It has been a challenging year for those involved in aircraft disassembly and recycling. Players have had to engage in ever more creative solutions in order to make the market work for them.
Different strategies have emerged as the end-of-life sector struggles with the economic downturn and the changing profile of aircraft favoured for dismantling.
According to Derk-Jan van Heerden, general manager of Aircraft End-of-Life Solutions (AELS), industry players are now more focused on finance and investment opportunities. “A major development in the market this year has been the strategic removal of aircraft from service, with companies making strategic investments rather than just waiting for an aircraft to come to the end of its service life,” he says.
Aircraft dismantlers used to wait for an aircraft to reach 20- to 25-years-of-age, fall out of active service and be parked. Heerden notices that: “Dismantlers are now purchasing younger, more expensive aircraft, which they believe offer them more opportunities. Everything has become more professional, as dismantlers seek out, say, particular landing gears or avionics, which they know there is a market for, rather than just wait to see what comes along.”
“If you are purchasing an aircraft for say $20m, you are going to be much more careful in choosing who carries out your teardown of such a valuable asset,” continues Heerden. This trend has benefitted members of the Aircraft Fleet Recycling Association (AFRA), particularly those who are accredited, in that they have both a reputation and certification affirming that they dismantle and recycle aircraft according to best industry practice and in an environmentally sensitive manner.
Since its formation in 2006, AFRA has championed best practice in aircraft dismantling and recycling through a series of best management practice (BMP) guides. Currently 21 organisations have received AFRA accreditation, having been appraised by an independent auditor.
Aircraft age: More than just a number
With fuel-burn accounting for up to 40 per cent of an airlines’ operating costs, aircraft are leaving service at a younger age and being replaced by newer, more fuel-efficient models.
A number of countries, the latest being Indonesia, have introduced restrictions affecting the age of aircraft allowed to operate from or in their country. Effectively, this means that aircraft of around 18 years or above are no longer accepted in certain markets. Operators in these countries will now favour younger aircraft, meaning another swathe of aircraft will be pushed to their end-of-life and denied the secondary markets.
Industry experts are largely in agreement that the number of aircraft available for teardown will increase significantly in the coming years. Speaking at AFRA’s annual meeting in July 2012, Larry Schneider, VP for development at Boeing Commercial Airplanes, said he expected “the number of airplanes leaving the global fleet to nearly double in the next decade”. This is up from a rate of close to 400 a year. The Boeing executive said accelerated fleet replacement would “rapidly increase the demand for aircraft dismantling and recycling services and introduce unique challenges to the sector”.
According to Bernard Comensoli, CEO of Research & Business Development and AFRA board member: “More attractive financial conditions for new aircraft, as well as a greater demand for more fuel-efficient and environmentally proficient aircraft, have effectively lowered the service life of older aircraft by two to three years.”
To part-out or not to part-out
One of the major challenges for those in the aircraft dismantling and recycling sector is to convince asset owners that an aircraft has reached the end of its working life.
As CEO of Aircraft Demolition and an AFRA member, Tim Zemanovic, notes: “I’ve had to argue that it makes no sense to continue paying extortionate parking fees and insurance costs, while the asset slowly but inevitably, diminishes in value. It can be hard to accept that an aircraft that you think is worth a couple of million dollars may now only be worth a couple of hundred thousand dollars.”
According to Karl Rickard, CEO of Powerjet Aviation and fellow AFRA member: “Only when aircraft are advertised without engines is there a semblance of acceptance from owners that this aircraft is an end-of-life asset. But, in truth, there are growing quantities of aircraft that fit both the age profile and the maintenance status. That places them in the hot zone for teardown.” How aircraft owners can be encouraged to come to terms with these uncomfortable truths remains a challenge.
A number of factors go into deciding whether to disassemble an aircraft aged 20 years and over. For example, how many service years does the aircraft have? Will it need a heavy C and D check and if so, will these costs be recuperated when leasing or re-selling the aircraft?
