IATA Maintenance Cost Conference · A320 7.6 411 1988 A318 6.6 30 2003 ... C check LDG Engine RP...

IATA Maintenance Cost Conference © SGI Aviation 2015

IATA Maintenance Cost ConferenceThe financial impact of extending or reducing a lease

24 September 2015

Miami, Florida

1IATA Maintenance Cost Conference © SGI Aviation 2015

Index

Introduction SGI Aviation

Leasing landscape

Maintenance reserves

Effects on maintenance cost

- Extending or reducing the lease term

- Engine maintenance cost

- Other cost

Conclusions

Questions


SGI Aviation

Who are we?

4 SGI has offices located in Amsterdam, Singapore, Guernsey and New York.

45+ Over 45 experts, located on almost all continents

15 Local experts in 15 countries who speak the language & know the culture

100+ More than 100 inspections performed, including 40 aircraft redeliveries in 2014

150Over 150 engines inspections, including management of 20 shop visits

7,500 More than 7,500 inspection days performed in 2014

SGI SingaporeAircraft & Engine technical servicesBusiness jets

SGI AmsterdamAsset managementAircraft & Engine technical servicesBusiness jetsConsultingRegulatory services

SGI AmericasTechnical servicesEngine services

63% Lessors& financiers

37% Airlines

150+Technical servicesEngine managementAsset managementConsulting services

25+ aircraft under management

Services

4050

3241Annual

Pre purchaseValuation

Redeliveries

Client base

Management 2014 Engagements


Index


Leasing landscape





- Other cost

Conclusions

Questions


Source: Ascend database

Initial lease terms have varied

greatly over the years

Overall the term has increased

slightly in the last two decades

Airlines are more risk averse,

usually opting for a shorter lease

term

Lessors prefer a longer lease

term, lowering remarketing and

associated movement cost

The average duration for the first

lease for the world fleet is

roughly 6 years

Initial lease term

The lease term has increased slowly, on average, over the last two decades

0

1

2

3

4

5

6

7

8

9

1999 2000

5,6

6,46,1

5,7

+3%

4,8

6,2

5,55,7

6,2

2013

5,6

2014

4,7

Duration

(years)

5,4

9,0

7,3

2001 2002

5,75,9

1995

4,8

2011 20122003 200920052004 2007 20082006 2010

7,3

5,7

6,8

19981996 1997

average lease term

Initial lease term – world fleet


Source: Ascend database

Note: Situation as of 01 September 2015

Different lease terms

Wide body aircraft typically have longer lease terms

Emirates Airline 10.1 years

Ryanair 7.0 years

easyJet 8.1 years

Air China 12.0 years

American Airlines 11.9 years

AirAsia 5.3 years

2010-2015 Leased aircraft

Aircraft typeAverage of lease

period (year)Leased amount Year of first delivery

A380 11.8 11 2007

787 11.2 17 2011

777 9.9 44 1995

A330 8.4 110 1994

747 4.2 16 1970

A340 3.8 8 1993

767 3.5 50 1982

737 (NG) 9.0 395 1997

A321 9.3 109 1994

A320 7.6 411 1988

A318 6.6 30 2003

A319 5.7 103 1996

757 3.9 20 1982

Singapore Airlines 8.7 years


Te

ch b

ub

ble

, 9

/11

Eco

no

mic

crisis

Source: SGI Aviation internal database, Ascend database, World Bank

During times of aircraft

shortages, lease terms and

lease rates will increase

This is further influence global

GDP growth

Airlines may not always be in a

position to negotiate the lease

term that best fits their operation

The large fluctuations in lease

rates may also result in airlines

having pay an additional

premium when extending the

lease term

Average lease rates

Lease rates largely depend on supply and demand and also follow macro economic developments

Airbus A320-200

CPI

Boeing 737-800

Hu

rric

ane

Ka

trin

a

Fue

l p

rice s

pik

e

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

0.48

11%

1%

8%

3%

2%

0.36

0.00

10%

9%

0.34

12%

7%

6%

4%

5%

0.42

0.30

0.22

0.26

0.24

0.28

0.32

0

0.38

0.40

0.44

0.46

CP

I

Lease r

ate

($m

il)

