USM Providers Banking On Cargo Aircraft, Engines During COVID-19 Downturn

Stakeholders in the used serviceable materials (USM) market expect a steep impact as airlines scramble to save money, but continued MRO activity within engines and cargo aircraft may provide some unanticipated surpluses in the wake of COVID-19 market shifts.

During the Aviation Week Network webinar “Used Serviceable Materials Post-Pandemic,” panelists from both GA Telesis and Contrail Aviation Leasing noted that a major impact to their businesses has been airline customers asking for deferral of payments.

“The biggest thing we’re seeing is a lack of payment—that’s for everybody. The airlines have gone different ways, some of them very generous, some of them not generous,” says Jason Reed, president of the component solutions group at GA Telesis. “We’ve seen everything from 60-180 days of the payment term requests, and I even have a few of them going 12-18 months of lack of payment requests. Some of them simply didn’t ask—they told [us] that they weren’t going to pay.”

In addition to putting off payments, airlines are looking to reduce capital expenses wherever they can. Audience polls during the webinar found that 74% of participants expect airlines to start sourcing components from their parked aircraft and 72% expect airlines to manage the USM supplier base by trying to find the cheapest parts possible.

For companies dealing in USM, this is a daunting prospect. According to Derk-Jan van Heerden, CEO of end-of-life provider AELS, the company’s internal discussion has revolved around this very topic. “If you have a fleet of 100 aircraft, you stop flying 50, you don’t expect them to fly soon and they’re the same aircraft type, then why would you buy parts if you have those airplanes grounded?” he says.

Steve Williamson, VP acquisitions and trading at Contrail Aviation Leasing, notes that in an environment where airlines are trying to increase liquidity, it makes sense that carriers would try to poach USM from their own aircraft—particularly in terms of larger assets such as engines and APUs.

“I do think that some of the biggest expenses airlines see are engine shop visits and I think that they’re going to do everything they can to avoid large maintenance outflows in the near term, so you’ll see internal and external green time being eaten up at a very quick rate,” says Williamson. “That doesn’t necessarily mean good things for the engine USM side. In the near term, however, eventually that green time pool drives up and engines have to go into the shop, and so that’s what’ll happen.”

Reed notes that GA Telesis is still seeing 30-40% of its normal engine activity and that the USM market will benefit from fewer new aircraft deliveries, since airlines won’t be able to use aircraft OEM goods and services credits to buy new parts.

In that vein, the massive demand for cargo alongside falling demand for next-gen aircraft during COVID-19 may breathe some life into the USM market. “What is flying is pretty much cargo only, so I think this is a big shot in the arm for the Boeing 767 and 747 and it’s interesting for the engine types that power those as well,” says Williamson, noting that the CF6-80C2B engine platform is powering “two of the largest workhorses in the fleet” right now.

Williamson adds that compared to the 2008 economic recession, during which the industry saw massive narrowbody fleet retirements, the current situation will keep demand for current-generation narrowbodies—and their parts—high. “You might see some of the older 2000-2005 vintage aircraft coming out. Some of those will be ripe for freighter conversions,” says Williamson, singling out the Boeing 737NG and Airbus A320ceo as prospects for longer operating periods. “It’s ultimately a good thing for the end-of-life space because it’s going to keep current generation stuff flying for a bit longer.”

Reed agrees that A320 and 737 lifespans will increase. “There’s not going to be another next-gen single-aisle for a very long time. We’re looking at 2030 or beyond now, so your odds of selling a single-aisle part are much greater on the used market,” he says.

While he believes procuring single-aisle parts will be safer moving forward, Reed says sourcing widebody parts from aircraft such as the Boeing 777 and Airbus A330 will provide more difficult odds, since “those are the number one products that are going to come down.”