afra panel discussion · afra panel discussion ... panelist: don wilson, inventory locator...

AFRA Panel Discussion Economics of End-of-Life Aircraft Management Panel

Moderator: Bradley Gregory, Air Salvage International Ltd. Panelist: Mark W. Atwood, Cozen O'Connor

Panelist: Daniel Hall, Flight Ascend Consultancy Panelist: Don Wilson, Inventory Locator Service,® LLC, a Boeing company

Moderator: Bradley Gregory, Commercial Director of Air Salvage International

Panelist: Mark W. Atwood, Member of Cozen O'Connor

FAA REGULATION OF LIFE-LIMITED

PARTS AND

FAA ENFORCEMENT OF RELATED REGULATIONS

Aircraft Fleet Recycling Association

Annual Meeting

Reston, VA / July 9-11, 2017

LIFE-LIMITED PARTS

• Aircraft salvagers must pay particular attention to handling of removed

Life-Limited Parts (“LLPs”):

– Definition: “Any part for which a mandatory replacement limit is

specified in the type design, the Instructions for Continued

Airworthiness, or the maintenance manual.” (14 CFR section

43.10(a))

– Limits usually calculated by hours, cycles, or both.

– Examples include: engine disks, spacers, spools, hubs, shafts, and

high-pressure cases.

LIFE-LIMITED PARTS

• Much of the value of salvaged aircraft is recovered through

reusable parts, many of which are LLPs.

• For example, a recent 737NG disassembly returned $9

million from resale of 20% of the parts.

• As many as 1800 parts of a 737 can be returned to the

supply chain.

• If these Life-Limited parts are reinstalled on a type-

certificated product, the parts and those who remove them

must comply with FAA regulations. Risks of non-

compliance are substantial.

LIFE-LIMITED PARTS

• 14 CFR section 43.10:

– Adopted in January 2002.

– Mandated by AIR-21 Act (Wendell H. Ford Investment and

Reform Act for the 21st Century).

– Act added section 44725 to the Transportation Code.

– Specified five methods of “safe disposition” of LLP’s that

must be followed each time an LLP is removed from an

aircraft.

• (Note: “disposition” does not necessarily mean “disposal” – this

applies to any handling of an LLP removed from aircraft.)

LIFE-LIMITED PARTS

• Congressional action deemed necessary as FAA found use of

expired LLPs during accident investigations and routine

inspections.

• This violated existing FAA rules (section 43.13(b)), but

Congress – with FAA agreement – felt specific measures were

required.

– Aircraft Type Certificates require observance of life limits for

incorporated parts.

– If not, aircraft in violation of TC, and therefore unairworthy.

– Operators may incur substantial penalties for flights.

LIFE-LIMITED PARTS

• In January 2004, after extensive comments on its proposal

were filed, FAA adopted its current rule.

• Requires compliance with one of 7 methods of “disposition:”

1. Record keeping system;

2. Tag or record attached to part;

3. Non-permanent marking;

4. Permanent marking;

5. Segregation (for expired/unusable parts);

6. Mutilation (for expired/unusable parts); and

7. “Other methods” approved or accepted by the FAA.

LIFE-LIMITED PARTS

• This rule applies to “a person who removes a life-limited part”

from an aircraft; you don’t have to be an MRO.

– In fact, a/c disassembly has been considered maintenance.

(See In the Matter of Stambaugh’s Air Service, Inc., FAA

Order 2001-7.)

• Although only the first refers to “record keeping system,” in fact

all these methods require accurate and updated records.

• Records do not have to be “back to birth;” the FAA only

expects that they will provide sufficient data to determine how

the current life status was obtained. (July 18, 2009, Legal

Opinion.)

LIFE-LIMITED PARTS

• The FAA rulemaking preamble makes clear that the rule’s

requirements don’t just apply if the part is already out of time; it

applies to any LLP at any point in its life.

– A part may be technically airworthy when removed, but

quickly put an operator into violation if installed.

• Does the rule create liability for the removers if a part is

installed past time? No.

