. But Mihalache reckons this will be balanced by increased demand due to the growing number of flights operating.
According to APOC, currently there are only a few established airlines flying A320 family aircraft equipped with CFM56-5A engines, but there are also some new, small airlines entering the market. “It’s a very specialised sector, there are only a handful of companies trading and leasing 5A engines and we all know each other – and the airlines know exactly who to talk to when they have a need. But it is the crisis generated by the pandemic which has impacted lease rates more than the current availability of the engines. Increasingly, we are seeing operators asking for reduced levels of rent, payment holidays and, most commonly, power-by-the hour contracts.”
At APOC Aviation they believe it is essential to have synergy between lessors and operators. “We are working with our customers to find ways to support them during these difficult times, it’s all about collaboration and working together to find solutions that will benefit everyone.”
The engines were acquired from PTS Aviation Inc. in Florida through a multimillion-dollar transaction. One of the engines was acquired with a lease attached to German charter airline, Condor and the other two will be integrated into APOC’s portfolio.
APOC’s engine programme allows for another five inductions before year end and these will soon come on-stream, not only feeding the lease pool, but also supplementing the new engine parts division which will complement APOC’s broader narrow body aircraft component sales, exchange and consignment facility.
In the current environment, investors are scrambling to buy engine parts for trading and seemingly this will have an impact on engine part prices. Mihalache says despite that we are entering what is normally ‘MRO season’, there could be a reduction in shop visits of between 30-70% in the coming months. “That said, there are still good levels of transactions for engine parts. Some shops and distributors are buying for stock right now, whereas others are buying for AOG and some are of course still buying for their shop visits.
“Naturally, there is still a high demand for hard to find parts, such as LLPs, blades etc., which already had long lead times prior to COVID-19 hitting.”
Mihalache points to another interesting trend being an increase in on-wing repairs, which require the exchange of parts, rather than replacement. She says on-wing repairs were not common previously as most MRO capacity was fully committed to in-shop repairs. But with reductions in shop bookings, many MROs can now comfortably deploy their teams to work on-site. She foresees this trend continuing soon.
Mihalache however, sees a slight decrease in engine part prices, but this will not be significant, and will presumably not drop further. “With the very real possibility of Coronavirus vaccines, and better medication, just around the corner, I believe the aviation industry will start recovering towards the end of this year, when we will start to see demand slowly returning.”
As for the return to pre-COVID price levels, Mihalache feels this will depend on how quickly a vaccine is found. But the predictions are that it will take between two and five years for the industry to fully recover and get back to 2019 price and activity levels. “Of course, the engines are the most expensive part of an aircraft but the expectation from operators is that the lessors will work with the airlines to accommodate a lower utilisation programme. But if a vaccine treatment becomes available at the beginning of next year, I do think the market recovery will start before the end of 2020.”
An issue often discussed with engine MROs and traders is unequivocal pursuit of industry recognised EGT margins. Exhaust Gas Temperature – EGT is a measure of the temperature of the gas as it leaves the turbine unit. Engines are certified with temperature limits enforced via a limit on maximum take‐off EGT, referred to as the redline EGT. EGT Margin is the difference between the peak EGT incurred during take‐off and the certified redline EGT. It is used to evaluate and track engine time on-wing and health. EGT margins are at their highest levels when the engines are new or just following refurbishment.
Mihalache says APOC currently have three CFM56-5A engines with between 2,000 and 3,000 cycles and part of the TRUEngine programme (engines that have been maintained to GE or CFM manuals and recommendations). The engines acquired by APOC Aviation each have between 20 to 35 degrees EGT margin on them.