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Used Serviceable Material (USM) Trends in Narrowbody Engines

Photo Courtesy of Magellan Aviation Group

The used serviceable material (USM) market has evolved significantly in the aftermath of the COVID-19 pandemic, given the constraints on global supply chains, MRO congestion and new aircraft delivery delays. This article will attempt to illustrate current USM and MRO trends in the three legacy narrowbody engine types powering the venerable A320ceo and 737NG aircraft types: the CFM-manufactured CFM56-5B (A320ceo family), CFM56-7B (B737NG family) models and the International Aero Engines (IAE) V2500-A5 (A320 family).

To global supply chains first: Post-pandemic supply chain disruption, geopolitical events, reactive aviation stakeholder fleet strategies and renewed passenger demand have contributed to shortages in spare parts availability, which is particularly pronounced on the engine side. Pre-COVID, we didn’t expect to see new OEM material inputs, including life-limited parts (LLPs), in shop visits in the above trio of engine variants, which are comfortably into or approaching their fourth decade since service entry. At the time of writing, the U.S. government had just rolled out a series of sanctions impacting a wide range of its established trading partners. This directive is likely to have a chaotic effect on global trade, particularly if the EU issues retrospective sanctions on U.S.-produced exports, the two key manufacturing markets for CFM and IAE engines.

The MRO market has been characterized by congestion, turnaround time delays and airline strategic realignment since COVID-19. As a result, we have seen prolonged demand for 5B, 7B and V25 engines. Lease rentals have increased by as much as 40% for certain high-demand models. Demand for off-the-shelf serviceable or overhauled USM inputs for these engines reflects these trends. When we look at 7B LLPs, for instance, the adoption of USM is compelling given the potential cost savings. A rule of thumb for material to-labor ratios in engine shop visits (SV) inputs is 90:10. When LLPs are considered in a shop visit work scope, this ratio can grow further. If we consider a Stage 3-8 Drum on a V2500-A5 engine, which has an OEM CLP of approximately US$450,000 and a Chapter 5 limit of 20,000 cycles, going to the USM market to procure an overhauled unit with 8,000 cycles remaining, which better reflects an engine interval at a pro rata rate of 100% of CLP, gives a saving of approximately US$180,000. Similar trends exist on the 5B and 7B engines.

The 5B and 7B are seeing the benefits of modular maintenance in the mature phase of operation. The Fan and LPT modules on both engines have different LLP limits compared to the core, and several MROs now specialize in module swaps, prolonging the economics of engine operations and reducing cost inputs and maintenance downtime. The mature phase of operation for the trio of engines has also seen operators and lessors trending toward reduced engine intervals, as they struggle to see the utility of operating in new LLPs, which could take 12 years to run down. Typical builds for CFM56-5/7 operations were 10,000-12,000 cycles; now we are seeing more operators focusing on reduced engine builds, often sub-8,000 cycles, where pro rata rates typically drop below 80%. V2500 mature intervals are typically 20% below those of the competing 5B and LLP pro-rata rates reflect this. Note that these trends are also being seen on fan blades and HPT blades with soft and hard limits.

With respect to part-out values, trading values being realized for run-out CFM56 and V25 cores have increased by 60%-80% in three years as the traditional part-out specialists compete with entities looking to rebuild engine cores to satisfy market demand. Where this value enhancement is most pronounced is on upgraded versions of these engines, tech insertion and Evolution variants on the 5B and 7B, respectively, and Select models on the V2500. Other factors, such as benign trace, carry a value premium, in addition to condition of records. Notwithstanding the underlying demand for good-quality part-out engines, records requirements imposed by customers and passed up through the aftermarket supply chain remain as rigid as ever. There are definite signs of more acceptance of harsh trace engine material, which is a positive step in terms of USM availability.

Pre-pandemic, the topic of PMA (Parts Manufacturer Approval) and DER (Designated Engineering Representative) content in engine maintenance inputs seemed to have died off, as airlines and MROs availed of savings through USM. As USM availability has tightened, those savings are harder to realize, and PMA and DER inputs are back in the conversation. From Magellan’s perspective, our only experience with PMA/DER would be via some third-party repair shops; however, these would be customer-approved and noncritical parts. The underlying view of PMA/DER presence in engines, particularly in the gas path, is a significant value impact of a similar magnitude to engines with incomplete tech records packs.

The demand for CFM and V25 green-time engines remains robust as of the time of writing, and USM specialists will lease out engines as a means to run them down to part-out. Green-time engine (short-term leases usually dictated by a cycle limit with minimum return conditions) lease rates are climbing and can also be priced on an all-in basis. It is not unusual for Magellan to see 7B engines with less than 1,500 cycles remaining and be confident in placing the engine to monetize and run down the LLPs, which would have no intrinsic market value otherwise.

Reliability and ongoing maintenance issues continue to prevail on the replacement tech LEAP and P&W GTF engines. This, when coupled with supply chain constraints on new and used material, MRO bottlenecks, engineering shortages, not to mention trade tariffs and industrial relationships, would tend to indicate that these USM trends for the 5B/7B and V25 should intensify. Lease extensions are continuing as a result. That said, it seems the airlines are at least beginning to take a more conservative view on engine interval builds, which shows growing confidence in future new aircraft deliveries.