– FAA changed proposed language from “must prevent

installation” after life limit, to “must deter.”

FAA ENFORCEMENT OF THE RULE

• FAA can bring actions for civil penalties or action against a

certificate (either an air operator, Part 145 maintenance base,

or individual airman).

– Can also end up merely with “administrative action” such as

letter of correction

• Enforcement is most likely against an operator flying out-of-

time part.

– FAA would consider this a violation of several parts,

particularly operating an unairworthy aircraft (e.g. section

91.403(c)).

– This can result in enormous civil penalties.

FAA ENFORCEMENT OF THE RULE

• An example is 2016 case against R&R Conner

Aviation of Montana – settled for a $140,000 penalty

for four flights using three out-of-time components.

• If parts used on commercial a/c in scheduled service,

the penalties can be in the millions.

• And needless to say, there can be substantial civil

liability as well. (E.g. Cartillar v. Turbine Conversions Ltd., 187 F.3d

858 (8th Cir. 1999))

FAA Enforcement

• Out-of-time components can also be considered “suspected

unapproved parts.”

– FAA Order 8120.16A definition includes “life limited parts

misrepresented as new or having useful time left.”

• “SUP” are taken very seriously by FAA.

– Can entail criminal prosecution.

– In past 5 years, FAA investigations have resulted in 63

indictments and 51 convictions.

• DOT Inspector General issued a report in May urging FAA to

improve its enforcement in this area.

FAA Enforcement

• Last year FAA issued a series of orders outlining new

“compliance philosophy” – encouraging a “problem-

solving approach,” self-disclosure, using enforcement

as weapon of last choice.

• Practical result: fewer civil penalty or certificate actions,

more “administrative” actions.

• However, would this affect enforcement posture

towards use of out-of-time parts or SUP’s?

Questionable….

Panelist: Daniel Hall, Senior Analyst for Flight Ascend Consultancy

flightglobal.com/consultancy

AFRA Aircraft Fleet Recycling Association Annual Conference

Reston, VA 9-11 July 2017

Daniel Hall, Senior Analyst, Flight Ascend Consultancy

1

Economics of

End-of-Life Aircraft Management


FlightGlobal: Pioneering aviation insight and analytics

business

2

RELX Group:

London, Amsterdam and New York

Stock Exchange listed

28,500 employees

Market Capital $36.87bn

FlightGlobal:

370+ staff

11 offices across the world

Part of a leading data

solutions group


Independent Global team – fully objective

We do not invest in aircraft and we are not brokers – we have NO conflicts of

interest

We are based in London, New York and Hong Kong and travel the world bringing

regional and global opinion into our research

Instant access to vast data for research

The only Appraiser with a globally recognized Fleets database used by our clients

The only appraiser with schedule information

Unparalleled Historical values data

Historical Market values from 1965

Access to industry Tier 1 participants

Clients are Airlines, all the top lessors, the major banks involved in aviation finance,

MROs, OEMs, regulatory bodies

Presence at all major aviation events (Paris Airshow, ISTAT Asia / US / Europe…)

3

Source: Flight Ascend Consultancy

Flight Ascend’s unique Value proposition as an

appraiser


Why Flight Ascend Consultancy?

4

Ascend and its predecessors have been delivering aviation data and

appraisals for close to 50-years

Thought leadership, market intelligence, analytical products, regular values

updates, bespoke advisory projects

Ascend appraisals used globally to value in excess of 200,000 aviation

assets annually

Unrivalled aircraft histories and values databases underpin values analysis

Market values based upon best data capture of any appraiser globally

Appraiser of the Year six of the past seven years

flightglobal.com/consultancy 5

Source: Flight Fleets Analyzer – western build jets only

Stored aircraft shows contrast between fall in

single-aisle and increase in twin-aisle & RJ

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

250

500

750

1000

1250

1500

1750

2000

2250

2500

% o

f F

lee

t in

Se

rvic

e

Co

mm

erc

ial J

et

Air

cra

ft i

n S

tora

ge

SA TA RJ RJ % stored SA % stored TA % stored Total% stored


Source: Airfax, 6-month rolling average of aircraft available for lease or sale (excludes wet-lease / ACMI)

