Earlier Airplane Retirements Have Mixed Consequences

 - October 8, 2014, 2:11 PM
Aircraft tear-down specialists generally derive more value from engines than any other component. (Photo: Aircraft Demolition)

The ready availability of low-interest-rate financing for new aircraft has seen the average age of airplanes retired for parts decline precipitously, keeping companies specializing in so-called teardowns busier than ever. Meanwhile, major and relatively rapid improvements in fuel efficiency promised by the world’s big airliner manufacturers and engine makers only promise to accelerate the trend, as operators tend to limit lease terms in anticipation of replacing their fleets with more efficient new models.

But whether or not one considers the trend positive depends on one's perspective. Of course, OEMs like more demand for new airplanes, and airlines benefit from less need to commit to costly heavy maintenance events and, potentially, lower cost for parts. However, it also might mean faster devaluation of airplanes and tighter profit margins for companies that deal in the resale of aftermarket components.

The situation has left Mike Cazaz, CEO of Mahwah, New Jersey-based Werner Aero Services, somewhat conflicted, but still optimistic about the future prospects for businesses such as his. Cazaz, whose company most recently bought an Airbus A321 previously operated by Transasia of Taiwan, explained that an overabundance of aftermarket parts has resulted from the ever-faster pace of aircraft retirements.   

“It’s becoming more and more the norm that younger airplanes, especially single-aisle airplanes, are being town down—ten, twelve years old, give or take,” explained Cazaz. “In today’s environment, money’s cheap, and the leasing companies make a good return on their lease business. It’s probably a better solution for them to resell the airplanes and move on with their lives.”

Even in developing countries, where much of Werner’s business resides, demand for used airplanes has declined, not only because of the availability of “cheap” money, but because of regulations that limit the age of the airplanes their operators may import.

“Fortunately and unfortunately, there are a lot more airplanes available now than there were five or six years ago,” said Cazaz. “On the flip side, we expect that the number airplanes will grow worldwide from somewhere around 26,000 today to about 36,000 in ten years...So there’s still going to be demand for the surplus, but we certainly see that the value of the aftermarket components is going down.”

Tim Zemanovic, CEO of Burnsville, Minnesota-based Aircraft Demolition and a board member at the Aircraft Fleet Recycling Association (AFRA), agreed that a surplus of newer-model airplanes has developed recently, largely because the prices haven’t yet come down to match demand. “The last six months or so the sellers of the aircraft have had a premium price on their airplanes,” he said. “It has been tough to acquire stuff, in my opinion, at a price that would work.” Eventually, he said, sellers will need to lower their prices by as much as 20 percent to clear the surplus.

“If you get your hands on one of the newer ones at a good price, the parts demand is extremely high,” he added. “So that’s a great market to be in.”   

Yet another variable—a ready supply of counterfeit parts and fly-by-night dealers—also suppresses the value of the components legitimate businesses sell and lease, and Cazaz lamented the lack of oversight the Federal Aviation Administration exercises over the industry. He said the problem has become even more acute in the U.S. than in Western Europe, where regulations are stricter and more tightly enforced.   

“Unfortunately, if you look at this market, it’s the Wild West,” said Cazaz. “I say unfortunately because I think if this market was regulated it would be safer and also better for people like us because it would result in less [unfair] competition. There are many fly-by-night people that come in and end up giving people like us, who have been in business twenty-something years, a bad reputation.”