Ryanair order

Announcement of

A320 NEO

Monthly lease rates


Negotiation the initial lease term and any possible extensions

requires airlines to look at all influencing factors

Determining the effect of each influencing factor requires

extensive knowledge and expertise, which airlines sometime

lack

Some elements can be determined relatively easily, whilst

others are much more subjective

The complexity of the lease agreement, associated

maintenance reserve mechanisms and redelivery conditions

make it difficult to determine the influence of major

maintenance items

The lease duration is typically centred around the major

maintenance events

Lease term

Airlines typically use a sophisticated decision making model to determine their requirements

AIRCRAFT LEASE

Lease rates

Aircraft

Availability

Commercial

requirements

(new routes)Aircraft life

cycle

(upcoming

maintenance)

Upgrades/

Modifications

Operating

cost

(fuel)


Index


Leasing landscape





- Other cost

Conclusions

Questions


Maintenance reserves are a pro-rata distribution of cost over the maintenance interval, usable for the various operators of the aircraft

Maintenance reserves are paid on a monthly basis and reduce the lessor’s exposure to unfunded maintenance events in case of an airline

bankruptcy

Maintenance reserves accumulate over time and are reimbursed to the airline once the maintenance event has taken place

- Reimbursement is limited to total accumulated maintenance reserves

- Shortfalls are funded by the airline

- Surplus is typically not returned to the airline

Maintenance reserves cover all major maintenance events; airframe heavy check, LDG overhaul, APU overhaul and LLP replacements and

engine performance restoration


What are maintenance reserves?

Second operatorFirst operator Third operator

6 years check

Accu

mu

late

d

Ma

inte

na

nce

Rese

rve


Main elements

How is it calculated?

Maintenance Reserve Calculation Challenge

Airframe heavy check 𝑀𝑅 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 =𝐼𝑛𝑠𝑝𝑒𝑐𝑡𝑖𝑜𝑛 𝑐𝑜𝑠𝑡

𝐹𝑖𝑥𝑒𝑑 𝑚𝑜𝑛𝑡ℎ 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙

Uncertainty over the heavy check cost. Cost can be difficult

to predict if the equipment is mature, in aging aircraft

programs or when checks are customized

Landing gear 𝑀𝑅 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 =𝑂𝑣𝑒𝑟ℎ𝑎𝑢𝑙 𝑐𝑜𝑠𝑡

𝑂𝑣𝑒𝑟ℎ𝑎𝑢𝑙 𝑖𝑛𝑡𝑒𝑟𝑣𝑎𝑙

Overhaul interval is typically calendar based or cycle based.

Prediction is relatively accurate

Engine performance restoration 𝑀𝑅 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 =𝑃𝑅 𝑐𝑜𝑠𝑡

𝑀𝑒𝑎𝑛 𝑡𝑖𝑚𝑒 𝑏𝑒𝑡𝑤𝑒𝑒𝑛 𝑟𝑒𝑚𝑜𝑣𝑎𝑙

Performance restoration cost and mean time between

removal is heavily dependent on the type of operation,

operating environment and engine maturity

LLP replacement 𝑀𝑅 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 =𝐶𝑎𝑡𝑎𝑙𝑜𝑔𝑢𝑒 𝑝𝑟𝑖𝑐𝑒

𝐶𝑦𝑐𝑙𝑒 𝑙𝑖𝑚𝑖𝑡Predictable, little to no uncertainty

APU overhaul 𝑀𝑅 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 =𝑃𝑅 𝑐𝑜𝑠𝑡

𝑀𝑒𝑎𝑛 𝑡𝑖𝑚𝑒 𝑏𝑒𝑡𝑤𝑒𝑒𝑛 𝑟𝑒𝑚𝑜𝑣𝑎𝑙

Overhaul cost and mean time between removal is dependent

on type of operation and operating environment


A320

Source: SGI Aviation internal database


How does this mechanism effect the airline?

