Engine Investor & Financier London Roadshow Engines event Slides/TES.pdf · Engine Investor &...

Engine Investor & Financier

London Roadshow

Bob James

Tuesday September 19th 2006

www.teswww.tes--uk.comuk.com

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 (GTA’s) in place - training, manuals & conferences

Established industry relationships with repair shops, airlines, lessors, financiers & legal firms

ISO9000-2000 / AS9100 / AC056A Quality accredited


TES Aviation Group – Complete Asset Management Services TES Aviation Group – Complete Asset Management Services

“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 Aviation Group TES Aviation Group StructureStructure


Engine Quantity by Type

RB211-535E4

CFM56-7

PW4000

V2500-A1V2500-A5

APU

PW125B

CF6-80E

CF6-80A2

CF6-50C2

CF6-50E2

CF6-80C2JT8D-200

CFM56-5B

CFM56-3CFM56-5C

CFM56-5A

TES’ Engine Portfolio

700 engines valued in excess of $2.0 bn700 engines valued in excess of $2.0 700 engines valued in excess of $2.0 bnbn


TES’ Customer PortfolioBanks and Leasing Companies

Manufacturers US Based Aircraft Manufacturer

UK Based Engine Manufacturer

Airlines

http://www.flymonarch.com/index.asp


When to part out ?

How much value is left at the end?

Key types ?

What are the main considerations from an investors perspective?

Breaking up is never easy !

What are the key considerations of Reduce To Produce (RTP) programs on aircraft engine?

What are the key considerations of Reduce To Produce (RTP) What are the key considerations of Reduce To Produce (RTP) programs on aircraft engine?programs on aircraft engine?


Where is the residual value in an aircraft ?……OR


Engine Value Projections with Time

Engine value increase as a percentage of aircraft value, until the engines account for almost all the residual value

Engine value increase as a percentage of aircraft value, until tEngine value increase as a percentage of aircraft value, until the he engines account for almost all the residual valueengines account for almost all the residual value


Financial, Management and Trading Phases

Where are your asset investments in the aircraft life cycle?Where are your asset investments in the aircraft life cycle?Where are your asset investments in the aircraft life cycle?


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

Financial Phase - Attributes

New Equipment at OEM list pricing typically less likely to offerfinancially viable disassembly program

New Equipment at OEM list pricing typically less likely to offerNew Equipment at OEM list pricing typically less likely to offerfinancially viable disassembly programfinancially viable disassembly program


Financial Phase

Hopefully the warranty and guarantees are in place!


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 AD’s SB’s

Transaction contract management

Delivery / Re-delivery / Configuration planning

Management Phase - Focus

Technical & Commercial Management become important with specific products suited to disassembly programs

Technical & Commercial Management become important with Technical & Commercial Management become important with specific products suited to disassembly programsspecific products suited to disassembly programs


Management phase

Engines beyond economical repair offer exchange potential


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

Trading Phase - Attributes

Disassembly programs increasingly offer a preferred exit route Disassembly programs increasingly offer a preferred exit route Disassembly programs increasingly offer a preferred exit route


Trading phase

What do we do with this – is there residual value?


Engine Life Cycle – Which assets are where in the cycle ?Engine Life Cycle Profile

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

BR700 CFM56-7

AE3007 CFM56-5B

TRENT GE90 V2500 CF34 CFM56-5C

PW4000 CFM56-5A

PW2000 RB211-535

CF6-80 TAY CFM56-3

JT8D-200

ALF500 RB211-524

CF6-50 JT9D JT8DBasic

CF6-6 CFM56-2

984 2756 1914 1368 688 260 1906 3016 896 2344 1042 1300 1208 3327 1874 3936 2468 816 1038 1414 1582 6263 249 2308

Engine Type + No. Engines

Average (AC) Age

Financial Management Trading

Not all assets progress chronologically through the phasesNot all assets progress chronologically through the phasesNot all assets progress chronologically through the phases


Engine Life Cycle – “Management Phase” Engines

CF6-80 PW4060 CFM56-3

CFM56-5A RB211-535E4 PW2037 JT8D-217/9

Tay 650

Axes : X – Aircraft Age; Y Aircraft Deliveries by Year Source : ACAS

Management Phase Engines – Potential for part-outManagement Phase Engines Management Phase Engines –– Potential for partPotential for part--outout


CF6-50 CFM56-2

Engine Life Cycle –”Trading Phase” Engines

Axes : X – Aircraft Age; Y Aircraft Deliveries by Year Source : ACAS

What are the market demographics ?What are the market demographics ?What are the market demographics ?


