A regular update where our in house team of aviation experts and ISTAT certified appraisers use our data to analyse values, market movements, and notable aviation news.
This week, our Head Appraiser Kane Ray compares engine value to aircraft value across asset ages identifying some of the key engine value drivers, across specific engine types along the way. This piece introduces the reader to AviationValues’ ISTAT certified engine appraisal services, establishing some of the requirements and subtleties when appraising aircraft engines, as well as some of the market trends and value indicators we are exposed to as part of our daily research.
Engine Value versus Aircraft Value
An engine’s value is dependent on numerous factors, but as the highest cost component, and largest maintenance cost driver of an aircraft, it is often a key determinant in the overall aircraft value. Generally, the engines’ proportional contribution to the overall aircraft’s value increases as the aircraft ages, and eventually exceeds the value of the aircraft as an intact entity.
The reason for this is that, unlike the aircraft hull it powers, the engine does not have a fatigue life. It comprises rotatable components that can be replaced when required through maintenance. Although rare in practice, an old engine can be restored back to ‘full life’ maintenance condition, having the comparable level of remaining life to a new delivery engine. In reality, engines are often restored to an intended specification reflective of a typical period of future maintenance, measured in engine flight hours (EFHs) or engine flight cycles (EFCs).
The line chart below shows a hypothetical value curve comparing aircraft half life value and the combined half life value (where both aircraft and engines are mid life or mid time between heavy maintenance events) of the engines (two engines in this instance) from age 0 to age 20. Although there is no definitive time at which it occurs, at some point, the engines as single unit values, have a higher combined value than the aircraft as a whole.
An aircraft’s value derives from its ability to fulfil a mission: generally, transporting payload from point A to point B. Ordinarily, a buyer has several options to choose from when evaluating a particular aircraft’s suitability for that mission.
AviationValues’ analysis of thousands of transaction data points indicates a consistent market preference for younger aircraft versus otherwise identical, older aircraft. The strength of this age preference varies with the balance of supply and demand and can result in markedly different depreciation profiles for different aircraft and different market circumstances. But ultimately, aircraft are fundamentally depreciating assets.
Initially, engines derive their value wholly from their ability to power the aircraft they are attached to. Once an operator has selected an aircraft, they are generally limited to the specific engine types that power that aircraft. In essence, they are a captive party if they want to continue to operate the aircraft. Furthermore, the engine’s ability to power the aircraft is primarily a function of its maintenance condition rather than its chronological age. As a result the market does not tend to exhibit a tendency to pay significantly less for older engines relative to otherwise identical newer ones. In other words, engines do not exhibit an age depreciation profile in the way that the aircraft they power do.
Case study: Narrowbody and Widebody Engine Value Share
In the following tables, AviationValues provides actual engine transactions with an ISTAT Appraiser derived Market Value to compare to the host aircraft Market Value as determined by AviationValues’ automated value model, supported by aircraft transaction prices.
The first table shows the final build standard engine on the Boeing 737-800, the CFM56-7B26E. AviationValues captured a transaction in May 2023 with a sale price of USD 6.60m and a derived Half Life Market Value of USD 6.80m. We show three ages of Boeing 737-800, their respective Market Values at 31 May 2023, as well as the combined engine value proportion of aircraft value based on the captured engine transaction of USD 6.80m. The comparative share of value as the aircraft age increases is evident.
This can be emphasised further using older Boeing 737-800 ages and a previous engine standard, the CFM56-7B26 to show the impacts for a farther reaching time period. The production engine standard prior to May 2007, there remains a large active fleet. Although a derived Half Life Market Value of USD 4.50m is below that of the CFM56-7B26E, the engine value share of 20 and 25 year old 737-800s follows the same trend.
The trend is not unique to Narrowbody engines. In July 2023 AviationValues captured a transaction for a General Electric CF6-80E1A4/B engine, one of several variants powering the Airbus A330-200 and A330-300 Widebody aircraft. Comparing ages 5, 10, and 15 A330-200s, we again observe the engine value’s growing share as the aircraft ages.
Engine Value Drivers
Sustaining an operation is often achieved through life limited part (LLP) cycle life and EFHs between overhaul availability. Determining the impact of engine value drivers is dependent on the engine life stage. Their influences vary due to effects such as consumption, the environment the engine operates in, age and reliability. Below we separate the newest and the oldest engines to assess some of the value drivers.
OEM list price, and annual escalation on list pricing
Similarly, the OEM cost associated with LLPs and overhauls
Engine thrust rating
Historically, the higher the thrust, the higher the OEM list price
Core engine value i.e. strip away the thrust, LLP and overhaul value portion
Accessory values such as Quick Engine Change kits, stands, and covers
Can be acquired used
Value of the flight hours or LLP flight cycles until run out
Measure of the lease rental cash flow plus maintenance reserves
Residual part out value once flight hour or flight cycle limiters have fallen due
Engine module sales
Component and material commonality with other engines
Anticipated fleet status outlook
Could lower cost repairs extend the earning capability
Dependent on the remaining aircraft fleet to serve
Plus, the availability of conditioned engines to serve an operation
Supply of and demand for aftermarket services
As engines move into a mature phase post new production, or a production standard, the size of the fleet, the reliability of the engine, and the success of the aircraft program the engine is attached to, are prominent measures of engine value. By looking at some specific engine families and aircraft pairings, we can make some broad observations on these points.