737

Maintenanc

e ReserveEvent Cost Interval Full life Typical rate

6Y Check $930,000 72 Mth $930,000 $12,917

12Y Check $730,000 144 Mth $730,000 $5,069

Nose Gear $145,000 120 Mth $145,000 $1,208

LH Gear $165,000 120 Mth $165,000 $1,375

RH Gear $165,000 120 Mth $165,000 $1,375

APU overhaul $260,000 5000 APU HR $260,000 $52

Engine

overhaul $2,900,000 25000 FH $5,800,000 $232

Engine LLPs $2,981,014 Variable $5,962,028 Variable

Total

maintenance

value

$14,157,028

Maintenance

ReserveEvent Cost Interval Full life Typical rate

8Y Check $550,000 96 Mth $550,000 $5,729

10Y Check $400,000 120 Mth $400,000 $3,333

12Y Check $600,000 144 Mth $600,000 $4,167

Nose Gear $103,000 120 Mth $103,000 $858

LH Gear $103,000 120 Mth $103,000 $858

RH Gear $103,000 120 Mth $103,000 $858

APU overhaul $257,000 5000 APU HR $257,000 $51

Engine

overhaul $2,700,000 27000 FH $5,400,000 $200

Engine LLPs $2,901,860 Variable $5,803,720 Variable

Total

maintenance

value

$13,319,720


Index


Leasing landscape





- Other cost

Conclusions

Questions


Typical redelivery condition (Narrow Body)

AIRFRAME

Clear of all tasks not less than 24 months,

6,000 Flight Hours and 4,500 Cycles.

ENGINES & LLPs

A minimum of 24 months, 6,000 flight hours and 4,500

cycle until the next Engine Performance Restoration

At least 3,000 Flight Cycles remaining

APU

No more than 2,000 APU Hours

since last overhaul or heavy repair

OTHERS

Strict requirements on documentation

and certification

LANDING GEAR

No less than 24 months or

2,000 FC remaining


Source: SGI Aviation internal database, industry data

Note: All figures are indicative

Maintenance life cycle

With an average lease term of 7.6 years, airlines are typically forced to perform an expensive engine shop visit

C check

LDG

Engine RP

12Y check

6Y check

Engine LLPs

APU

Criteria:

CFM56-5B equipped

Assume the aircraft is operating 5

flight cycles per day

Non escalated maintenance

program (MPD)

North American or European climate

(non-harsh climate)

Average lease

term (7.6) Mandatory clearance

period as per lease

agreement6.000

3.000

4.500

1.500

0

Engine

Performance

Restoration

C-Check

LDG

Engine

Performance

Restoration

12Y Check

APU

11 1210

C-Check

76 8

6Y Check

5 94

C-Check

13

APUAPU

1 3

US$ (x1000)

14 152

C-Check




Lease-extend scenario

Extending 2-year lease term adds on APU, LDG and 12Y check cost

2 more years’ operational time

Add-on cost

- APU overhaul

- LDG overhaul

- 12Y-check

Average lease

term (7.6) 9.6

12Y check

APU

C check

Engine RP

LDG

Engine LLPs

6Y check

Mandatory clearance

period as per lease

agreement

1.500

4.500

0

6.000

3.000

Engine

Performance

Restoration

13117

Engine

Performance

Restoration

C-Check

54 98

12Y Check

C-Check

LDG

APU

6

6Y Check

APUC-Check

321

C-Check

1514

US$ (x1000)

APU

1210





With an average lease term of 9.9 years, airlines are typically required to perform an expensive engine shop visit

Engine LLPs

Engine RP

APU

LDG

8Y check

C check Criteria:

GE90-115B equipped

Assume the 777 is operating 1.7

flight cycles per day

Non escalated maintenance

program (MPD)

North American or European climate

(non-harsh climate)

4.500

0

7.500

1.500

6.000

9.000

3.000

3

C-Check

2

C-Check

1 15

C-Check

14

APUC-Check

1312

US$ (x1000)

