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Stuart Rubin, Principal ICF SH&E, offers tips to new investors on how to estimate engine residual values.
Compared to purchasing a new commercial aircraft, commercial jet engines have a lower capital cost, are more easily transitioned between operators and are often more liquid assets than the host aircraft, making spare engines an asset class of interest to many investors.
Further, interest in engines from aircraft lessors increases as an asset ages, given that the proportion of asset value attributable to the engines increases from about 25% in a new aircraft to 90% or more in an engine approaching its end of life. Indeed, some industry participants casually refer to airframes of end- of- life aircraft as "engine stands".
Engine residual values and their careful management are consequently of high importance both to operators and investors.
Multiple factors drive engine value behaviour, including maintenance costs, fuel burn, ease of remarketing, forecast demand for the associated aircraft and aircraft expected useful life.
In general, as an aircraft reaches the latter stages of its operational life, the engines comprise a much greater percentage of total asset value. As a result, investors and airlines pay close attention to residual values of their engines.
Engine value behaviour and trends
Aircraft engines may be categorized by the maximum amount of thrust they produce and, all else being equal, the values of new engines are strongly related to this parameter. Used engine values are, however, related to asset-specific considerations, together with general supply and demand for the engine model.
Asset-specific considerations
Throughout its life cycle the value of an individual engine varies significantly based on its specific maintenance condition: principally the condition of the life- limited parts in the engine and the time the engine can be expected to operate before requiring performance restoration. Other factors such as open mandatory compliance maintenance tasks, the presence of Parts Manufacturer Approval (PMA) parts or Designated Engineering Representative (DER) repairs in engines may impact values as well.
As seen in chart two, the value of a run-out engine can range from 10% to 50% of the value of a full-life engine.
General value trends over engine life cycle
The general value trends for engines can be characterized over three phases of the asset life cycle.