Swap You

Chris Kjelgaard investigates why aircraft operators and leasing companies often decide to exchange one engine for another

AIRCRAFT ENGINE EXCHANGE

One of the worst operational and financial nightmares any operator of airliners, business aircraft or helicopters can face is for one of its expensive aircraft to be grounded suddenly because of an engine failure or severe damage to an engine caused by it ingesting foreign object debris or by a bird strike.

In such situations, the operator is faced with not only the need to get the aircraft back into the air and earning revenues again as quickly as possible, but also the unwelcome prospect of having to spend a great deal of money to send the damaged or failed powerplant to an engine maintenance and repair shop to have the engine restored to the condition it was in at the time it was damaged – or better. The bigger the engine, the bigger the repair and overhaul cost; a full overhaul of a massive GE90-115B turbofan installed on a Boeing 777-300ER or 777-200LR can cost $5 million or more. Even repairs and overhauls of smaller turbine engines powering business jets and turboprops, or helicopters, can run into the hundreds of thousands of dollars.

Leasing companies often face a different, but related headache. Sometimes a leasing company finds itself in the position of having an aircraft whose lease to a given airline or operator will soon end, but with no subsequent lease customer for the aircraft – or, indeed, having a subsequent customer for it, but a customer that wants to operate the aircraft in a different way from or on a less frequent basis than the current lessee.

In such cases, leasing companies can face the dilemma of knowing the engines fitted to their aircraft have considerable remaining market value at the end of the current lease, but that the rental payments in the subsequent lease do not financially take into account this full market value because the new lessee doesn’t need the aircraft’s engines to be in new or mid-life condition. In new or mid-life condition, modern turbine engines can remain on-wing to power an aircraft for many thousands of flying hours, but not every operator or every lease requires an aircraft’s engines to offer that much operational life. Therefore, lessors transitioning an aircraft from one lease to the next can effectively find themselves with very valuable aero engines on their hands from which they can’t obtain a sufficient return on investment.

img_57-1_62.jpg
GE Aviation’s TrueChoice Transitions pool covers every major turbofan-engine model GE Aviation has made over the past 30 years, including CF6-50C2s. This CF6-50C2-powered Finnair Airbus A330-302 OH-LTT (msn 1088) is pictured departing Helsinki.
Aleksi Hamalainen/AirTeamImages
img_58-1_73.jpg
1 The GE Aviation TrueChoice Transitions pool occasionally includes older GE90s fitted to current-production widebodies such as the Boeing 777.
GE Aviation

However, the turbine aero engine market is nothing if not sophisticated; and as aero engines have become more complex, more capable and more costly over the decades and computerisation has created new communications and logistics capabilities, the companies that make, maintain and trade turbine engines have become greatly attuned to their customers’ requirements and challenges. Long ago, several engine makers, as well as some large aircraft and engine maintenance companies and parts traders and brokers, evolved the concept of engine exchange programmes to address the critical aircraft-on-ground emergencies that aircraft operators face – and the engine return-on-investment challenges leasing companies sometimes need to address.

img_58-2_50.jpg
2 Most of the exchange engines CFM has in its current pool are older CFM56-3 variants as now-vintage Boeing 737-300s, 737-400s and 737-500s have been retired.
GE Aviation

GE Aviation’s and CFM’s Engine Exchange Programmes

As General Manager of GE Aviation Materials and Head of the engine manufacturer’s TrueChoice Transitions engines and materials management programme for its customers, Rudy Bryce controls a pool of engines the company makes available for exchange programmes. The number and composition by model of the engines in GE’s constantly changing pool varies, but usually the pool contains 20 to 40 engines. Bryce says his goal in managing GE Aviation’s TrueChoice Transitions portfolio of engine support services is to provide a total of 15 to 25 exchange engines a year to customers.

The engines in the pool include every major turbofan-engine model GE Aviation has made over the past 30 years or so: CF34 engines for regional jets, CF6-80C and CF6-80E engines for various widebody airliner types (as well as, occasionally, older CF6-50C2s for older widebodies) and even GE90s and GEnx engines for currentproduction widebodies, such as the Boeing 777 and 787 families. (However, because these engine types are still relatively early in their operational lives, GE doesn’t trade many in and out of its exchange pool yet.) GE Aviation’s exchange pool occasionally also includes fan and low-pressure turbine modules for its engine models, because customers sometimes merely want to exchange modules, not entire engines, and these modules can typically be swapped in and out of an engine without having to send it to an overhaul shop for full disassembly.