Used jet availability stable and at lowest level

since 2010

0

100

200

300

400

500

600

700

800

900

0

50

100

150

200

250

300

350

400

450

Ja

n-1

0

Apr-

10

Ju

l-1

0

Oct-

10

Ja

n-1

1

Apr-

11

Ju

l-1

1

Oct-

11

Ja

n-1

2

Apr-

12

Ju

l-1

2

Oct-

12

Ja

n-1

3

Apr-

13

Ju

l-1

3

Oct-

13

Ja

n-1

4

Apr-

14

Ju

l-1

4

Oct-

14

Ja

n-1

5

Apr-

15

Ju

l-1

5

Oct-

15

Ja

n-1

6

Apr-

16

Ju

l-1

6

Oct-

16

Ja

n-1

7

Apr-

17

Ju

l-1

7

To

tal C

om

me

rcia

l J

et

Mo

nth

ly A

va

ila

bilit

y

Tw

in-A

isle

/ S

ing

le-A

isle

/ R

eg

ion

al J

et

Mo

nth

ly

Ava

ila

bilit

y

Twin-Aisle (LHS) Single-Aisle (LHS) Regional Jets (LHS) All Jets (RHS)


Source: Flight Fleets Analyzer, all Airbus/Boeing/MDC aircraft with data, all usages

Average annual utilisations recovered through

2011 and show an improving trend during 2016

2,600

2,800

3,000

3,200

3,400

3,600

3,800

4,000

4,200

200

7 Q

1

200

7 Q

2

200

7 Q

3

200

7 Q

4

200

8 Q

1

200

8 Q

2

200

8 Q

3

200

8 Q

4

200

9 Q

1

200

9 Q

2

200

9 Q

3

200

9 Q

4

201

0 Q

1

201

0 Q

2

201

0 Q

3

201

0 Q

4

201

1 Q

1

201

1 Q

2

201

1 Q

3

201

1 Q

4

201

2 Q

1

201

2 Q

2

201

2 Q

3

201

2 Q

4

201

3 Q

1

201

3 Q

2

201

3 Q

3

201

3 Q

4

201

4 Q

1

201

4 Q

2

201

4 Q

3

201

4 Q

4

201

5 Q

1

201

5 Q

2

201

5 Q

3

201

5 Q

4

201

6 Q

1

201

6 Q

2

201

6 Q

3

201

6 Q

4

Ave

rag

e a

nn

ual u

tili

sa

tio

n (

rollin

g 4

qu

art

ers

)

Single-aisle Twin-aisle Total


Source: Flight Fleets Analyzer

Over 10,000 commercial jet aircraft have been retired to

date

0

5

10

15

20

25

30

35

40

0

100

200

300

400

500

600

700

800

Ave

rag

e A

ge

at

Air

cra

ft R

eti

rem

en

t

Air

cra

ft R

eti

red

<15 Years Old at Retirement >15 Years Old at Retirement

Average Age at Retirement Average Age at Economic Retirement



291 <15-year old aircraft parted-out since 2010

0

10

20

30

40

50

60

70

<1

5-Y

ea

r O

ld A

irc

raft

Reti

red

2010 2011 2012 2013 2014 2015 2016 2017


Source: Flight Fleets Analyzer, as at 20 September 2013 / 2016

Fleet of 15+ year old aircraft is 1,300 aircraft

larger than it was three years ago

0

200

400

600

800

1,000

1,200

1,400

1,600

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30+

Pa

ss

en

ger

Je

t A

irc

raft

in

Se

rvic

e

Aircraft Age (Years)

2013

2016


Flight Ascend Part-Out Value Forecast

2005-YOB Boeing 737-800 (CFM56-7B26, 155,500lb MTOW), 2%-infl

Source: Flight Ascend Part Out Tool, Flight Ascend Values, FlightGlobal Fleets Forecast (2016)“Total Part-Out Value Forecast” includes airframe (incl LG + APU) and engine shipset

