AFRA Panel Discussion Economics of End-of-Life Aircraft Management Panel
Moderator: Bradley Gregory, Air Salvage International Ltd. Panelist: Mark W. Atwood, Cozen O'Connor
Panelist: Daniel Hall, Flight Ascend Consultancy Panelist: Don Wilson, Inventory Locator Service,® LLC, a Boeing company
Moderator: Bradley Gregory, Commercial Director of Air Salvage International
Panelist: Mark W. Atwood, Member of Cozen O'Connor
FAA REGULATION OF LIFE-LIMITED
PARTS AND
FAA ENFORCEMENT OF RELATED REGULATIONS
Aircraft Fleet Recycling Association
Annual Meeting
Reston, VA / July 9-11, 2017
LIFE-LIMITED PARTS
• Aircraft salvagers must pay particular attention to handling of removed
Life-Limited Parts (“LLPs”):
– Definition: “Any part for which a mandatory replacement limit is
specified in the type design, the Instructions for Continued
Airworthiness, or the maintenance manual.” (14 CFR section
43.10(a))
– Limits usually calculated by hours, cycles, or both.
– Examples include: engine disks, spacers, spools, hubs, shafts, and
high-pressure cases.
LIFE-LIMITED PARTS
• Much of the value of salvaged aircraft is recovered through
reusable parts, many of which are LLPs.
• For example, a recent 737NG disassembly returned $9
million from resale of 20% of the parts.
• As many as 1800 parts of a 737 can be returned to the
supply chain.
• If these Life-Limited parts are reinstalled on a type-
certificated product, the parts and those who remove them
must comply with FAA regulations. Risks of non-
compliance are substantial.
LIFE-LIMITED PARTS
• 14 CFR section 43.10:
– Adopted in January 2002.
– Mandated by AIR-21 Act (Wendell H. Ford Investment and
Reform Act for the 21st Century).
– Act added section 44725 to the Transportation Code.
– Specified five methods of “safe disposition” of LLP’s that
must be followed each time an LLP is removed from an
aircraft.
• (Note: “disposition” does not necessarily mean “disposal” – this
applies to any handling of an LLP removed from aircraft.)
LIFE-LIMITED PARTS
• Congressional action deemed necessary as FAA found use of
expired LLPs during accident investigations and routine
inspections.
• This violated existing FAA rules (section 43.13(b)), but
Congress – with FAA agreement – felt specific measures were
required.
– Aircraft Type Certificates require observance of life limits for
incorporated parts.
– If not, aircraft in violation of TC, and therefore unairworthy.
– Operators may incur substantial penalties for flights.
LIFE-LIMITED PARTS
• In January 2004, after extensive comments on its proposal
were filed, FAA adopted its current rule.
• Requires compliance with one of 7 methods of “disposition:”
1. Record keeping system;
2. Tag or record attached to part;
3. Non-permanent marking;
4. Permanent marking;
5. Segregation (for expired/unusable parts);
6. Mutilation (for expired/unusable parts); and
7. “Other methods” approved or accepted by the FAA.
LIFE-LIMITED PARTS
• This rule applies to “a person who removes a life-limited part”
from an aircraft; you don’t have to be an MRO.
– In fact, a/c disassembly has been considered maintenance.
(See In the Matter of Stambaugh’s Air Service, Inc., FAA
Order 2001-7.)
• Although only the first refers to “record keeping system,” in fact
all these methods require accurate and updated records.
• Records do not have to be “back to birth;” the FAA only
expects that they will provide sufficient data to determine how
the current life status was obtained. (July 18, 2009, Legal
Opinion.)
LIFE-LIMITED PARTS
• The FAA rulemaking preamble makes clear that the rule’s
requirements don’t just apply if the part is already out of time; it
applies to any LLP at any point in its life.
– A part may be technically airworthy when removed, but
quickly put an operator into violation if installed.
• Does the rule create liability for the removers if a part is
installed past time? No.
– FAA changed proposed language from “must prevent
installation” after life limit, to “must deter.”
FAA ENFORCEMENT OF THE RULE
• FAA can bring actions for civil penalties or action against a
certificate (either an air operator, Part 145 maintenance base,
or individual airman).