Zemanovic notes: “Every aircraft is different; it depends what equipment has been installed. The avionics might have been upgraded, which adds value. They may have been fitted with all-weather radar. Each aircraft has to be taken on its own merit. You have to know your market, know what is in high demand and more importantly, know what is not.”
In the past year, there has been a noticeable change in the profile of aircraft types favoured for dismantling and recycling. Traditional favourites such as the classic 737 have fallen out of favour and have significantly dropped in price. Market experts claim you can now purchase a 737 Classic without engines, for around $100,000 to $200,000, which is less than half the market price two years ago.
Older A320s are not as popular a choice for dismantling as they once were, yet they have an enduring appeal. Many are fitted with parts that have been upgraded over the years. These parts are valuable in that they can be fitted on to the younger model A320s and with minimal repair, they can also be re-certified and can re-enter the parts market.
“There will always be some parts that are worth their weight in gold,” claims Rickard. “You need to buy the right aircraft at the right price as well as knowing how to manage the repair cycle of the valuable parts that you remove from the aircraft. So investment in the component repair can be crucial.”
In terms of widebody aircraft, dismantlers’ talk of older 747’s as having potential for disassembly, even though their price has fallen to around $3-4m.
The availability of both 737 Classics and older A320s for teardown has become more prevalent. Yet, AELS’ Heerden explains that this can present difficulties as well as opportunities. “It’s true that there are more aircraft available for parting out, which has led to a drop in prices for certain types of aircraft and also for parts from these aircraft, which makes these less attractive to dismantlers.”
“I would estimate that in certain cases, prices for parts have dropped by more than 20 to 25 per cent over the past year. In this climate, parts distributors don’t want to be sitting on a stock of parts for two to three years,” states Rickard.
When an aircraft type is first disassembled one can expect to retrieve around 1000 parts from each aircraft. However, as time passes and more of these aircraft are dismantled, it makes less economic sense to strip many parts as the demand is not there. Indeed, it is estimated that only half the parts will now be recovered from older aircraft.
Take the classic A320. It no longer makes sense to remove the parts that are hard to access when you may already have 10 of these in your warehouse. You are much more likely just to remove the high-value parts, to which you have relatively easy access.
The total package
“It is not necessarily the number of aircraft available that is making the difference in the sector, it is the type and ‘quality’ of the aircraft that is increasingly seen as the key to this sector thriving,” confirms Zemanovic.
Today, players are being more strategic by targeting younger aircraft that offer more economic opportunities. Increased competition in the sector also means that players have out more niche markets and more challenging opportunities.
However, financing becomes much more of an issue when targeting younger aircraft, hence the emergence of specific financing tools to support the aircraft end-of-life sector. Purchasing one of the younger aircraft (which are more sought after because of their engines and parts) can cost upwards of $10m. One particular specialised fund is Aeronautics Fund, which purchases aircraft for dismantling and recycling.
“The prices for these younger aircraft can be high, but so can the returns,” says RBD’s Comensoli. But if you are competing with cargo companies that want to convert aircraft into freighters, then you need financial companies like Aeronautics Fund to purchase these more expensive assets, enabling them to be dismantled by recognised AFRA members.
“You need to know what parts people want to buy; you need a certain amount of expertise. All our people have a long history of working in the aviation sector, which means they know the business, they know the markets. This is not always the case, especially when you get to the aircraft materials side of things,” says Zemanovic.
AFRA members highlight market response to packages that cover all aspects of disassembly and recycling. For example, Aircraft Demolition have developed a business model whereby they offset the cost of a full dismantle by offering credit on the monies received from tearing down and recycling the metals from the aircraft fuselage.
Traditionally, the model has entailed one company specialising in removing and dealing with the engines, another with the major parts and a third with the recycling of aircraft materials. To what extent these new ‘total’ packages are becoming the norm is unclear but it is obvious that the market as a whole is developing in many interesting ways.