Jetrader - Fall 2014 - 37

Continued from page 35
increasingly winning new engine sales by
guaranteeing the lowest flight hour cost
for the airline placing the order. These
all-inclusive support packages have grown
dramatically in the past decade and are now
estimated to cover nearly 50 percent of all
new aircraft delivered. Most OEM packages
share a common feature that affects investors universally: regular cash collection for
continuous support that in most circumstances forces investors to forfeit valuable engine-related maintenance reserve
cash flows.
OEM all-inclusive support packages
are now routinely pushed with new aircraft campaigns and are being sold in
ever-greater volumes at the point of sale.
These packaged deals appear to be a superb
arrangement from the airlines' perspective-often at exceptionally cheap allinclusive rates compared to maintenance
reserve rates quoted by investors or indeed
the airlines' own engine maintenance cost
data for their legacy fleets. Crucially, these
flight hour contracts are often priced on
the first-significantly cheaper-decade
of an engines' life, what is known as a
term-based agreement.

Issues for Investors
Apart from the security and cash flow
issues, the major concern for investors
has shifted to the growing effects such
packages are having on residual values.
Despite being a truly all-inclusive deal visà-vis the operator, many of these packages are term-based, covering the initial
10 or 12 years of an engine's maintenance
life. For many engine types, this period
generally consumes 30 percent or so of
total lifetime maintenance costs, so the
offered rates can be discounted by up to
40 percent compared to life-based rates.
At the end of this period, the OEM is not
fully covered for the second decade of the
engine operations and typically needs to
charge a substantial buy-in fee or similar
cost recovery mechanism in order to compensate for the initial discount.

essential part of their business plan to
recoup new engine development costs.
In this respect, Rolls-Royce is in a league
of its own, having moved to address this
situation 10 years before the other OEMs.
By our definition, today there are no
truly independent MROs servicing Trent
engines, whereas there are 30 or so entities competing in the CFM56 marketplace.
The three nominally independent MROs
maintaining Trent engines are fully aligned
with the Rolls-Royce manuals and practices and neither develop independent

repairs nor install any used material. In
other words, they compete on the very
marginal man-hour rate whilst the bulk
of the cost-80 percent or so, relating to
materials and repairs-is fixed.
The GE90-115B fitted to the 777-300ER
shares a similar OEM domination issue. GE
appears to be in total control of all shop
capacity and material repair schemes; however, the 777-300ER fleet is younger than
the A330/777-200, and the market has not
yet witnessed many lessee transitions.
Continued on page 39

Aircraft being retired?
Assets coming off lease?
We want to be your ﬁrst call !

Contrail Aviation Support, Inc. is a leading, worldwide supplier of surplus
and aftermarket commercial jet engine components. We are continuously
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"Building lasting relationships with asset owners
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Future for MROs
OEMs have also become more alert to
the erosion of the potential value of their
aftermarket caused by third party MROs
and have made concerted efforts to close
this potential revenue leakage-now an

"Set Your
Expectations High"

ACCREDITED

AIRLINE SUPPLIERS
A S S O C I A T I O N

435 Investment Court, Verona, WI 53593 * (608) 848-8100 * www.contrail.com

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Jetrader - Fall 2014

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