AviaAM Leasing Weighs Aging Aircraft Strategies

 - October 14, 2013, 1:25 PM
Storing an aircraft in the desert could cost an owner as much as $300,000 a year. (Photo: Alan Radecki)

As next-generation airliners approach their commercial launch dates, airlines, leasing companies and other asset owners face the “pressing” question of what to do with their aging aircraft. The dilemma lies in the fact that sometimes none of the main options–restoration, conversion or simply scrapping the equipment–presents an attractive path.

A new report published by Lithuania’s AviaAM Leasing offers advice on how to avoid missing what it calls the point of no return, when aircraft become no longer worth maintaining or refurbishing.

“A major technical inspection and repair work on such aircraft as Boeing 737 Classics will cost approximately $700,000, while the market price of a 20-year-old 737 Classic is below $4 million and keeps dropping as we speak,” said AviaAM Leasing CEO Tadas Goberis. “The question is what the owner may do in order to at least compensate its ongoing costs of maintaining the aircraft. One of the options is to lease or sell the aircraft to another operator. But is it the best option?”

The answer has become all the more elusive as travellers in emerging markets become more discerning and operational costs show no sign of dropping, factors that encourage local airlines to seek more fuel-efficient and less maintenance-demanding airplanes. Old, fuel-thirsty and well worn aircraft no longer meet the needs of those operators, driving demand for 20- to 30-year-old airplanes lower each year.

Another option–converting an aging airplane into a freighter–proves cost-effective only 20 percent of the time, said the report. Meanwhile, as global freight demand grows at an anemic rate and many countries limit the age of aircraft in their registry to 15 or 20 years, conversions have become an even less attractive option.

As maintenance expenses become too burdensome, interior and avionics upgrades less cost-efficient and aircraft conversions unviable, aircraft owners find themselves with two options: storage or scrap. Of course, storage becomes necessary when an owner, for example, believes enough demand will return to justify service re-entry. Costing as much as $300,000 per year, however, storage often doesn’t make sense when it could cost less to tear down the airplane for parts and scrap metal.

“Depending on aircraft type and the scope of work, aircraft teardown will cost the owner up to $200,000,” said Goberis. “Fortunately, new aircraft recycling technologies allow reclaiming of 80 to 85 percent of retired airplanes, meaning that the aircraft dismantling business is becoming increasingly efficient and thus profitable. All in all…in certain cases the margin from dismantling an aircraft may vary from 20 percent up to 80 percent.”

The report cites more demand for spare parts from newer aircraft such as the 737NG than from 737 Classics as the older airplanes approach the end of their life cycles and relatively few used NG parts have yet reached the aftermarket. “However, if an operator wishes to invest in scrapping such aircraft rather than operate them, one should act fast” or risk an increasing inventory and, therefore, lower parts prices as 737NGs reach 20 years of age, said the report.

Meanwhile, practically none of the same rules will apply to the most modern aircraft, particularly those made largely of composites, a material for which recycling technology remains fairly immature, noted Goberis.

“All in all, there is no universal formula for aging aircraft,” he said. “The main issue [is] not to miss the point [at which] you can still make [a] profit from your asset rather than being forced to write it off.”