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Engine Investor & Financier

London Roadshow
Tuesday September 19th 2006
Bob James

TES Aviation Group Overview

Established 1995, HQ Cardiff, UK. Privately owned


Professional 52 person team
Over 60 customers in 20 countries
700 engines under fleet management
~100 Shop Visits per year
Independent Technical, Commercial & Logistic expertise
OEM agreements (GTAs) in place - training, manuals &
conferences
Established industry relationships with repair shops, airlines,
lessors, financiers & legal firms
ISO9000-2000 / AS9100 / AC056A Quality accredited
www.tes-uk.com

TES Aviation Group


Structure

Aircraft Engine Tech / Commercial


Asset Management and technical
services

Aircraft Engine Physical Asset


Mgt, Parts provisioning,
remarketing and disposition.

Tailored software solutions for


effective asset management.

TES
TES Aviation
Aviation Group
Group Complete
Complete Asset
Asset Management
Management Services
Services
www.tes-uk.com

TES Engine Portfolio

CF6-80E

Engine Quantity by Type

CF6-80A2
CF6-50C2
CF6-50E2
JT8D-200

APU

CF6-80C2

CFM56-7

PW125B
V2500-A5
V2500-A1
PW4000
RB211-535E4

CFM56-5B

CFM56-5A
CFM56-5C

CFM56-3

700
700engines
enginesvalued
valuedin
inexcess
excessof
of$2.0
$2.0bn
bn
www.tes-uk.com

TES Customer Portfolio


Banks and Leasing Companies

Manufacturers

US Based Aircraft Manufacturer


UK Based Engine Manufacturer

Airlines

www.tes-uk.com

Breaking up is never easy !


When to part out ?
How much value is left at the end?
Key types ?
What are the main considerations from an investors perspective?

What
Whatare
arethe
thekey
keyconsiderations
considerationsof
ofReduce
ReduceTo
ToProduce
Produce(RTP)
(RTP)
programs
programson
onaircraft
aircraftengine?
engine?
www.tes-uk.com

Where is the residual value in an aircraft ?


OR

www.tes-uk.com

Engine Value Projections with Time

Engine
he
Enginevalue
valueincrease
increaseas
asaapercentage
percentageof
ofaircraft
aircraftvalue,
value,until
untiltthe
engines
enginesaccount
accountfor
foralmost
almostall
allthe
theresidual
residualvalue
value
www.tes-uk.com

Financial, Management and Trading Phases

Where
Whereare
areyour
yourasset
assetinvestments
investmentsin
inthe
theaircraft
aircraftlife
lifecycle?
cycle?
www.tes-uk.com

Financial Phase - Attributes

New equipment
No engine shop visit liability
Premature removals OEM supported
Warranties on wing life, removal rate
Guarantees reliability, piece part life, fuel burn
OEM grow data & experience
OEM campaigns supported
Provisioning kits supported
Limited aircraft remarketing
Less demands for Technical Asset Management

New
NewEquipment
Equipmentat
atOEM
OEMlist
listpricing
pricingtypically
typicallyless
lesslikely
likelyto
tooffer
offer
financially
financiallyviable
viabledisassembly
disassemblyprogram
program
www.tes-uk.com

Financial Phase

Hopefully the warranty and guarantees are in place!


www.tes-uk.com

Management Phase - Focus

Engine Removal Planning and Forecasting


When ? What ? How Much ? Where ?

Engine shop visit liabilities


Contract Definition
Workscope definition / control
Design standard of parts fitted?

Maintenance reserve draw downs


Workscope and replacement material
Shop contract terms
Industry support programs ADs SBs

Transaction contract management


Delivery / Re-delivery / Configuration planning

Technical
Technical&&Commercial
CommercialManagement
Managementbecome
becomeimportant
importantwith
with
specific
specificproducts
productssuited
suitedto
todisassembly
disassemblyprograms
programs
www.tes-uk.com

Management phase

Engines beyond economical repair offer exchange potential


www.tes-uk.com

Trading Phase - Attributes

Equipment obsolescence

Engine values may exceed aircraft value

Cost of overhaul exceeds cost to replace

Engine exchanges rather than repair

Reliability decreasing

Cost of operations increasing

Operators look to phase out equipment

Disassembly of equipment for parts

Aircraft and engine trading

Entrepreneurial / opportunistic investments

Technical decision making important to risk management

Asset values not generally proportional to lease income

Disassembly
Disassemblyprograms
programsincreasingly
increasinglyoffer
offeraapreferred
preferredexit
exitroute
route
www.tes-uk.com

Trading phase

What do we do with this is there residual value?


www.tes-uk.com

Engine Life Cycle Which assets are where in the cycle ?