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 demographics significantly influence decision makingMarket demographics significantly influence decision makingMarket demographics significantly influence decision making


Demographics – by Operator ( Example)

RB211-535E4 powered B757 - Individual Operator Fleet Size

2 Operators362 Engines





1 to 56 to 1011 to 2021 to 5051+

No. of a/c

Total RB211-535E4 Operators : 82Total RB211-535E4 Engines installed : 1140Total Operators with <6 aircraft : 62

Source : ACAS May 2006

15 Operators70 Engines4 Operators

54 Engines




1 to 56 to 1011 to 2021 to 5051+

PW2037 powered B757 - Individual Operator Fleet Size

No. of a/c

Total PW2000 Operators : 27Total PW2000 Engines installed : 862Total Operators with <6 aircraft : 15

Operator diversity significantly greater of RB211-535E4 than PW2037Operator diversity significantly greater of RB211Operator diversity significantly greater of RB211--535E4 than PW2037535E4 than PW2037


Engine Life Cycle – Aircraft Values

Value Index for All Commercial Jets (History and Forecast)

50

60

70

80

90

100

110

120

1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

Years

IndexHistory Forecast

Source Avitas

Value dictated by position in

the life cycle.

Predictions show peak values

circa 2009.

More money, chasing fewer

deals = fewer disassembly

programs.

We have seen B757 programs move from viable disassembly to conversions to continued passenger use, all within 12 mths

We have seen B757 programs move from viable disassembly to We have seen B757 programs move from viable disassembly to conversions to continued passenger use, all within 12 conversions to continued passenger use, all within 12 mthsmths


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 profileVolume in serviceCommonality

Airframe Part-out locationWho can disassemble?Logistics, environmental concernsReputation, capacity, storage and part-out cost

Engine RemovalCostsCertifications and records

Airframes often sold separately to enginesAirframes often sold separately to enginesAirframes often sold separately to engines



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 disassembly can be logistically and technically complexEngine disassembly can be logistically and technically complexEngine disassembly can be logistically and technically complex



Can we lease the engine residual life before disassembly?

Engine Life Limited Parts (LLP’s) status vs potential rebuild life

Key material scrappage based upon time since “Overhaul” and known

technical issues.

Specific LLP’s 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 security remains a critical aspect to asset backed financing of disassembly programs

Maintaining security remains a critical aspect to asset backed Maintaining security remains a critical aspect to asset backed financing of disassembly programsfinancing of disassembly programs


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 documentNon incident statement from every operator

AD’s– 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 cost modelling requires both time and expertiseAccurate cost modelling requires both time and expertiseAccurate cost modelling requires both time and expertise


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 technical control and focus required to maximise valuesTotal technical control and focus required to maximise valuesTotal technical control and focus required to maximise values


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 ?

Sales Outlets – influencing factors

Critically assess your disposition provider as required for credit committee approval on an unsecured debt transaction

Critically assess your disposition provider as required for credCritically assess your disposition provider as required for credit it committee approval on an unsecured debt transactioncommittee approval on an unsecured debt transaction