As one might expect, the CFM International joint venture – in which GE Aviation is a 50% partner, Safran Aircraft Engines being the other – also offers engine exchanges. Most of the exchange engines CFM has provided to date and also those in its current pool are of the older CFM56-3 variants, because many of these engines have become available relatively cheaply as now-vintage Boeing 737-300s, 737- 400s and 737-500s have been retired. Like GE Aviation, CFM can overhaul any engine it offers for exchange to exactly the build condition the customer wants (i.e. the amount of remaining operational life the operator or leasing company customer requires from the engine).

img_59-1_54.jpg
3 Numbers of CFM56-5Bs (for Airbus A320-family aircraft) and CFM56-7Bs (for Boeing 737NGs) for exchange are bound to grow substantially as more and more A320s and 737NGs are retired.
GE Aviation

CFM also offers CFM56-5Bs (for Airbus A320-family aircraft) and CFM56-7Bs (for Boeing 737NGs) for exchange. While as of yet it is only offering these engines for exchange in relatively small numbers, their numbers are bound to grow substantially as more and more A320s and 737NGs are retired and CFM acquires CFM56-5Bs and CFM56-7Bs it can overhaul.

What Engine Exchanges Offer

Bryce says an engine exchange programme’s value lies in the fact it allows an aircraft operator or a leasing company to swap a damaged or over-valuable engine from an aircraft and replace it immediately with another engine that is fully operational, meets the operator’s or leasing company’s exact requirements for engine-build condition and doesn’t require the operator or owner to send the engine being replaced away for expensive repair or overhaul.

Instead, the aircraft operator or leasingcompany owner buys the exchange engine GE Aviation supplies. However, in a separate arm’s-length transaction, after GE Aviation provides a fair-market valuation of the engine being replaced and the operator accepts that valuation, it sells that engine to GE Aviation for the engine’s agreed fair-market value. In this manner, not only is the aircraft operator/owner able to keep its aircraft flying with the minimum of downtime, but it also avoids the cost of sending an engine away for overhaul – and gets back some, if not all, of its investment in the replacement engine by selling GE Aviation its own damaged or unwanted engine.

img_59-2_35.jpg
4 GEnx engines for current-production widebodies are part of GE Aviation’s exchange pool, although because these engines are still relatively early in their operational lives GE doesn’t trade many in and out of its exchange pool yet.
GE Aviation

In cases where operators’ engines are badly damaged, GE Aviation’s valuation of an engine being replaced often considers only the fair-market value of that engine’s life-limited parts (LLPs, such as compressor and turbine blades) and rotable parts (such as line replaceable units (LRUs), which can be overhauled), because the engine as an entire unit will never fly again. Instead, the powerplant will be broken down for the remaining used serviceable LLPs and LRUs it contains. GE Aviation can then incorporate these parts into its own inventory of used engine parts, which it sells to its myriad customers.

Bryce says the airlines GE Aviation most often sees as being interested in engine exchanges are those “that require spareengine support or have a short-term need for spare engines, and want the best overall choice for their investment horizons and operating needs”. Typically, these are smaller carriers without deep cash reserves, but while “larger airlines do have more resources, depending on their operating horizons they may have a situation where an exchange may be advisable”.

GE’s and CFM’s TRUEngine Certification

Engine exchanges offer the customers of GE Aviation and CFM International several important operational and financial benefits, according to Bryce. One is that GE Aviation and CFM provide full TRUEngine certification for every exchange engine they sell. A TRUEngine is an engine that has been maintained to the standards laid out in GE Aviation’s or CFM’s manuals and whose maintenance also complies with all of the manufacturers’ recommendations. This certification gives customers full access for their exchange engines to GE’s or CFM’s TrueChoice support agreements.

img_60-1_71.jpg
1 A GEnx low-pressure turbine. GE Aviation’s exchange pool occasionally includes fan and lowpressure turbine modules, because customers sometimes merely want to exchange modules, not entire engines.
GE Aviation

Bryce says TRUEngine certification for exchange engines also offers customers three other benefits. First, GE and CFM can value a TRUEngine-certificated engine much more quickly and easily than they can engines without the certification, “because we know what we’re getting”. Second, and even more important, some aircraft appraisers are now according higher residual values to GE or CFM engines with TRUEngine certification than they are to comparable GE or CFM engines of the same model and year of build and with similar total accumulated flight cycles or flying hours, but which lack the certification. Bryce says: “A key component of total [aircraft] value is its residual value – and the engines represent a higher and higher proportion of aircraft value as an aircraft matures.”

img_60-2_49.jpg
2 A P&WC PW150 for a Bombardier Q400. Pratt & Whitney Canada owns the largest rental pool of engines of any company, having positioned some 850 rental and exchange engines throughout the world.
Pratt & Whitney Canada

This translates into a third benefit for GE’s and CFM’s engine exchange customers, according to Bryce. Because their TRUEngine-certificated engines are often valued more highly in the used-engine market than are powerplants without the manufacturers’ certification, airlines and leasing companies can find these exchange engines more attractive to banks and other aviation industry investors as collateral for loans, and thus can obtain loan financing for them more easily.

The fact that customers buy exchange engines and then are often able to finance their purchases by means of bank loans creates another, general, benefit for them: they are able to recognise these engines as capital assets on their balance sheets and thus are able to depreciate them over periods fixed by accounting rules. If these companies decided instead to keep their damaged or unsuitable-condition engines, they would usually have to send them for overhaul at considerable expense; that expense would not be recognised as capital investment, so it would not be given accounting treatment as favourable as that accorded engines purchased through exchange programmes.

