IATA Maintenance Cost Conference - Worldtek · CFM56-5B equipped Assume the aircraft is operating 5 flight cycles per day ... IATA Maintenance Cost Conference © SGI Aviation 2015

IATA Maintenance Cost Conference © SGI Aviation 2015

IATA Maintenance Cost ConferenceThe financial impact of extending or reducing a lease

24 September 2015Miami, Florida

1IATA Maintenance Cost Conference © SGI Aviation 2015

Index

Introduction SGI Aviation

Leasing landscape

Maintenance reserves

Effects on maintenance cost

- Extending or reducing the lease term

- Engine maintenance cost

- Other cost

Conclusions

Questions


SGI AviationWho are we?

4SGI has offices located in Amsterdam, Singapore, Guernsey and New York.

45+Over 45 experts, located on almost all continents

15Local experts in 15 countries who speak the language & know the culture

100+More than 100 inspections performed, including 40 aircraft redeliveries in 2014

150Over 150 engines inspections, including management of 20 shop visits

7,500More than 7,500 inspection days performed in 2014

SGI SingaporeAircraft & Engine technical servicesBusiness jets

SGI AmsterdamAsset managementAircraft & Engine technical servicesBusiness jetsConsultingRegulatory services

SGI AmericasTechnical servicesEngine services

63% Lessors& financiers

37% Airlines

150+Technical servicesEngine managementAsset managementConsulting services

25+ aircraft under management

Services

40

50

32

41Annual

Pre purchase

Valuation

Redeliveries

Client base

Management 2014 Engagements


Index


Leasing landscape





- Other cost

Conclusions

Questions


Source: Ascend database

Initial lease terms have varied greatly over the years

Overall the term has increased slightly in the last two decades

Airlines are more risk averse, usually opting for a shorter lease term

Lessors prefer a longer lease term, lowering remarketing and associated movement cost

The historical average duration for the first lease for the world fleet is roughly 6 years

Initial lease termThe lease term has increased slowly, on average, over the last two decades

0

1

2

3

4

5

6

7

8

9

5,6

2006

6,4

2005

5,7

2004

5,5

2003

5,4

2002

6,2

2001

5,6

2000

4,7

1999

4,8

1998

6,2

1997

5,9

1996

5,7

1995

4,8

2011

Dur

atio

n(y

ears

)

2010 20132012

9,0

7,37,36,8

5,7

20142009

5,7

2008

6,1

2007

+3%average lease term

Initial lease term – world fleet


Source: Ascend databaseNote: Situation as of 01 September 2015

Different lease termsWide body aircraft typically have longer lease terms

Emirates Airline 10.1 years

Ryanair 7.0 years

easyJet 8.1 years

Air China 12.0 years

American Airlines 11.9 years

AirAsia 5.3 years

2010-2015 Leased aircraft

Aircraft type Average of lease period (year) Leased amount Year of first delivery

A380 11.8 11 2007787 11.2 17 2011777 9.9 44 1995

A330 8.4 110 1994747 4.2 16 1970

A340 3.8 8 1993767 3.5 50 1982

737 (NG) 9.0 395 1997A321 9.3 109 1994A320 7.6 411 1988A318 6.6 30 2003A319 5.7 103 1996757 3.9 20 1982

Singapore Airlines 8.7 years


Tech

bub

ble,

9/1

1

Econ

omic

cris

is

Source: SGI Aviation internal database, Ascend database, World Bank

During times of aircraft shortages, lease terms and lease rates will increase

This is further influenced by global GDP growth

Airlines may not always be in a position to negotiate the lease term that best fits their operation

The large fluctuations in lease rates may also result in airlines having pay an additional premium when extending the lease term

Average lease ratesLease rates largely depend on supply and demand and also follow macro economic developments

