With Delta and Chromally combining to produce parts for the CFM56-5 and CFM56-7 engines, the threat to traditional spares pricing continues to escalate, further undermining the value attributable to full-life maintenance status. Appraisers are increasingly being asked by financial institutions to add the...
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With Delta and Chromally combining to produce parts for the CFM56-5 and CFM56-7 engines, the threat to traditional spares pricing continues to escalate, further undermining the value attributable to full-life maintenance status.
Appraisers are increasingly being asked by financial institutions to add the dollar difference between half-life and full-life maintenance status to indicated current and future values. The difference is calculated by taking the dollar value of a D check; engine overhaul; engine Life Limited Parts (LLPs); and landing gears. The major part of the adjustment relates to the engine. An overhaul of a CFM56-7 can cost $1.2 million depending on the work-scope while life limited parts may can cost in excess of $2 million per engine. The difference between half and full life on a B737-800 can therefore amount to $4 million including D check and landing gears. The figure of $4 million is added to the projected future value.
There are, however, two issues when adding such an adjustment. The deal between Delta and Chromally increase the prospect that third parties will be able to produce life- limited parts for engines cheaper than those produced by the original equipment manufacturer (OEM). The engine makers have traditionally sold installed engines at a low price and then sought to reap their profits from the sale of spares. Parts Manufacturing Approval (PMA) is now taking hold such that spares are being produced by manufacturers other than the OEM. With the ability to produce at lower cost, not least because PMA companies do not have to amortize design and development costs, the use of OEM list prices for full-life adjustment will increasingly lose relevance. Instead of $4 million being used as the adjustment, a figure of $3.5 million will perhaps be more realistic. For widebodies, the difference could be much more significant although owing to the complexity of modern high thrust turbofans and a more limited market, there is less likelihood of PMAs being produced. The use of PMA parts is increasing, being adopted by a range of operators.
The overhaul of airframes is increasingly being carried out by companies with much lower hourly costs than traditional maintenance companies. Instead of a D check or equivalent costing $3 million, it is possible to find the same service at a significantly lower price. The use of the full-life maintenance adjustment based on OEM pricing as a means of improving the return on investment will therefore likely increasingly lose its relevance in the coming years.
Secondly, while the adjustment may reflect the dollar cost of maintenance, the amount cannot necessarily be considered part of the assessed value. An aircraft in full life will be more attractive when remarketing and will attract something of a premium. With an A320 being valued at $8 million in 2014, buyers will not be willing to pay a $4 million premium because of full-life maintenance status. The dollar difference between half and full life for a larger widebody may be $12 million or more but if the aircraft based on half life is only valued at $25 million, then the premium for full life will be less than the dollar cost.
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