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Ask Bob: Is An Aircraft Retirement Tsunami Coming?

Yes, More Than 14,000 Aircraft Over The Next 20 Years

Retirements: To put things in context, only about 7,000 aircraft have been retired since the dawn of the jet age. More than twice that amount or about 14,000 commercial aircraft will be retired over the next 20 years. This is why this cycle has been referred to as “The Retirement Tsunami.” The chart to the right shows some of the most impacted aircraft over the next eight years or by 2022. Aircraft retirement data were provided by Ascend and we correlated these data to depict the number of engines coming out of service for the same period. This is indeed an unprecedented cycle in aviation history, both for new aircraft deliveries but also retirements.

Market Implications: Residual values will continue to decline on these products as buyers calibrate to higher levels of availability. Used material prices and lease rates will also decline as competition increases. Based on historical patterns, there will often be periods during this cycle where availability will tighten, values may stabilize and even increase temporarily. Risk levels for buyers are higher on these products as price point becomes more critical. Channels and access to the market are key factors. Those material providers with captured customers and likely locked in pricing will experience more stability during this period while those having a pure transactional business model will be impacted more unfavorably. As is always the case in the surplus business (regardless of market conditions), the overall outcome is largely dependent on the purchase price.

Ask Bob: Does The CFM56-3 Surplus Market Still Have Runway?

Does The CFM56-3 Surplus Market Still Have Runway?

Short-Term Leasing Is One Area To Consider

Retirements: Many 737 classic aircraft exiting service have engines with green (serviceable) time. These serviceable engines become an alternative source of power and on a dollar per flight cycle basis, can be more financially attractive than a more expensive shop visit. Over the next eight years, about 68% of all or more than 1,900 CFM56-3 engines will be retired and many of the engines will have serviceable green time.

 Fleet Size & Commonality: Large retiring fleets (such as the CFM56-3) with production spread over 15 years ensure equilibrium or balance of supply and demand across the fleet. In other words, the retirement curve is more gradual over time. The high level of material commonality and interchangeability across the variants of the CFM56-3 help stretch the life cycle.

MRO Economics: Although material cost decreases significantly during late maturity, the cost of labor, overhead and repair outsourcing keeps shop visit cost relatively high. For example, a full core restoration on a CFM56-3 engine can still run upwards of $1.2M USD.

Operator Philosophy: Many smaller airlines and some majors enjoy the late mature phase of the product life cycle because they can be more cost effective by avoiding expensive shop visits and smoothing out their cash flows through leasing. This approach can be particularly beneficial when considering the retirement schedule in that the short-term lease offers more flexibility and less risk vs. overhauling.