Focus: With airline fleets grounded, plane recyclers bet on parts boom

Tokyo Century

13/09/2020 06:01

By Allison Lampert
    MONTREAL, Sept 13 (Reuters) - As COVID-19 grounds swaths of
airline fleets, companies that profit off the dismantling and
trade of aircraft parts are seeing early signs of an expected
rebound in activity as carriers accelerate plane retirements. 
    While companies that store, dismantle, and buy and sell used
aircraft parts see opportunity in parked planes, a sudden
increase in the supply of used parts risks depressing prices in
the estimated $3 billion a year industry, despite demand from
airlines seeking to lower maintenance costs, executives and
analysts say.
    Even as aviation remains in a slump because of the pandemic,
the head of U.S. commercial aerospace company GA Telesis was
made aware of five airlines calling for offers to dismantle
planes.
    Across the border, Canada's Aerocycle is bidding to buy
grounded planes for the first time to dismantle and resell for
parts, instead of just recycling aircraft on consignment from
carriers, its CEO said.
    The fate of the world's pool of grounded planes is being
closely watched by players in the market for used-serviceable
material, with one report from consultants Oliver Wyman
forecasting "a tsunami of demand" for such parts, as airlines
seek to lower costs. 
    Used materials could compete with new parts and defer
immediate airline demand for "aftermarket" spend, referring to
the maintenance, repair and overhaul sector, now estimated by
Naveo Consultancy at $50 billion.
    As a result, one industry executive said he has avoided
buying parts, fearing a slump if too many planes are dismantled.
    "I think we’re going to see a rapid decrease in pricing,”
said the executive, speaking on condition of anonymity. 
    The number of planes dismantled for parts or scrap could
double to 1,000 annually through 2023, up from roughly 400 to
500 planes a year since 2016, according to data firm Cirium. 
    Naveo estimates 60% of global passenger and cargo fleets are
currently flying.
    In 2020, Naveo expects 2,000 aircraft will be retired, or
parked and not returned to service, up from 680 in 2019. But
those planes would not all be immediately dismantled, as some
carriers wait in case market conditions improve, Managing
Director Richard Brown says. 
    Indeed, UK-based Air Salvage International, which normally
dismantles between 40 and 50 aircraft a year, has parked more
planes without a buyer for their parts since the COVID-19
outbreak. Founder Mark Gregory expects most will eventually be
dismantled.
    Before the pandemic, planes arrived at Air Salvage with a
buyer, reflecting healthy demand for coveted parts like engines.
    Airlines seek viable used parts from retired aircraft for
their younger planes that are due for heavy maintenance. That
allowed airlines to avoid costly repairs and keep their aircraft
flying.
    GA Telesis, which counts Tokyo Century Corp  8439.T  as its
largest shareholder, has seen airlines use spare parts from
their grounded aircraft to put off maintenance at the company's
repair business, chief executive Abdol Moabery said.
    
    EARLY RETIREMENTS
    The pandemic, which is expected result in a 55% drop in 2020
passenger numbers, has prompted early retirements of older
planes, including the grounding of B747 jets by British Airways,
some of which are headed to Air Salvage.  urn:newsml:reuters.com:*:nL8N2FJ424
    Fewer twin-aisle planes flying internationally means less
demand for their parts, with the exception of certain aircraft
used to transport cargo.
    Gregory said Air Salvage was approached by an aircraft
leasing company about dismantling several A380s, but with only
about 5% of the jumbo jets still active according to Naveo,
demand is slim for their parts. 
    Airlines are looking for narrowbody parts, since around 64%
of that single-aisle aircraft type are active, flying domestic
routes.
    James Benfield, a UK partner with Baird Capital, expects
increased demand for disassembly services for single-aisle B737
and A320 aircraft, after the private equity company acquired a
disassembler in August.
    While maintenance companies and new engine producers also
deal in used materials, a parts surplus could weigh on their
sales.
    General Electric Co's  GE.N  CEO said during a July earnings
call that the company is "well positioned to participate" in the
industry trend for used serviceable material. 
    GE Aviation makes engines, but also uses second-hand parts. 

    BARGAIN HUNTERS
    Aerocycle sees opportunity in plane retirements. The small
aircraft recycler has hired a new business development executive
to drive demand, as it looks to buy planes, CEO Ron Haber said. 
    "It's a calculated risk," Haber said. "We know what type of
aircraft are going to be flying and still in high demand."
    Airlines have avoided selling aircraft at losses, despite
pressure from certain bargain-hunters.
    "There's a lot of low-balling going on," Moabery said. "But
those offers aren't being accepted yet."
    Companies like Florida-based International Aircraft
Associates (IAA) are watching in case airlines and lessors cut
their losses by year's end and convert their parked planes for
parts.
    "If they do that, that's when people like us want to be
ready," IAA President Mitch Weinberg said.

 (Reporting by Allison Lampert in Montreal
Editing by Denny Thomas and Matthew Lewis)
 ((Allison.Lampert@thomsonreuters.com; 514-796-4212; Reuters
Messaging: allison.lampert.reuters.com@reuters.net))