– Can also end up merely with “administrative action” such as
letter of correction
• Enforcement is most likely against an operator flying out-of-
time part.
– FAA would consider this a violation of several parts,
particularly operating an unairworthy aircraft (e.g. section
91.403(c)).
– This can result in enormous civil penalties.
FAA ENFORCEMENT OF THE RULE
• An example is 2016 case against R&R Conner
Aviation of Montana – settled for a $140,000 penalty
for four flights using three out-of-time components.
• If parts used on commercial a/c in scheduled service,
the penalties can be in the millions.
• And needless to say, there can be substantial civil
liability as well. (E.g. Cartillar v. Turbine Conversions Ltd., 187 F.3d
858 (8th Cir. 1999))
FAA Enforcement
• Out-of-time components can also be considered “suspected
unapproved parts.”
– FAA Order 8120.16A definition includes “life limited parts
misrepresented as new or having useful time left.”
• “SUP” are taken very seriously by FAA.
– Can entail criminal prosecution.
– In past 5 years, FAA investigations have resulted in 63
indictments and 51 convictions.
• DOT Inspector General issued a report in May urging FAA to
improve its enforcement in this area.
FAA Enforcement
• Last year FAA issued a series of orders outlining new
“compliance philosophy” – encouraging a “problem-
solving approach,” self-disclosure, using enforcement
as weapon of last choice.
• Practical result: fewer civil penalty or certificate actions,
more “administrative” actions.
• However, would this affect enforcement posture
towards use of out-of-time parts or SUP’s?
Questionable….
Panelist: Daniel Hall, Senior Analyst for Flight Ascend Consultancy
flightglobal.com/consultancy
AFRA Aircraft Fleet Recycling Association Annual Conference
Reston, VA 9-11 July 2017
Daniel Hall, Senior Analyst, Flight Ascend Consultancy
1
Economics of
End-of-Life Aircraft Management
flightglobal.com/consultancy
FlightGlobal: Pioneering aviation insight and analytics
business
2
RELX Group:
London, Amsterdam and New York
Stock Exchange listed
28,500 employees
Market Capital $36.87bn
FlightGlobal:
370+ staff
11 offices across the world
Part of a leading data
solutions group
flightglobal.com/consultancy
Independent Global team – fully objective
We do not invest in aircraft and we are not brokers – we have NO conflicts of
interest
We are based in London, New York and Hong Kong and travel the world bringing
regional and global opinion into our research
Instant access to vast data for research
The only Appraiser with a globally recognized Fleets database used by our clients
The only appraiser with schedule information
Unparalleled Historical values data
Historical Market values from 1965
Access to industry Tier 1 participants
Clients are Airlines, all the top lessors, the major banks involved in aviation finance,
MROs, OEMs, regulatory bodies
Presence at all major aviation events (Paris Airshow, ISTAT Asia / US / Europe…)
3
Source: Flight Ascend Consultancy
Flight Ascend’s unique Value proposition as an
appraiser
flightglobal.com/consultancy
Why Flight Ascend Consultancy?