Engine

Performance

Restoration

9

C-Check

87

APU

6

C-Check

5

Engine

Performance

Restoration

C-Check

4

APU

10

8Y Check

C-Check

APU

11

C-CheckLDG

Average lease

term (9.9)

Mandatory clearance

period as per lease

agreement





With an average lease term of 9.9 years, airlines are typically forced to perform an expensive engine shop visit

LDG

Engine RP

APU

8Y check

C check

Engine LLPs

2 year reduction in lease term

Possible additional cost for cabin

refurbishment

Reduced cost:

- LDG overhaul

- APU overhaul

- C-check

Average lease

term (9.9)

Mandatory clearance

period as per lease

agreement

7.9

6.000

1.500

7.500

4.500

0

3.000

9.000

US$ (x1000)

8

C-Check

12

8Y Check

6

C-CheckC-Check

115 7

C-Check C-Check

Engine

Performance

Restoration

9

APU

Engine

Performance

Restoration

LDGC-Check

APU

4 15141310

C-CheckC-Check

APU

2 31

C-Check

APU


Index


Leasing landscape





- Other cost

Conclusions

Questions


Assume the engine is operating 5FC per day

Engine shop visit and LLP replacement

Engine maintenance cost is the largest contributer to the overall maintenance cost

16y0 8y

12,000-18,000 FC

2nd SV

8,800 – 12,900 FC

2nd SV

737NG with CFM56-7B

A320 with CFM56-5B

13,500 – 18,800 FC

1st SV

15,000 – 20,000 FC

1st SV

A320 5B SV cost: $2.9 million (excl. LLP)

Average period 1st run: 8.9 year

Average period 2nd run: 5.9 year

LLP

Life Cycles Cost

20,000 $1,502,580

25,000 $817,700

30,000 $661,400

LLP

Life Cycles Cost

20,000 $1,768,660

25,000 $811,500

30,000 $321,700

B737NG 7B SV cost: $2.7 million (excl. LLP)

Average period 1st run: 9.6 year

Average period 2nd run: 8.2 year


Index


Leasing landscape





- Other cost

Conclusions

Questions


31 Business-class seats

267 Economy-class seats

A full reconfiguration can be anything

from US$100,000 to several millions

Cabin reconfiguration

Aircraft cabin reconfigurations are costly and time consuming

Engineering $370,000

· LOPA change $80,000

· Monument change (each) $30,000

· CAM development $20,000

· IFE database upgrade $100,000

· Seats certification $20,000

Interior parts $3,481,000

· Full height monument restoration $280,000

· Class divider kits (per pair) $50,000

· PSU (each) $8,000

· PSU spacer panels (each) $400

· Standard sidewall panels (each) $5,000

· Seat to seat cables (each) $600

· Placards set $4,000

· Miscellaneous $15,000

Seats $3,876,500

· Economy seats (each) $5,500

· Business seats (each) $20,000

· In-seat video (each) $6,000


* Cost per narrow body aircraft.

Authorities continuously introduce

new operational requirements and

safety programs

These may not be known at the start

of the lease

Lease agreements typically cover

cost sharing for Airworthiness

Directives

Operational requirements may not

always be mandated by an AD

Other operational requirements

There are many other cost drivers which should be taken into consideration

2015 2016 2017

$80,000

TCAS 7.1EASA

2018 2019

$240,000

FTIS

100%fleetFAA

$150,000

SATCOMCAAC

$80,000

TCAS 7.1EASA

2020

$400,000

FANS B+EASA

2021

$100,000

ADS-B OutFAA

$100,000

ADS-B OutEASA


Index


Leasing landscape





- Other cost

Conclusions

Questions


Questions?

Remko Bruinsma

T +31 20 880 4243 F +31 20 890 8490 M +31 6 1585 69 39

Email: [email protected] │Web: http://www.sgiaviation.com

IATA Maintenance Cost Conference · A320 7.6 411 1988 A318 6.6 30 2003 ... C check LDG Engine RP...

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Transcript of IATA Maintenance Cost Conference · A320 7.6 411 1988 A318 6.6 30 2003 ... C check LDG Engine RP...