Engine Life Cycle Profile
Average (AC) Age
45.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
BR700 CFM56- AE3007 CFM56- TRENT
7
5B
984

2756

1914

1368

688

GE90

V2500

CF34

260

1906

3016

CFM56- PW4000 CFM56- PW2000 RB211- CF6-80


5C
5A
535
896

2344

1042

1300

1208

3327

TAY

CFM563

JT8D200

1874

3936

2468

ALF500 RB211- CF6-50


524
816

1038

1414

JT9D

JT8D
Basi c

CF6-6

CFM562

1582

6263

249

2308

Engine Type + No. Engine s


Financial

Management

Trading

Not
Notall
allassets
assetsprogress
progresschronologically
chronologicallythrough
throughthe
thephases
phases
www.tes-uk.com

Engine Life Cycle Management Phase Engines

CF6 80

Tay 650

CFM56-5A

RB211-535E4

PW4060

PW2037

CFM56-3

JT8D-217/9

Source : ACAS

Axes : X Aircraft Age; Y Aircraft Deliveries by Year

Management
-out
ManagementPhase
PhaseEngines
EnginesPotential
Potentialfor
forpart
part-out
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Engine Life Cycle Trading Phase Engines

CF6-50

CFM56-2

Axes : X Aircraft Age; Y Aircraft Deliveries by Year

Source : ACAS

What
Whatare
arethe
themarket
marketdemographics
demographics??
www.tes-uk.com

Demographic considerations
How many engines in service
What are the operator demographics?
Geographic spread / concentration of operators
Engine type applications to different aircraft
Engine thrust ratings and upgrade potential
What are the SV arisings / material forecast
Obsolesence, regulatory directive considerations?
How many repair facilities are there?
Future value predictions for the type?
Spare engine availability?
Market
Marketdemographics
demographicssignificantly
significantlyinfluence
influencedecision
decisionmaking
making
www.tes-uk.com

Demographics by Operator ( Example)


RB211-535E4 powe re d B757 - Indiv idual Ope rator Fle e t Size

8 Operators
226 Engines

3 Operators
224 Engines

2 Operators
362 Engines

No. of a/c
1 to 5
6 to 10

7 Operators
98 Engines

11 to 20

PW2037 powered B757 - Individual Operator Fleet Size

2 Operators
158 Engines

3 Operators
492 Engines

No. of a/c
1 to 5

3 Operators
88 Engines

6 to 10
11 to 20

21 to 50

21 to 50

51+

62 Operators
230 Engines

Total RB211-535E4 Operators


Total RB211-535E4 Engines installed
Total Operators with <6 aircraft

: 82
: 1140
: 62

51+

15 Operators
70 Engines

4 Operators
54 Engines

Total PW2000 Operators


Total PW2000 Engines installed
Total Operators with <6 aircraft

: 27
: 862
: 15

Source : ACAS May 2006

Operator
-535E4 than
Operatordiversity
diversitysignificantly
significantlygreater
greaterof
ofRB211
RB211-535E4
thanPW2037
PW2037
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Engine Life Cycle Aircraft Values


Value Index for All Commercial Jets
(History and Forecast)

Forecast

History

Value dictated by position in

120

the life cycle.

110
100

Predictions show peak values

90

circa 2009.

Index

80

More money, chasing fewer

70

deals = fewer disassembly

60

programs.

1976

1979

1982

1985

1988

1991

1994
Years

1997

2000

2003

2006

2009

50
2012

Source Avitas

We
Wehave
haveseen
seenB757
B757programs
programsmove
movefrom
fromviable
viabledisassembly
disassemblyto
to
conversions
conversionsto
tocontinued
continuedpassenger
passengeruse,
use,all
allwithin
within12
12mths
mths
www.tes-uk.com

Which Assets do we part-out Key considerations


Purchase price / Book Value how much do we need to realise ?
Full part-out modelling required :Airframe value
Age / operator profile
Volume in service
Commonality
Airframe Part-out location
Who can disassemble?
Logistics, environmental concerns
Reputation, capacity, storage and part-out cost
Engine Removal
Costs
Certifications and records

