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CFM56 engine
FORT WORTH—Values for serviceable CFM56 and V2500 engines should not decline anytime soon, panelists said at Aviation Week Network’s Engine Leasing, Trading and Finance (ELTF) Americas event on Jan. 27.
A survey of audience participants at the panel discussion found that 64% believed demand for previous generation engines such as IAE’s V2500 and GE Aerospace and Safran’s CFM56 would remain elevated for two to four years, while 36% thought the market would not normalize for five to seven years.
“I think four-plus years before we see it normalize, but you have to break it up into two parts: the serviceable market will remain hot, while the parts side varies from platform to platform,” said Paul Hasson, senior vice president of asset management at Setna iO. Overall, “valuation will remain high on all these narrowbody engines,” he added.
“On the one hand, if you want to look at turnaround times, maybe it’s a proxy for a more normal environment,” said Ken Herbert, managing director of RBC Capital Markets. However, he noted that significant challenges still exist for the supply chain, while airlines continue to talk about positive indicators and aftermarket spending remains high. Given that the supply and demand imbalance “continues to get pushed to the right, we are several years from normalization,” he said.
Sloane Churchill, manager of asset valuations at mba Aviation, highlighted the significance of the rise in engine core values, in particular for current generation narrowbody engines. “What ends up happening is there are a couple of thousand cycles remaining on the engine and we have to switch to a dollar per flight cycle valuation. Operators are using as much green time as they can get their hands on,” she said. A “green time” engine is typically older with limited remaining life on its key components.
“So long as parts are needed and demand is hot, we are going to going to burn off as much green time as we possibly can,” said Hasson.
Panelists differed in their assessments of the accuracy of engine pricing. “I truly believe the V2500 is pretty well underpriced, mostly due to the saturation of parts availability,” Hasson said. “The whole asset valuation falls off a cliff when parts flood the market.”
Churchill said that narrowbody engines currently might be slightly overvalued. “It is hard from a returns perspective to see where these valuations are coming from, but I don’t see those coming down anytime soon,” she added.
While demand will remain strong for older engines in the next few years, further down the line new-generation engines are expected to become dominant. In a presentation at ELTF Americas, John Mowry, managing director of Alton Aviation Consultancy, said that aircraft powered by a new generation of engines will account for about 66% of the fleet and 77% of shop visits by 2034. This forecast illustrates a coming “shift in demand towards new technology engine platforms,” he said.
New generation spare engine demand is robust and anticipated to grow strongly, while limited supply portends well for value retention, he added.
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