REPORT Issued April 2018 New generation engines The picture s cloudy Member of ISTAT UK CAA Approval No. UK.MG.0622 www.iba.aero
In a two-part article, Kane Ray, IBA s Head Analyst - Commercial Engines, takes a deeper look into some specific issues affecting new technology engines after entry into commercial service (EIS) and considers if these may influence airline selection and/or impact on residual values. This first of two parts follows on from IBA s Engine Selection webinar held in November 2017, which is still available from our on demand channel. The second part of the report will be issued later this year and will explore more closely the impact on residual values. Buy new now, defer delivery, or stick with the old? What factors impact the decision? The primary purpose of all new engine types is to offer an airline customer a reduced fuel bill and longer ranges for the same fuel load. But this comes at a price. Highly complex technical innovation, particularly in material science is extremely costly so the OEMs (original equipment manufacturers), like the Pratt & Whitney who invested $10 billion to develop their GTF engine, seek to recoup heavy initial investments through sticker prices and service-in-life support programmes. The price of fuel is often the first consideration for middle tier and small airlines so the question they want to answer is will the business be better off continuing to operate current technology engines, as opposed to the cost of acquiring new more fuel efficient engines? The following tables give an overview of fuel price stability in recent years, and over a 10+ year period. Fuel expenditure Worldwide airline industry Worldwide airline industry 2015 2016 2017 Fuel spend, US$ billion 180 124 129 % change over year -19.9% -31.2% 4.1% % operating cost 27.3% 19.2% 18.7% Fuel use, billion litres 307 323 334 % change over year 5.6% 5.1% 3.4% Table 1 Source IATA, IEA, McKinsey Table 2 US$m billions 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018F Fuel 127 146 203 134 151 191 228 231 224 132 130 130 156 % of expenses -28.4 29.8 35.6 28.3 28.3 30.7 33.2 33.2 30.9 26.4 20.6 18.8 20.5 Crude oil price, Brent, 65.1 73 99 62 79.4 111.2 111.8 108.8 99.9 53.9 44.6 54.2 60 US$/B Source IATA Designed at a time when fuel costs were high the new engines are now coming on stream at a time of relatively low oil prices. This is good news for narrowbody operators because it enables them to evaluate the situation that is best for their business with the luxury of choice. IBA believes that when it comes to first engines out of new engine production, reliability, build specification and performance promises (fuel burn) are key factors for all stakeholders. Of these, fuel burn is of primary long-term importance. IBA estimates that the latest generation of engines could achieve $150 less fuel cost per hour, although this is dependent on route structures. There are potential fuel cost savings here that will be measured across the lifetime or a time period of respective aircraft. 2
Narrowbody Market New Engine Options and Status of EIS Issues The narrowbody market is dominated by the A320 and B737 families and their new iterations neo and MAX. Below we will summarise changes over the past 12 months and look mainly at ongoing issues and new problem items. PW1000 GTF EIS Issues Engine Issue Fix Status Impact Combustor liner 3# Bearing Seal Start Issue Spare Engine Shortage HPC Rear Hub Knife Edge Seal Caused early removals in India. New liner upgraded as the current standard. In-service fleet to be modified at next shop visit. New dry face seal introduced as the current standard. In-service fleet to be modified at next shop visit. Corrected in 2016. No longer an issue. As of 1Q 2018, Pratt & Whitney have significantly increased the number of spare engines. This will enable quick resolution to the recent hub issue. Modification clearance approved and is new production and MRO standard. Reduced time on-wing in severe operating environments. Engine removal driver. Interim solution introduced in 2017 reduced removals. Removal reduction by 90%. Higher than desired engine start-up time in early batch of production engines. No longer an issue. Operational delays. The increase in spare engines will add a spare engine buffer allowing for quicker upgrades for the future & existing fleet. A subpopulation. 