Airframes
Airframesoften
oftensold
soldseparately
separatelyto
toengines
engines
www.tes-uk.com

Which Assets do we part-out Key considerations


Engine disassembly - Location, capacity, capability, space & cost
Parts Repair - Which parts, where, repair investment and timescale
Scrap Rates - Scrap rates by line item by P/No.
Sales Prices Overhaul sales price by line item and part no.
Sales Demand - Sales timing prioritisation of parts (A,B,C,D)
Sales outlets to be defined
Competition OEM pricing, DER/PMA pricing, material availability

Engine
Enginedisassembly
disassemblycan
canbe
belogistically
logisticallyand
andtechnically
technicallycomplex
complex
www.tes-uk.com

Which Assets do we part-out Key considerations


Can we lease the engine residual life before disassembly?
Engine Life Limited Parts (LLPs) status vs potential rebuild life
Key material scrappage based upon time since Overhaul and known
technical issues.
Specific LLPs may account for 75% of total LLP value rejection during
inspection may adversely impact value of material recovery
Technical documentation increasingly important standards vary
As a lender, how do I maintain asset security post disassembly to parts?

Maintaining
Maintainingsecurity
securityremains
remainsaacritical
criticalaspect
aspectto
toasset
assetbacked
backed
financing
financingof
ofdisassembly
disassemblyprograms
programs
www.tes-uk.com

Full Due-Diligence Inspection

Full records check updated and certified


Traceability documentation requirements of piece parts
significantly greater than if installed in an engine !
Certified operator on / off disk sheets.
Birth document
Non incident statement from every operator
ADs certified means of compliance.
Repair Certifications FAA/EASA not local release
Key modification incorporation major impact on
obsolescence and material value recovery.
Historical shop visit data Full definition of works performed
Key component configuration number of previous repairs,
repair standards and OEM soft time recommendations.

Accurate
Accuratecost
costmodelling
modellingrequires
requiresboth
bothtime
timeand
andexpertise
expertise
www.tes-uk.com

Full Due-Diligence Inspection (Contd)

Current MPA performance check full take-off power check


in addition to ECM

Full video boroscope overviewed by experienced engineers

Log books updated for Ferry Flights 2 hours and 1 cycle


can have a major value impact

Full physical inventory your definition of Bare and QEC


will not be the same as mine

Storage & preservation review 30 days means 30 days. 45


days means a technical deviation or an expensive engine
shop visit !!

Total
Totaltechnical
technicalcontrol
controland
andfocus
focusrequired
requiredto
tomaximise
maximisevalues
values
www.tes-uk.com

Sales Outlets influencing factors

Market demand shop visit arisings, new part cost,


repairability and obsolesence.

Material availability - quantity and quality of material


available, competitors and market players

Airlines Who ? Where ? How Big ?

Parts Traders Who ? What ? How Much ?

Repair Shops How Many ? Where ? Repair Volume ?

Critically
it
Criticallyassess
assessyour
yourdisposition
dispositionprovider
provideras
asrequired
requiredfor
forcred
credit
committee
committeeapproval
approvalon
onan
anunsecured
unsecureddebt
debttransaction
transaction
www.tes-uk.com

Repair Shops How Many ? Where ? Repair Volume ?


MRO Geographic Location RB211-535E4
RR - UK

MRO Geographic Location JT8D-200

Iberia - Spain

Volvo Sweden

AeroThru
st - US

Finnair Finland

Delta Tech
Ops - US
AMECO - China
TAESL US

AES - US
HAESL Hong Kong

PGTC
US
ITR Mexico

Iberia Spain
Avio Italy
Bedek
Aviation
(IAI),
Israel

ST
Aerospa
ce Singapor
e
P&W New
Zealand

MRO Geographic Location CFM56-3


TIMCO - US
Delta Tech Ops
- US
MTU
Canada
United Services,
US
GE - US

GE Celma - Brazil

AeroThrust US

LTAI Ireland

P&W
(NEC) Norway

GE Wales

MRO Geographic Location CFM56-5A

Lufthansa
Technik Germany
THY - Turkey
Snecma
- China

Snecma
France &
AFIBelgium
- France
TAP Portugal
Snecm
aMoroc
co

GE - US
IHI Japan

ST
Aerospace Singapore

Lufthansa
Technik Germany

Air
Canada Canada

MTU - China

GE Malaysia

Bedek
Aviation
(IAI), Israel
Jet Turbine - Australia

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GE - Wales
Snecma France
AFI - France

Iberia Spain

MTU China
GAMCO
Abu
Dhabi

Repair Shops How Many ? Where ? Repair Volume ?