0

500

1,000

1,500

2,000

2,500

3,000

0

2

4

6

8

10

12

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Fo

reca

st R

etire

men

ts (

cu

mula

tive

)

$U

SD

-Mn

Year

Forecast Retirements (cumulative) "Run-Out" Base Value Forecast

"Run-Out" Soft Market Value Forecast Total Part-Out Value Forecast ("Run-Out")

Downside Part-Out Scenario


Flight Ascend Part-Out Value Forecast

2000-YOB Boeing 737-800 (CFM56-7B26, 155,500lb MTOW), 2%-infl

Source: Flight Ascend Part Out Tool, Flight Ascend Values, FlightGlobal Fleets Forecast (2016)“Total Part-Out Value Forecast” includes airframe (incl LG + APU) and engine shipset

0

500

1,000

1,500

2,000

2,500

3,000

0

1

2

3

4

5

6

7

8

9

2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Fo

reca

st R

etire

men

ts (

cu

mula

tive

)

$U

SD

-Mn

Year

Forecast Retirements (cumulative) "Run-Out" Base Value Forecast

"Run-Out" Soft Market Value Forecast Total Part-Out Value Forecast ("Run-Out")

Downside Part-Out Scenario


In Q4 2012 Aerotron Ltd parted out an ex-Aircastle (former LATAM)

V2500-powered A320 (1997-YOB; MSN 0758).

Ascend (“half-life”) CMV $10.5 million

Book value $16.5 million

Aircraft “disposal” via part-out:

Maintenance reserves $6.5 million

Engine ‘sales’ $8.4 million

Airframe sale $2.3 million

Net sales value $17.2 million

Lessor realized net profit of $0.7 million

Aircraft realized $24-m rental over six years of ownership and an unlevered IRR of ~10%

13

Source: Aircastle Investor Presentation (April 2013), Flight Ascend Consultancy

Maintenance reserves are key to closing the

book value vs market value gap

Importance of lessor (end-of-life) management:


Source: Flight Fleets Analyzer & Flight Fleet Forecast 2016

CFM56 will remain largest installed engine fleet

until 2027

0

5,000

10,000

15,000

20,000

25,000

30,000

35,0001

99

41

99

51

99

61

99

71

99

81

99

92

00

02

00

12

00

22

00

32

00

42

00

52

00

62

00

72

00

82

00

92

01

02

01

12

01

22

01

32

01

42

01

52

01

62

01

72

01

82

01

92

02

02

02

12

02

22

02

32

02

42

02

52

02

62

02

72

02

82

02

92

03

02

03

12

03

22

03

32

03

42

03

5

En

gin

es

in

se

rvic

e

CFM56 V2500 LEAP PW GTF

LEAP & GTF have combined fleet of 29,500 engines by 2027


Source: Flight Fleets Analyzer & Flight Fleet Forecast 2016

Part-out value driven by fleet decline

Strong demand for spare engines until significant part-outs occur

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Pe

rce

nta

ge

of

en

gin

e f

lee

t in

se

rvic

e

CFM56-5 CFM56-7 Trent 700


RJ & NB fleet engines – proportion remaining in

service

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Nu

mb

er

of

ins

tall

ed

en

gin

es

Current in service Current stored Retired

<5% of CFM56-5B, -7, V2500-A5 retired to-date



WB engine fleets – proportion remaining in

service

Still a lot of opportunity even for those in ‘sunset’ phase


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Nu

mb

er

of

ins

tall

ed

en

gin

es

Current in service Current stored Retired


Daniel Hall

Senior Analyst

Accredited Senior Appraiser (ASA)

+1 646 746 6840

+1 781 382 5946

[email protected]

The information contained in our databases and used in this presentation has been assembled from many sources, and whilst reasonable care has been taken to ensure accuracy, the information is supplied on the

understanding that no legal liability whatsoever shall attach to Ascend Flighglobal Consultancy, its offices, or employees in respect of any error or omission that may have occurred.

Panel Discussion

afra panel discussion · afra panel discussion ... panelist: don wilson, inventory locator...

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