MRO Geographic Location RB211-535E4

RR - UK

AMECO - China

HAESL – Hong Kong

Iberia - Spain

TAESL – US

MRO Geographic Location – CFM56-3

GE -Malaysia

ST Aerospace -Singapore

IHI -Japan

MTU - China

Bedek Aviation (IAI), Israel

AFI - France

Snecma -Morocco

Snecma –France & Belgium

TAP Portugal

LTAI -Ireland

GE - US

Snecma - China

P&W (NEC) -Norway

GE -Wales

TIMCO - USLufthansa Technik -Germany

AeroThrust -US

MTU Canada

Delta Tech Ops - US

United Services, US

GE Celma - Brazil

Jet Turbine - Australia

THY - Turkey

MRO Geographic Location – JT8D-200

Delta Tech Ops - US

Finnair -Finland

PGTC –US

AeroThrust - US

ITR -Mexico

P&W – New Zealand

Avio -Italy

Bedek Aviation (IAI), Israel

ST Aerospace -Singapore

Volvo -Sweden

AES - US

Iberia -Spain


MRO Geographic Location – CFM56-5A

Air Canada -Canada

GE - Wales

Snecma -France

AFI - France

Iberia -Spain

MTU -China

Lufthansa Technik -Germany

GE - US

GAMCO –Abu Dhabi


MRO Geographic Location – PW2037

Delta Tech Ops - US

MTU -Germany

Finnair - Finland

United Services, US

P&W US


MRO Geographic Location CF6-80C

GE -Brazil

TAP -Portugal

Lufthansa Technik -GermanyMTU -

Germany

Finnair -Finland

ANZES –New Zealand

GAMCO –Abu Dhabi

KLM –Netherlands

Alitalia - Italy

GE - US

American Airlines - USAir India - India

Jet Turbine - Australia

Thai Airways - Thailand

MRO Geographic Location PW4000

Delta Tech Ops - US

P&W (ESA) Singapore

LTUAM- Germany

United Services –US P&W Cheshire -

USGE -Malaysia

Volvo Aero -Sweden

SRT Switzerland Lufthansa Technik –Germany

AMECO - China

MRO Geographic Location V2500

P&W -US

Lufthansa Technik -Germany

P&W – New Zealand

IHI -Japan

SAA Technical –South Africa

MTU Zuhai -China

R-R - UK

MTU -Germany


So what values are achievable from engine disassembly programs?


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

What value can we get realise ?

Airframe Sales Value $2.25M

#1 Engine Unserviceable#2 Engine Serviceable

1800 cyc residual

Part-Out. Net Sales

Revenue projection $2.5M

Over 24 months Part-Out. Net Sales

Revenue projection $2.5M

Over 24 months

Lease out over 12 months

“residual” lease $945,000

X3 90 day leases @ $3,500 per day

~$8.2M over 2 year program

Are we prepared for $500,000 investment in material repairs ?

Are we prepared for short term leasing to maximise returns ?

What are the program costs? Finance, shipping, teardown, legal, insurances, mgt fees?


Disassembly Example 2

CF6-50C2 Program 2004/5Engine purchases x6 $600,000Costs

Acquisition / legal $75,000Shipping / stands $100,000Teardown $300,000Repair of parts $900,000Other $150,000

Total Costs $1,585,000Total Parts Sales $4,000,000Total Gross Profit $2,415,000Project Return 60% ROS

CF6-50C2 Program 2006Engine purchases x2 $550,000Costs

Acquisition / legal $25,000Shipping / stands $60,000Teardown $50,000Repair of parts $300,000Other $25,000

Total Costs $1,585,000Total Parts Sales $1,650,000Total Gross Profit $640,000Project Return 39% ROS

Would you provide debt against CF6-50C2 engines?Would you provide debt against CF6Would you provide debt against CF6--50C2 engines?50C2 engines?Would you provide debt against CF6-50C2 engines for disassembly?

Would you provide debt against CF6Would you provide debt against CF6--50C2 engines for 50C2 engines for disassembly?disassembly?


Trust my modelling we’ve done

this before !!

The “Part out” and “break up” business can attract ringmasters. The “Part out” and “break up” business can attract ringmasters. The “Part out” and “break up” business can attract ringmasters.

!! Caution !!


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 apartner 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.


The ultimate residual value retaining asset

““The leading engine asset management service provider The leading engine asset management service provider offering innovative commercial and technical solutions to offering innovative commercial and technical solutions to investors and operators of commercial aircraft engines”.investors and operators of commercial aircraft engines”.

www.tes-uk.com

TES Aviation GroupTES Aviation Group

Thank you for your attention

Engine Investor & Financier London Roadshow Engines event Slides/TES.pdf · Engine Investor &...

Documents

Transcript of Engine Investor & Financier London Roadshow Engines event Slides/TES.pdf · Engine Investor &...