4
Ascend and its predecessors have been delivering aviation data and
appraisals for close to 50-years
Thought leadership, market intelligence, analytical products, regular values
updates, bespoke advisory projects
Ascend appraisals used globally to value in excess of 200,000 aviation
assets annually
Unrivalled aircraft histories and values databases underpin values analysis
Market values based upon best data capture of any appraiser globally
Appraiser of the Year six of the past seven years
flightglobal.com/consultancy 5
Source: Flight Fleets Analyzer – western build jets only
Stored aircraft shows contrast between fall in
single-aisle and increase in twin-aisle & RJ
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0
250
500
750
1000
1250
1500
1750
2000
2250
2500
% o
f F
lee
t in
Se
rvic
e
Co
mm
erc
ial J
et
Air
cra
ft i
n S
tora
ge
SA TA RJ RJ % stored SA % stored TA % stored Total% stored
flightglobal.com/consultancy 6
Source: Airfax, 6-month rolling average of aircraft available for lease or sale (excludes wet-lease / ACMI)
Used jet availability stable and at lowest level
since 2010
0
100
200
300
400
500
600
700
800
900
0
50
100
150
200
250
300
350
400
450
Ja
n-1
0
Apr-
10
Ju
l-1
0
Oct-
10
Ja
n-1
1
Apr-
11
Ju
l-1
1
Oct-
11
Ja
n-1
2
Apr-
12
Ju
l-1
2
Oct-
12
Ja
n-1
3
Apr-
13
Ju
l-1
3
Oct-
13
Ja
n-1
4
Apr-
14
Ju
l-1
4
Oct-
14
Ja
n-1
5
Apr-
15
Ju
l-1
5
Oct-
15
Ja
n-1
6
Apr-
16
Ju
l-1
6
Oct-
16
Ja
n-1
7
Apr-
17
Ju
l-1
7
To
tal C
om
me
rcia
l J
et
Mo
nth
ly A
va
ila
bilit
y
Tw
in-A
isle
/ S
ing
le-A
isle
/ R
eg
ion
al J
et
Mo
nth
ly
Ava
ila
bilit
y
Twin-Aisle (LHS) Single-Aisle (LHS) Regional Jets (LHS) All Jets (RHS)
flightglobal.com/consultancy 7
Source: Flight Fleets Analyzer, all Airbus/Boeing/MDC aircraft with data, all usages
Average annual utilisations recovered through
2011 and show an improving trend during 2016
2,600
2,800
3,000
3,200
3,400
3,600
3,800
4,000
4,200
200
7 Q
1
200
7 Q
2
200
7 Q
3
200
7 Q
4
200
8 Q
1
200
8 Q
2
200
8 Q
3
200
8 Q
4
200
9 Q
1
200
9 Q
2
200
9 Q
3
200
9 Q
4
201
0 Q
1
201
0 Q
2
201
0 Q
3
201
0 Q
4
201
1 Q
1
201
1 Q
2
201
1 Q
3
201
1 Q
4
201
2 Q
1
201
2 Q
2
201
2 Q
3
201
2 Q
4
201
3 Q
1
201
3 Q
2
201
3 Q
3
201
3 Q
4
201
4 Q
1
201
4 Q
2
201
4 Q
3
201
4 Q
4
201
5 Q
1
201
5 Q
2
201
5 Q
3
201
5 Q
4
201
6 Q
1
201
6 Q
2
201
6 Q
3
201
6 Q
4
Ave
rag
e a
nn
ual u
tili
sa
tio
n (
rollin
g 4
qu
art
ers
)
Single-aisle Twin-aisle Total
flightglobal.com/consultancy 8
Source: Flight Fleets Analyzer
Over 10,000 commercial jet aircraft have been retired to
date
0
5
10
15
20
25
30
35
40
0
100
200
300
400
500
600
700
800
Ave
rag
e A
ge
at
Air
cra
ft R
eti
rem
en
t
Air
cra
ft R
eti
red
<15 Years Old at Retirement >15 Years Old at Retirement
Average Age at Retirement Average Age at Economic Retirement
flightglobal.com/consultancy 9
Source: Flight Fleets Analyzer
291 <15-year old aircraft parted-out since 2010
0
10
20
30
40
50
60
70
<1
5-Y
ea
r O
ld A
irc
raft
Reti
red
2010 2011 2012 2013 2014 2015 2016 2017
flightglobal.com/consultancy 10
Source: Flight Fleets Analyzer, as at 20 September 2013 / 2016
Fleet of 15+ year old aircraft is 1,300 aircraft
larger than it was three years ago
0
200
400
600
800
1,000
1,200
1,400
1,600
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30+
Pa
ss
en
ger
Je
t A
irc
raft
in
Se
rvic
e
Aircraft Age (Years)
2013
2016
flightglobal.com/consultancy 11
Flight Ascend Part-Out Value Forecast
2005-YOB Boeing 737-800 (CFM56-7B26, 155,500lb MTOW), 2%-infl
Source: Flight Ascend Part Out Tool, Flight Ascend Values, FlightGlobal Fleets Forecast (2016)“Total Part-Out Value Forecast” includes airframe (incl LG + APU) and engine shipset
0
500
1,000
1,500
2,000