CPIBoeing 737-800Airbus A320-200

Hur

rican

e Ka

trina

Fu

el p

rice

spik

e 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

440

1%

0

420

360

400

380

340

320

480

260

300

240

280

460

0

220

5%

4%

10%

6%

2%

3%

11%

12%

9%

8%

7%

CPI

Ryanair order

Leas

e ra

te U

S$ x

(100

0)

Announcement of A320 NEO

Monthly lease rates


Negotiation the initial lease term and any possible extensions requires airlines to look at all influencing factors

Determining the effect of each influencing factor requires extensive knowledge and expertise, which airlines sometime lack

Some elements can be determined relatively easily, whilst others are much more subjective

The complexity of the lease agreement, associated maintenance reserve mechanisms and redelivery conditions make it difficult to determine the influence of major maintenance items

The lease duration is typically centred around the major maintenance events

Lease termAirlines typically use a sophisticated decision making model to determine their requirements

AIRCRAFT LEASE

Lease rates

AircraftAvailability

Commercial requirements(new routes)

Aircraft life cycle

(upcoming maintenance)

Upgrades/Modifications

Operating cost(fuel)


Index


Leasing landscape





- Other cost

Conclusions

Questions


Maintenance reserves are a pro-rata distribution of cost over the maintenance interval, usable for the various operators of the aircraftMaintenance reserves are paid on a monthly basis and reduce the lessor’s exposure to unfunded maintenance events in case of an airline

bankruptcyMaintenance reserves accumulate over time and are reimbursed to the airline once the maintenance event has taken place

- Reimbursement is limited to total accumulated maintenance reserves- Shortfalls are funded by the airline- Surplus is typically not returned to the airline

Maintenance reserves cover all major maintenance events; airframe heavy check, LDG overhaul, APU overhaul and LLP replacements and engine performance restoration

Maintenance reservesWhat are maintenance reserves?

Second operatorSecond operatorFirst operatorFirst operator Third operatorThird operator

6 years check

Accu

mul

ated

M

aint

enan

ce R

eser

ve


Main elementsHow is it calculated?

Maintenance Reserve Calculation Challenge

Airframe heavy check

Uncertainty over the heavy check cost. Cost can be difficult to predict if the equipment is mature, in aging aircraft programs or when checks are customized

Landing gear

Overhaul interval is typically calendar based or cycle based. Prediction is relatively accurate

Engine performance restoration

Performance restoration cost and mean time between removal is heavily dependent on the type of operation, operating environment and engine maturity

LLP replacement

Predictable, little to no uncertainty

APU overhaul

Overhaul cost and mean time between removal is dependent on type of operation and operating environment


A320 CFM56-5B

Source: SGI Aviation internal databaseNote: All figures are indicative

Maintenance reservesHow does this mechanism effect the airline?

737-800 CFM56-7B

Maintenance Reserve Event Cost Interval Full life Typical rate

6Y Check $930,000 72 Mth $930,000 $12,917

12Y Check $730,000 144 Mth $730,000 $5,069

Nose Gear $145,000 120 Mth $145,000 $1,208

LH Gear $165,000 120 Mth $165,000 $1,375

RH Gear $165,000 120 Mth $165,000 $1,375

APU overhaul $260,000 5000 APU HR $260,000 $52Engine

overhaul $2,900,000 25000 FH $5,800,000 $232

Engine LLPs $2,981,014 Variable $5,962,028 Variable

Total maintenance

value$12,524,028

Maintenance Reserve Event Cost Interval Full life Typical rate

8Y Check $550,000 96 Mth $550,000 $5,729

10Y Check $400,000 120 Mth $400,000 $3,333

12Y Check $600,000 144 Mth $600,000 $4,167

Nose Gear $103,000 120 Mth $103,000 $858

LH Gear $103,000 120 Mth $103,000 $858

RH Gear $103,000 120 Mth $103,000 $858

APU overhaul $257,000 5000 APU HR $257,000 $51Engine

overhaul $2,700,000 27000 FH $5,400,000 $200

Engine LLPs $2,901,860 Variable $5,803,720 Variable

Total maintenance

value$13,319,720


Index


Leasing landscape





- Other cost

Conclusions

Questions


Typical redelivery condition (Narrow Body)Lease extensions provide the airline with the opportunity to re-negotiate redelivery conditions

AIRFRAMEClear of all tasks not less than 24 months, 6,000 Flight Hours and 4,500 Cycles.

