Aeroji Blog

Engine Valuation – A Brief Abstract

Aviation Business
Dear Aviation Community, what should have been the start of the aviation industry's revival is now being overshadowed by another global crisis: the Ukraine-Russia conflict. We don't want to get into the specifics of how this crisis is affecting the aviation sector in total. Instead, we would want to concentrate on the effect on aircraft engine values. How are engines valued following the COVID19 outbreak, and how much will the east European conflict affect the value?

Post-Covid19 Engine Values

Prior to the pandemic, the aviation sector was a thriving and stable business. The book values and lease rates of modern engines and aircrafts were at all-time highs. Due to COVID-19 limits, passenger transit by plane was forced to halt on a regional and international level, putting operators and lessors in a financial bind. Because airlines were prohibited from selling fares by the individual nations, operators with rented engines were unable to fulfill their lease contracts. The introduction of Covid-19 vaccinations was bringing some optimism to the engine market, but merchants were hesitant to sell at the 30-50 percent discounts that were requested. In order to maintain financial liquidity, owners faced a reality where their assets would potentially be traded far less than their book value.

Following recent statistics from IBA, the long-term value of commercial aircraft engines is expected to resist the severe effects of Covid-19. According to the majority of aviation specialists, the recovery of the aviation sector was forecasted to take up to four years. MRO demand will begin to exceed pre-Covid levels in early 2024, with shop visit demand not expected to rebound until 2022 at the earliest. In the short term, engine values and lease rates are still low in all widebody, narrowbody, and regional aircraft sectors. The most significant reductions have occurred in mature widebody engines, whereas the smallest reductions have occurred in newer narrowbody engines. With activity focused on next-generation engines, lease rate factors on sale and leaseback activities have increased, but shop visits have now stabilized at only 50% of pre-Covid levels.

Lessors are seeing an increased amount of engines returned off lease and stored, MROs are lowering capacity to meet new demand levels, and OEMs are focusing their efforts on fixing service entry difficulties with new engines as a result of this new normal in the engine industry. While some engine types have a good long-term value proposition, cash management is a major concern for most engine owners, lessors, and airlines. During the pandemic, significant efforts were undertaken to optimize the cost-to-time-on-wing ratio.

Effects of the Ukraine-Russia crisis

It is still unclear if the conflict between Russia and Ukraine will have a long-term influence on the engine values and their recovery. Aviation experts are split on whether it would delay the engine industry from recovering for a year or more or will not have any effects at all.

What's undeniable is that aircraft and engine lessors are taking the brunt throughout this crisis. Despite the EU sanctions imposed on Russia, statistics reveal that Russian Airlines still have several equipped engines in their fleet. Lessor feedback suggests that leased engines to Russian operators were difficult to reclaim and that engine paperwork was not kept up to date. In addition, it is very difficult to keep track of the number of spare engines in Russia.

However lessors are optimistic that the crisis will not have any influence on engine values, leasing prices and material supply. However, due to the Ukraine conflict, oil price volatility, and inflation, it is apparent that the aviation sector will not experience the level of recovery that everyone expected in 2022. Furthermore, in 2022, the demand for engine shop visits is expected to remain low.

Future Trends and Market Outlook

Despite the Ukraine-Russia situation, IBA evaluations reveal that overall utilization within the aviation sector is progressively improving after adapting to the new reality with Covid-19. When it comes to the trading market, it's clear that SLB activity is rising up again. The OEMs have healthy order books, and the aviation sector is dominated by top-tier airlines with little competition. Fuel costs, on the other hand, may push mature values further lower over time.

We are looking forward for the next steps of aviation recovery and will gladly be a contributor for a new era of business in 2022. If you want to be a part of Aeroji, join for free and get your user experience first handed. See you on our platform.

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