2,500
3,000
0
2
4
6
8
10
12
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Fo
reca
st R
etire
men
ts (
cu
mula
tive
)
$U
SD
-Mn
Year
Forecast Retirements (cumulative) "Run-Out" Base Value Forecast
"Run-Out" Soft Market Value Forecast Total Part-Out Value Forecast ("Run-Out")
Downside Part-Out Scenario
flightglobal.com/consultancy 12
Flight Ascend Part-Out Value Forecast
2000-YOB Boeing 737-800 (CFM56-7B26, 155,500lb MTOW), 2%-infl
Source: Flight Ascend Part Out Tool, Flight Ascend Values, FlightGlobal Fleets Forecast (2016)“Total Part-Out Value Forecast” includes airframe (incl LG + APU) and engine shipset
0
500
1,000
1,500
2,000
2,500
3,000
0
1
2
3
4
5
6
7
8
9
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Fo
reca
st R
etire
men
ts (
cu
mula
tive
)
$U
SD
-Mn
Year
Forecast Retirements (cumulative) "Run-Out" Base Value Forecast
"Run-Out" Soft Market Value Forecast Total Part-Out Value Forecast ("Run-Out")
Downside Part-Out Scenario
flightglobal.com/consultancy
In Q4 2012 Aerotron Ltd parted out an ex-Aircastle (former LATAM)
V2500-powered A320 (1997-YOB; MSN 0758).
Ascend (“half-life”) CMV $10.5 million
Book value $16.5 million
Aircraft “disposal” via part-out:
Maintenance reserves $6.5 million
Engine ‘sales’ $8.4 million
Airframe sale $2.3 million
Net sales value $17.2 million
Lessor realized net profit of $0.7 million
Aircraft realized $24-m rental over six years of ownership and an unlevered IRR of ~10%
13
Source: Aircastle Investor Presentation (April 2013), Flight Ascend Consultancy
Maintenance reserves are key to closing the
book value vs market value gap
Importance of lessor (end-of-life) management:
flightglobal.com/consultancy 14
Source: Flight Fleets Analyzer & Flight Fleet Forecast 2016
CFM56 will remain largest installed engine fleet
until 2027
0
5,000
10,000
15,000
20,000
25,000
30,000
35,0001
99
41
99
51
99
61
99
71
99
81
99
92
00
02
00
12
00
22
00
32
00
42
00
52
00
62
00
72
00
82
00
92
01
02
01
12
01
22
01
32
01
42
01
52
01
62
01
72
01
82
01
92
02
02
02
12
02
22
02
32
02
42
02
52
02
62
02
72
02
82
02
92
03
02
03
12
03
22
03
32
03
42
03
5
En
gin
es
in
se
rvic
e
CFM56 V2500 LEAP PW GTF
LEAP & GTF have combined fleet of 29,500 engines by 2027
flightglobal.com/consultancy 15
Source: Flight Fleets Analyzer & Flight Fleet Forecast 2016
Part-out value driven by fleet decline
Strong demand for spare engines until significant part-outs occur
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Pe
rce
nta
ge
of
en
gin
e f
lee
t in
se
rvic
e
CFM56-5 CFM56-7 Trent 700
flightglobal.com/consultancy 16
RJ & NB fleet engines – proportion remaining in
service
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Nu
mb
er
of
ins
tall
ed
en
gin
es
Current in service Current stored Retired
<5% of CFM56-5B, -7, V2500-A5 retired to-date
Source: Flight Fleets Analyzer
flightglobal.com/consultancy 17
WB engine fleets – proportion remaining in
service
Still a lot of opportunity even for those in ‘sunset’ phase
Source: Flight Fleets Analyzer
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Nu
mb
er
of
ins
tall
ed
en
gin
es
Current in service Current stored Retired
flightglobal.com/consultancy 18
Daniel Hall
Senior Analyst
Accredited Senior Appraiser (ASA)
+1 646 746 6840
+1 781 382 5946
The information contained in our databases and used in this presentation has been assembled from many sources, and whilst reasonable care has been taken to ensure accuracy, the information is supplied on the
understanding that no legal liability whatsoever shall attach to Ascend Flighglobal Consultancy, its offices, or employees in respect of any error or omission that may have occurred.
Panel Discussion