Other Considerations

While the concept of engine exchange is simple in theory, there are, as one might expect, some wrinkles that can often make engine exchanges more complex in practice. One of the benefits Bryce claims for exchanging an engine rather than sending it away for overhaul and replacing it in the short term with a leased engine is that an engine exchange transaction can involve just one engine removal and one engine installation.

However, in practice, GE Aviation, CFM and other manufacturers offering engine exchanges usually offer to build exchange engines to each customer’s exact specification. This often involves the customer requiring an engine that offers enough remaining operating life – green time, in engine-industry parlance – to get the customer to the point where either it expects to hand the aircraft back once a lease has ended, or to retire and replace the aircraft.

Typically, in building exchange engines to specific operating-life horizons, manufacturers such as GE Aviation incorporate used serviceable material such as LLPs with enough operating life remaining to match closely the customer’s requirements. Building an engine to a specific remaining-life condition takes time, though, so GE Aviation often will offer an engine exchange customer a short-term lease on yet another engine, to allow the customer to operate the aircraft while it is waiting for its exchange engine to be delivered.

However, as when an operator or leasing company decides to send a damaged engine away for repair and lease another engine for a short period while the damaged engine is being overhauled, using a short-term engine lease and then replacing the leased engine always involves a total of two engine removals and two engine installations. These can be time-consuming and costly.

img_61-1_57.jpg
3 Pratt & Whitney Canada has offered engine exchanges for more than 25 years and its rental pool is offered in all of its segments – general aviation, regional aviation and helicopters. Pictured here is a PW308 for a business jet.
Pratt & Whitney Canada

Another wrinkle in performing engine exchanges is that if the exchange engine the manufacturer offers the customer doesn’t have components such as LRUs or a quick exchange kit of the same standard as those in the customer’s own engine, the customer might not want to trade away to the manufacturer some still serviceable components from its own engine. In such cases, says Bryce, GE Aviation is happy to incorporate into its exchange engine build the components the customer wants to retain from the engine it is going to replace. GE Aviation will adjust accordingly the fair market valuation of the engine the customer is trading to it.

Pratt & Whitney Canada

Having manufactured more than 100,000 aero engines for general aviation aircraft, turboprop-powered regional airliners, business aircraft, civil-market helicopters and auxiliary power units and today having in service 60,000 engines operated by 12,300 customers in more than 200 countries worldwide, Pratt & Whitney Canada (P&WC) has offered engine exchanges for more than 25 years. According to Geoffrey Corbeil, P&WC’s general manager, aftermarket commercialisation, a key factor is that P&WC owns the largest rental pool of engines of any company. It has positioned some 850 rental and exchange engines throughout the world to support its maintenance, repair and overhaul activity. He says: “This rental pool is a unique asset that enables P&WC to offer multiple options to its operator base when it comes to engine exchanges. Each operator has a different mission and with the number of rental engines we own we are in a position to cater to each operator’s used-engine exchange needs. Additionally, our rental pool is continually renewed with new engines [and so] P&WC also plays a unique role in fleet rejuvenation with engine exchanges. Our Fleet Enhancement Program [FEP] is an exchange programme where operators trade in their time-expired core engine for a brand-new P&WC engine of the latest configuration, including the new-engine warranty and brandnew life-limited components. This translates directly into a gain in the aircraft residual value while minimising maintenance costs. P&WC’s FEP has been in place for more than 20 years and operators have benefited from it in all of our segments – in general aviation, in regional [aviation] and the helicopter segment.”

P&WC’s extensive experience in providing engine exchanges has given it a keen sense of exactly what its customers want from such deals, according to Corbeil: “We know our customers are looking for certainty, cost predictability, no surprises, minimised downtown and a seamless experience – all of which we strive to deliver in our engine exchange programmes. [For airlines in particular], lifelimited components are among the most important elements of an engine exchange programme, as these components need to have sufficient life remaining to enable airlines to [keep an engine in service until its] next scheduled engine heavymaintenance event.”

The company also knows well the benefits that engine exchanges can offer. Corbeil says: “At P&WC, we listen closely to our customers and continue to evolve our programmes to best meet their needs – from operations and maintenance, to financial and cash flow perspectives. The main advantage to exchanging an engine rather than buying one outright is the ability to reduce the cash outlay required to procure an engine. The operator’s core engine is effectively a means of payment for an exchange engine that has [green] time remaining … in supplement to cash. The other important element is that an outright purchase would provide an operator with an additional engine, while an exchange keeps the number of assets in the books flat.”

img_61-2_38.jpg
4 Life-limited components such as this PW901A auxiliary power unit need sufficient life remaining to enable airlines to keep an engine in service until the next scheduled heavy-maintenance event.
Pratt & Whitney Canada