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Part Out Values Not A Constant

February 22, 2016

Parting out aircraft remains a key option for investors and operators but forecasting when the optimum point for such a method of disposal remains as much a complex task as determining market based residual values.

The part out value of an aircraft is not a constant and as such using a part value determined as of today will likely not be relevant in the coming years. There have a number of B737NG part outs in the last few years partly because the value of the engines has been high. The value of a CFM56-7B may be $5 million today but in five years it may be much less, reducing the aircraft part out value, even though the condition of the engines remains the same. The experience of the B737-300 illustrates just how much the market can change. The value of a spare CFM56-3 engine was previously in excess of $1 million per engine but as availability increased and the fleet contracted the demand for spare engines declined.

Generally, the part out value of an aircraft remains reasonably high when the type remains in production and in the years immediately following cessation of production. Once the first aircraft to be produced reaches some 15 years of age the part out value starts to decline though there may be some variation depending on the frequency of engine overhauls and the resulting demand for spare engines. When approximately 20 percent of the fleet is retired then the decline becomes more notable. The contraction of the fleet coincides with lesser utilization. Lower utilization of the fleet results in longer intervals between overhauls.

The state of the market also plays a role in determining the price of parting out. When the market is strong – like that of today – aircraft are retained in service and are worked hard. When the market faces weakness, new aircraft are used are increasingly used as replacement capacity, accelerating the retirement of older aircraft. The rapid withdrawal of such aircraft as the DC9 and B727 in the latter part of the 1990s and the early 2000s led to an increase in supply of spares at the same time as demand fell due a lesser number of aircraft in service. The expectation that a B737NG will still have a part out value of $7-8 million in five to ten years’ time will be misplaced. Similarly, the envisaged part out value of an A380 will change over the next decade. With the oldest B777-300ER already some 13 years of age there is increasing emphasis on estimating a part out value alongside residual values over the next ten years. The estimated value will inevitably not be a constant.

 

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