20 engines in the field need to be returned for upgrades. This should be resolved during 2Q 2018. While the geared turbofan has met performance specifications in areas such as fuel burn, noise and emissions, it has also been beset by manufacturing hurdles. Airlines such as IndiGo, India s largest carrier, have been forced to ground neos. The latest issue with modifications concerning the HPC Rear Hub Knife Edge Seal is said to be impacting 43 engines. EASA had also issued an interim emergency Airworthiness Directive citing pairings of the engine batch on one aircraft. Consequently, that required de-pairing of engines across the wing, meaning one engine serial number below P450- to be matched with P450- and above. Pratt & Whitney have validated an approved corrective action that is being incorporated on all engines delivered from the production line and MRO. Of the original 43 engines, there are still approximately 20 engines onwing that will come back for this corrective action. GTF summary Notwithstanding all performance improvement benefits, operators will be restricted by the engine hardware issues discussed and the resultant delay in aircraft deliveries. Geared architecture and fan drive gear system have performed faultlessly. Whilst entry into service issues 3
have caused some disruption and delivery delays, today s delivered engine contains all the upgrades for the key issues and, all in services engines will get upgraded to the latest standard in the near term. The impact of unplanned visits and component upgrades are primarily handled through warranty, and OEM maintenance agreements. In discussions, Pratt & Whitney highlighed that the GTF continues to provide the lowest fuel consumption and highest payload capability on the neo platform and, the technology of the geared turbofan is only a foundation to what is expected to be further developments and enhancements over and above the current GTF technology. Engine Issue Fix Status Impact Time on-wing. Booster 2 CFM LEAP-1A & -1B EIS Issues incorporated into the CFM Booster Performance Time on-wing/egtm. LEAP production line from Compared to P&W EIS issues CFMI issues have received less mid-2017. coverage as they are performance related rather than hardware related. Engines can experience a sudden shift in EGT margin. Environment Barrier Coating On HPT Shroud New Bonding Process alleviates issues. CFM are EGTM. due to introduce a redesign this quarter. HPT/ LPT LLP Quality Concern Supplier batch issue impacting both variants (limited subpopulation). Supplier now switched. An early replacement requirement if there are findings during inspection. No findings on 67% of affected HPT Disks. LPT Disks all cleared without replacement requirement. Starter Air Valve (Honeywell) Modified. Upgrade/Replace. LEAP Summary TGB Support Bearing Redesign reduces potential of failure. Extra Oil Consumption. While the LEAP engine in comparison is making less troubled progress, the real ramp-up has yet to fully kick in. Safran partner with GE in CFM, has already acknowledged that it is struggling to stay on top of the Leap output rise. Those rate increases, to about 60 narrowbody aircraft per month for both Airbus and Boeing, will put enormous pressure on the entire supply chain. CFM delivered 459 engines in 2017 which was above initial estimates for 2017 production. Narrowbody Summary As has been seen, both OEMs are making strides to eradicate these early imperfections, there has been evidence from both that this is happening. Whilst there is frustration for operators with EIS issues, in our experience they are generally short lived and eventually resolved. Given the backlog of orders we trust this is the case. The latest challenges unfortunately push deliveries to the right and we would now forecast that both programmes will be delivered problem free by 2021, assuming no further issues arise. 4
100% Advising 100% of major aircraft and engine OEMs. 30 Years of proprietary valuations and maintenance data. 100 Advising the top 100 banks, lessors and airlines. 100 Aircraft under fully serviced management contract IBA is an award winning and leading independent aviation consultancy advising a broad mix of lessors, operators, financiers and investors. Operating globally, we inform decision making and support operations across the aviation spectrum. Supporting strategic investments, managing aircraft, advising on expansion, or driving efficiency improvements, our mix of intelligence gathering, analysis, proprietary data, technical expertise and decades of aviation experience delivers value across aviation opportunities and challenges. If you have any questions, comments or feedback please contact: Kane.ray@iba.aero IBA are hosting an Engine Market Update Webinar on Tuesday 24th April 2018 08:30-09:30 am GMT. If you would like to attend you can register your interest here IBA regularly distributes thought leadership, forthcoming events and comments on industry news via email. If you would like to recieve future communications please sign up here 5