MRO Geographic Location PW2037
P&W US

Finnair - Finland

Delta Tech Ops


- US

MRO Geographic Location PW4000


SRT Switzerland
Volvo Aero Sweden

MTU Germany
Delta Tech
Ops - US

Lufthansa Technik
Germany
LTUAM- Germany

United
Services, US
United
Services
US

AMECO - China
P&W Cheshire US

GE Malaysia

P&W (ESA) Singapore

MRO Geographic Location CF6-80C


KLM
Netherlands

GE - US

GE Brazi
l

Lufthansa
Technik -MTU GermanyGermany

IHI Japan

R-R
- UK

Alitalia
- Italy
American Airlines - US

MRO Geographic Location V2500

Lufthansa
Technik Finnair -Germany
MTU Finland
Germany

Air India - India

P&W US

Thai Airways - Thailand

TAP Portugal

GAMCO
Abu
Dhabi
Jet Turbine - Australia

ANZES
New
Zealand

www.tes-uk.com

SAA
Technic
al
South
Africa

MTU
Zuhai China

P&W New
Zealand

So what values are


achievable from engine
disassembly programs?

www.tes-uk.com

Disassembly Example 1
B757 (RB211) 1986
C Check & Pylon mod required,
one engine u/s, one engine low
time remaining
Do we reduce to spare parts
#1 Engine Unserviceable

What value can we get realise ?

#2 Engine Serviceable
1800 cyc residual
Lease out over 12 months

Part-Out. Net Sales

Airframe Sales Value $2.25M

residual lease $945,000


X3 90 day leases @ $3,500 per day

Revenue projection $2.5M


Over 24 months

Part-Out. Net Sales


Revenue projection $2.5M
~$8.2M over 2 year program

Are we prepared for


$500,000 investment
in material repairs ?

What are the program costs?


Finance, shipping, teardown,
legal, insurances, mgt fees?

www.tes-uk.com

Over 24 months
Are we prepared for
short term leasing to
maximise returns ?

Disassembly Example 2

CF6-50C2 Program 2004/5


Engine purchases x6 $600,000
Costs

Acquisition / legal
Shipping / stands
Teardown
Repair of parts
Other

CF6-50C2 Program 2006


Engine purchases x2 $550,000
Costs

$75,000
$100,000
$300,000
$900,000
$150,000

Total Costs
Total Parts Sales
Total Gross Profit

$1,585,000
$4,000,000
$2,415,000

Project Return

60% ROS

Acquisition / legal
Shipping / stands
Teardown
Repair of parts
Other

$25,000
$60,000
$50,000
$300,000
$25,000

Total Costs
Total Parts Sales
Total Gross Profit

$1,585,000
$1,650,000
$640,000

Project Return

39% ROS

Would
-50C2 engines
Wouldyou
youprovide
providedebt
debtagainst
againstCF6
CF6-50C2
enginesfor
for
Would
you
provide
debt
against
CF6
50C2
engines?
Would you providedisassembly?
debt against CF6-50C2 engines?
disassembly?
www.tes-uk.com

!! Caution !!
Trust my
modelling
weve done
this before !!

The
ThePart
Partout
outand
andbreak
breakup
upbusiness
businesscan
canattract
attractringmasters.
ringmasters.
www.tes-uk.com

Summary / Conclusions
Complete technical and commercial control required throughout the
key phases of the aircraft life in order to maintain residual value
Study the market demographics carefully if you are to maximise the
realiseable value from a disassembly program.
Disposition management & control requires careful selection of a
partner to manage the process with an excellent technical
understanding of the product and sales outlets.
Asset backed financing of engines for disassembly remains a niche
market but offers significant returns for those prepared to invest
with a trusted, experienced and respected service provider.

www.tes-uk.com

The ultimate residual value retaining asset


www.tes-uk.com

Thank you for your attention

TES Aviation Group


The leading engine asset management service provider
offering innovative commercial and technical solutions to
investors and operators of commercial aircraft engines.
www.tes-uk.com