Lessors believe GTF issues extend to A220s and E2 Jets

 

RTX, Pratt & Whitney’s (Pratt) parent firm, unleashed aviation's latest black swan event in September when it revealed that hundreds of A320neos are set to be grounded over the next three years. Pratt will be forced to perform 600 to 700 incremental shop visits (i.e. above and beyond its original maintenance forecast) for PW1100G engines due to faults regarding powdered metal used across several of its components. Ishka summarises three ways in which the crisis could impact lessors and aircraft investors.
 

Boosted lease rates across the board, and for NBs for the next 3 years
 

The GTF inspections crisis is magnifying an existing trend across the space, which is the shortage of serviceable commercial aircraft in a fast-recovering market. Lessors confirm there has been a dramatic rise in demand for lease extensions for single-aisle aircraft. One of the largest leasing firms told Ishka it had seen a $10,000-$15,000 increase in monthly lease rates for CFM- and IAE-powered A320ceos in the last six months, which are now well “over $200,000” and expected lease rates to increase by another $10,000 -$15,000 in the next six months. One lessor confided he had seen lease rates rise for 8-10-year old A320ceos from $240,000 a month to $270,000 in the six weeks since the RTX announcement. 

RTX has stated that the peak of grounded aircraft will be Q1 2024 for the PW1100G engines, but lessors believe that the issue is not confined simply to one engine type, and is likely to impact other Pratt GTF engine types including the PW1500G, which powers the Airbus A220, and the PW1900G – the power plant behind the Embraer E2s.

Another lessor adds that the powdered-metal issue is also still impacting new PW1100G aircraft engines being made by Pratt.  “It takes time for a manufacturer to adapt their manufacturing process”, explains the leasing source.

In its September GTF fleet update Pratt stated it is continuing to finalize the powdered metal analysis on the other Pratt engine programmes but continues to believe the other parts of the fleet will be far less impacted. 

Several lessors are a lot less confident. “I believe this crisis is going to get worse. You have to remember that Pratt’s new PW1100 engines are still being manufactured with a powdered-metal issue and we hear that the powdered-metal issue could be an issue for more GTF engines, we are expecting more bad news in November”, explains a senior lessor.

Others are more sanguine and believe that the crisis may last between “two to three years”.  “Like the MAX this will be resolved and when it does Pratt will have an amazing engine which will be popular” reflects one lessor.

 

Longer and longer MRO queues

 

The GTF inspections are happening during a time of already constrained MRO availability in which airlines and lessors have seen lengthening queue times for engine and aircraft overhauls. In its September earnings call, RTX stated that the time between an engine being removed from a wing to being returned to an operator will reach approximately 250 – 300 days on average. Several engine lessors talking to Ishka were cynical about whether Pratt would be able to consistently meet the 300-day shop turnaround guidance. Others believed that the 300-day target was achievable.

It is important to note that the GTF inspections will only impact certain MRO lines but they will be a “giant distraction” for the MRO facilities dealing with the engine type, according to one lessor familiar with engines, and while Pratt is set to open up more MRO capacity to deal with the GTF inspections this will take time to come on board.  Secondly, it is important to stress that airlines will still have access to spare engines (and be able to switch engines between assets)  and that the severity of the impact, according to RTX, will be front-loaded in the first half of 2024. Nonetheless, the concerns airlines have over the continued delays has helped lessors book longer lease extensions with airlines.

 

Airlines will look to Pratt to comp lost revenues and grounded aircraft costs

 

Several airlines have already been public about the potential impact on their business. Wizz Air stated it expects the GTF checks will ensure it will need to potentially reduce its capacity by 10% for the second half of the 2024 financial year.  Airlines will have fixed costs that will need to be paid, as revenues are reduced because of grounded aircraft.  RTX stated that the gross financial impact of the GTF inspections will be between $6 billion to $7 billion.

Because airline contracts with Pratt vary airlines are likely to have very different contractual arrangements when it comes to spare engine arrangements, and the costs associated with a potential claim against the OEM.

Many airlines will have FMP warranties from Pratt ensuring access to spare engines for aircraft grounded over a certain period (the duration can vary from airline to airline but for some these warranties are triggered if the aircraft is grounded for more than 100 days). However, legal sources state that Pratt is potentially able to challenge whether it is liable for these costs if the extended grounded times are due to “reasonable delays”.  Airlines may challenge Pratt on whether these delays can be deemed reasonable, given Pratt’s restricted control of the MRO network.

Other lessors point out that some of the costs remain unknown for airlines. A good example is spare engine support costs. Pratt has sold engines to third parties but because of the scarcity of supply it still controls the effective bulk of PW1100 spares.

“What is the cost to lease a spare PW1100 engine? No one can give you an answer because Pratt is the only supplier at the minute minus a handful of engines it sold to Willis. So, debating about the cost will be interesting because Pratt will be the one setting the cost,” muses one lessor.  

 

The Ishka View

 

It is tempting to draw comparisons between the GTF checks and the Boeing 737 MAX crisis but there are key differences. All MAX aircraft were grounded immediately in March 2019 following the Ethiopian Airlines crash. In contrast, the GTF checks will effectively ground only a portion of the fleet at any one time as the inspections take place due to the scarcity of PW1100 spare engines. The MAX crisis was a lethal design flaw which resulted in tragedy while the GTF checks are a quality control issue which is being addressed by the OEM. The similarity is that both crises impacted a large swathe of delivered aircraft to numerous airlines - impacting their operations and resulting in financial repercussions for the manufacturer.  

If the powdered-metal issue is indeed impacting other GTF engine types, something Pratt has not confirmed yet, it will invariably put further pressure on already stretched MROs and would likely negatively impact A220 and E2 operators.  Ishka understands Pratt is currently trying to expand the MRO offering but inspections will remain a lengthy process even if Pratt can secure more MRO capacity. 

It is important to add that CFM also has issues around the performance of its LEAP engine, which is also putting pressure on MROs but CFM’s wider, more open, MRO network seems to be offering lessors confidence about the OEM’s ability to resolve its issues relatively quickly.  The GTF inspections crisis will help firm up residual values for current-tech aircraft, but as one senior lessor was quick to point out it is airlines who will ultimately suffer as they face increased and uncertain costs.

 

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