ENGINES & LLPsA minimum of 24 months, 6,000 flight hours and 4,500 cycle until the next Engine Performance RestorationAt least 3,000 Flight Cycles remaining

APUNo more than 2,000 APU Hours since last overhaul or heavy repair

OTHERSStrict requirements on documentation and certification

LANDING GEARNo less than 24 months or 2,000 FC remaining


Source: SGI Aviation internal database, industry dataNote: All figures are indicative

Maintenance life cycleWith an average lease term of 7.6 years, airlines are typically forced to perform an expensive engine shop visit

C check

LDG

Engine RP

12Y check6Y check

Engine LLPs

APU

Criteria:

CFM56-5B equipped

Assume the aircraft is operating 5 flight cycles per day

Non equalized/escalated maintenance program (MPD)

North American or European climate (non-harsh climate)

Average lease term (7.6) Mandatory clearance

period as per lease agreement6.000

3.000

4.500

1.500

0

Engine Performance Restoration

C-CheckLDG

EnginePerformanceRestoration

12Y Check

APU

11 1210

C-Check

76 8

6Y Check

5 94

C-Check

13

APUAPU

1 3

US$ (x1000)

14 152

C-Check



Lease-extend scenarioExtending 2-year lease term adds on APU, LDG and 12Y check cost

2 year increase in lease term

Add-on cost- APU overhaul- LDG overhaul- 12Y-check

Average lease term (7.6) 9.6

Engine LLPs

C check

Engine RPAPULDG12Y check6Y check

Mandatory clearance period as per lease

agreement

3.000

4.500

1.500

0

6.000


C-CheckLDG

APU

8 12 1311 15

APU

10 14

12Y Check

9


74

C-Check

6Y Check

2

C-Check

65

APU

3

C-Check

1

US$ (x1000)




Engine RP

C check

Engine LLPs

APULDG8Y check

Criteria:

GE90-115B equipped

Assume the 777 is operating 1.7 flight cycles per day

Non equalized/escalated maintenance program (MPD)

North American or European climate (non-harsh climate)

1.500

6.000

9.000

0

7.500

3.000

4.500

C-Check C-Check

1210

Engine Performance

Restoration

C-Check

1511 14

LDG

9

8Y Check

C-CheckAPU

7

US$ (x1000)

Engine Performance

Restoration

C-Check

2

C-Check

1381

C-Check


C-Check

5 6

APU

APU

43

APUC-Check

Average lease term (9.9) Mandatory clearance

period as per lease agreement




Engine LLPs

8Y check

APU

C check

LDG

Engine RP

2 year reduction in lease term

Possible additional cost for cabin refurbishment

Reduced cost:- LDG overhaul- APU overhaul- C-check

Average lease term (9.9)

Mandatory clearance period as per lease

agreement

7.9

0

6.000

9.000

7.500

3.000

4.500

1.500

146 11

C-Check

8

C-Check

107

APU LDG

9


APU

Engine Performance

Restoration

12

Engine Performance

Restoration

C-Check C-Check

C-CheckAPU

13

8Y Check

C-Check

2 4

C-Check

US$ (x1000)

APUC-Check

3

C-Check

51 15


Index


Leasing landscape





- Other cost

Conclusions

Questions


Source: SGI internal database, OEM dataNote: Assumes the engines are set at 22k thrust rating and operating 5FC per day

Engine shop visit and LLP replacementEngine maintenance cost is the largest contributer to the overall maintenance cost