Note: data depicts the live fleet. Includes both factory and converted freighters.
In the above depiction, and by using our newly released freighter aircraft data, we deduce how an engine’s share of a passenger fleet transitions to a freighter fleet (factory and converted freighters), and how established aircraft/engine fleets have supported engine values. As is often the case in passenger to freighter transition, General Electric’s CF6-80C2 remained the engine of choice, and it was strengthened still by being the only engine option for the Boeing 767 factory freighter. Its success to this day, having entered service in 1985, can also be measured by the demand for Maintenance, Repair and Overhaul (MRO) services. China Airlines and Asiana Airlines are two examples of airlines signing up to OEM and independent MRO service agreements recently. Market values have a long established base, something that can also be said for the PW4000-94” due to a significant fleet size.
Note: data depicts the live fleet.
Looking at an in production aircraft family, General Electric’s GEnx-1B engine family holds the dominant powerplant share under the wing of the Boeing 787 aircraft family. Whilst engine selection can often follow historical relationships i.e. British Airways selecting Rolls-Royce Trent 1000 engines for its fleet of 787s, the claimed performance benefits of the GEnx-1B cannot be ignored particularly when measuring reliability. Rolls-Royce Trent 1000 in service fixes are well documented and have taken place over a considerable period in which the GEnx-1B has gained more market share. Still, secondary market trading as associated pricing has been scarce, yet, at aircraft level, trading prices do appear to favour GEnx-1B powered Boeing 787s.
Note: data depicts the live fleet.
The dominant share of an engine does not always lead to it being the most sought after and ultimately, the highest valued. Airbus A320ceo family engine power option the International Aero Engines (IAE) V2500-A5 is a good example of this, often commanding a higher lease rate and value to the competing CFM56-5B. The V2500-A5 engine has been marred on numerous occasions by certain Airworthiness Directives meaning a large proportion of the fleet requires certain inspection or future replacement actions. Further, the engine does not benefit from the same longevity between heavy shop visits, notably the first run, as the CFM56-5B family. Even so, there is a significant fleet of V2500-A5 engines to serve, and demand peaks caused by necessary maintenance are reflected in lease rates and market values for spare engines.
Unlike new and in production engines that tend to be maintained with new engine material and LLPs, out of production and mature engines are often the subject of the discussion of repair or replacement of the engine.
Repair: cash outlay in maintenance to sustain the intended future operation
Replace: to dispose of a run out engine and fit an acquired engine which can sustain the intended future operation.
In certain engine markets, this is an attractive proposition given the cost of maintenance and LLP replacements which can coincide. The V2500-A5 is an example here. In other markets, there have been shortages of green time engines which leads to increases in shop visit inductions.
There is also the consideration of new engine material or used serviceable material (USM) insertion at shop visits aimed at reducing costs during maintenance at the expense of on wing longevity.
Module replacement, common on CFM56 engines
Used LLPs can offer significant cost savings over new
Has the operator contributed towards an aftermarket service agreement
Engine build expectations i,e. new LLPs.
USM is often pre sold, and those specialising in acquisition of engines for tear down and supply to MROs will have strategised this way to ensure cash flows and reduced inventory. It is therefore not always accessible to end users unless there is a contractual agreement. The balance of engine reliability and build life (determined by the most limiting LLP) linked to the aircraft’s operation also has a sweet spot that often decreases as retirements and fleet exits loom. The market is proactive to this, and the retention of lower life CFM56-5B/-7B LLPs for use in future years for instance, has been commonplace for future consumption.
Why should I invest in engines?
Like the leased aircraft fleet, the spare engine market has continued to grow in line with the fleet it serves. This has tended to be among the same participants of old and it is owed to the sophisticated technical and market knowledge that engines present for which those participants remain well positioned.
For those investing in engines, the attraction of doing so extends beyond the life of one MSN, and from various market cycles through to maturity. Every dog has its day, but engines paired to successful aircraft programs, do appear to have many. Whether it be service extension through passenger to freighter programmes or reliability issues with new technology and in service passenger extensions, there are rewards to be had for those immersed in the supply of engines and engine aftermarket services.
AviationValues is tracking engine sales and lease transactions that influence our standalone and portfolio engine appraisals. As with all our appraisals, end users have the unique benefit of corroborating transactions and the associated context linked to the values issued. To hear more about our aircraft engine appraisal services and the engine market in more detail, please get in contact.
Data as of December 2023.
Disclaimer: The purpose of this blog is to provide general information and not to provide advice or guidance in relation to particular circumstances. Readers should not make decisions in reliance on any statement or opinion contained in this blog.
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