16y0 8y

12,000-18,000 FC2nd SV

8,800 – 12,900 FC2nd SV

737NG with CFM56-7B

A320 with CFM56-5B

13,500 – 18,800 FC1st SV

15,000 – 20,000 FC1st SV

A320 5B SV cost: $2.9 million (excl. LLP)Average period 1st run: 8.9 yearAverage period 2nd run: 5.9 year

LLP

Life Cycles Cost

20,000 $1,502,580

25,000 $817,700

30,000 $661,400

LLP

Life Cycles Cost

20,000 $1,768,660

25,000 $811,500

30,000 $321,700

B737NG 7B SV cost: $2.7 million (excl. LLP)Average period 1st run: 9.6 yearAverage period 2nd run: 8.2 year


Index


Leasing landscape





- Other cost

Conclusions

Questions


31 Business-class seats

267 Economy-class seats

A full reconfiguration can be anything from US$100,000 to several millions

Cabin reconfigurationAircraft cabin reconfigurations are costly and time consuming

Engineering $370,000 ∙ LOPA change $80,000∙ Monument change (each) $30,000∙ CAM development $20,000∙ IFE database upgrade $100,000∙ Seats certification $20,000

Interior parts $3,481,000∙ Full height monument restoration $280,000∙ Class divider kits (per pair) $50,000∙ PSU (each) $8,000∙ PSU spacer panels (each) $400∙ Standard sidewall panels (each) $5,000∙ Seat to seat cables (each) $600∙ Placards set $4,000∙ Miscellaneous $15,000

Seats $3,876,500 ∙ Economy seats (each) $5,500∙ Business seats (each) $20,000∙ In-seat video (each) $6,000


Note: Cost per narrow body aircraft.

Authorities continuously introduce new operational requirements and safety programs

These may not be known at the start of the lease

Lease agreements typically cover cost sharing for Airworthiness Directives

Operational requirements may not always be mandated by an AD

These operational requirements may lead to additional modifications and cost

Other operational requirementsThere are many other cost drivers which should be taken into consideration

2015 2016 2017

$80,000

TCAS 7.1EASA

2018 2019

$240,000FTIS

100%fleetFAA

$150,000

SATCOMCAAC

$80,000

TCAS 7.1ICAO

2020

$400,000

FANS B+EASA

2021

$100,000

ADS-B OutFAA

$100,000

ADS-B OutEASA


Index


Leasing landscape





- Other cost

Conclusions

Questions


SummaryEngine maintenance and modifications are main drivers in this process

AIRCRAFT LEASE

Lease rates

AircraftAvailability

Commercial requirements(new routes)

Aircraft life cycle

(upcoming maintenance)

Upgrades/Modifications

Operating cost(fuel)

6.000

3.000

4.500

1.500

0


C-CheckLDG


12Y Check

APU

11 1210

C-Check

76 8

6Y Check

5 94

C-Check

13

APUAPU

1 3 14 152

C-Check


Each situation is different and you should look at all the aspects

−Don’t under estimate the complexity

−Develop or get in the expertise to analyze the complete situation

Each change to the duration of the lease will require a revision to the contract

−Airlines should use this to their advantage

−Renegotiate restrictive redelivery conditions

−Include aircraft age (and its secondary market)

The engines are the biggest contributor, so pay special attention to their performance and future shop visits

−Try to increase flexibility to cope with future “changes”

RecommendationsEach extension of the lease term will allow you to renegotiation certain terms


Index


Leasing landscape





- Other cost

Conclusions

Questions


Questions?Joost Groenenboom – Executive Director Airlines

T +31 20 880 4238 F +31 20 890 8490 M +31 6 506 36001

Email: [email protected] │Web: http://www.sgiaviation.com

IATA Maintenance Cost Conference - Worldtek · CFM56-5B equipped Assume the aircraft is operating 5 flight cycles per day ... IATA Maintenance Cost Conference © SGI Aviation 2015

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