Blain’s Morning Porridge – July 28th 2023: New Jet Engines are terribly efficient, but only when they work….
“The monkey looked the buzzard right dead in the eye. And said your story’s so touching, it’s sounds just like a lie.”
The news “green” Pratt & Whitney engines don’t work very well on new aircraft puts a whole new slant on the economics of airlines – favouring mid-life planes over less reliable, but oh-so-environmentally-more-friendly new ones..
I am absolutely in favour of new properly green aircraft – and there are things happening in battery technology that may make electric airliners happen in my lifetime – but simply updating older aircraft designs with newer, greener engines, has proved a bit of an embarrassment.. The Boeing Max had proved a reputational disaster, while engine problems on Airbus Neos are hitting airline bottom-lines. The real problem is Boeing blew its profits on buy-backs and certainly doesn’t have the capital to develop new designs, and if Airbus took European money to do so, the Americans would cry foul! Realistically we are decades away from proper green aircraft.
In the medium term we all still want to fly – whatever climate change protestors say.
For many months now I’ve been advocating a very simple alternative asset thesis in aviation: Older aircraft are worth more because of the multiplying delays in delivery of new more modern aircraft types, particularly the Airbus 320 “Neo” (New Engine Option), and Boeing’s 737 Max series – see Morning Porridges The Outlook for Aviation is Dynamic and Aviation – An asset class ripe with opportunity. Air travel has boomed following the post-pandemic reopening, but there is now a serious shortage of available aircraft. (Also of crews and engineering staff who were let go during the Covid crisis.)
Underlying slow deliveries are a host of supply chain, labour relations, and management mistakes, but also new technology problems around the engines. The reason every airline wants the new Neos and Maxes is the engines are supposedly more efficient and greener. Many aviation banks are unwilling to fund older aircraft that don’t use these new powerplants – if they do they can’t brag quite so loudly about their ESG financing credentials.
Now it turns out that not only are older “mid-life” aircraft the only solution to the immediate demand/supply imbalance in the market, but they are proving more cost-effective and reliable than the newer types.
That’s great news for the new Mid-Life Aviation Asset Private debt securitisation deal we’re currently marketing ($150mm 5-yr 10% coupon, plus upside at maturity). I would not advise anyone looking to invest in aviation narratives to simply go buy planes, then try to rent them out (lease them to aircraft), while dealing with the documentation, finance, tax and multiple other hoops around planes – much better to buy deals managed by experienced aviation experts who do nothing else except manage planes… (just like our current deal…)
The downside is delays in new aircraft deliveries will lengthen. Every month Boeing and Airbus miss production targets means the queue waiting for new planes lengthens. There is no short-term solution. Over the next 20-years the global airline business needs some 40600 new airliners – at the moment supply is under 1300 per annum, and these numbers are likely to result in a widening delivery gap for at least a decade! Aircraft may be a depreciating asset – but when supply is short, as it will remain, the returns will remain very positive.
One of the primary problems in the Aircraft supply chain is engines.
We knew months ago there have been serious problems with engine reliability on new aircraft, which is delaying the delivery of new engines to the OEMs (original equipment manufacturers). A significant number of Neos have been grounded, awaiting repairs or replacement Pratt and Whitney Geared Turbofan (GTF) engines. (An Indian airline Go First cited the grounding of half its Neo fleet as a factor in bankruptcy earlier this year.) At the Paris Airshow last month Pratt and Whitney told the market the problems had been fixed.
However, an engineer at one of the OEM’s (a reader of the Porridge) confirmed the issues PW identified with turbine blades and the engine combustor were being addressed, but that there were other longer-term issues with shorter-than-expected turbine disc reliability, maintenance schedules and service checks. (We were also told there are “unexpected” filter and gasket issues with new engines in hot climates – which I have not seen mentioned elsewhere.)
I wrote about engine problems back in May:
“Airlines want new aircraft with greener engines because that attracts investors who want to peacock their green investment credentials by buying clean, carbon efficient, fuel-efficient planes they can highlight in corporate green-bragging brochures. The problem is the new clean green engines on the new aircraft might be more fuel efficient, but experience shows they require longer and more frequent maintenance on the ground, thus making them as costly as older aircraft types that use 15% more fuel but are more reliable.”
Raytheon, or RTX as it now calls itself, is the owner of Pratt & Whitney engines – the PW GTF powering 40% of the Airbus Neo fleet.
This week they shocked the market when they admitted there is a “new” long-term problem. It caused the stock price to collapse. There is a “powdered metal contamination” issue which can cause turbine discs to crack, a factor requiring lengthy downtime to unmount the engine from the wing for checks and repair/replacement. Over 600 aircraft built between 2015-21 are affected, meaning over 1200 complex engine checks at a time when the aviation maintenance sector is desperately short of trained staff and facilities. RTX will be bearing the costs of these checks and compensating airlines for the down time.
However, it appears PW knew about the metal contamination issue as early as 2020. The question on aviation insiders minds is why has the firm only now announced it – some suspect it’s to avoid potential litigation re transparency with clients if the problem results in even more engine failures, groundings or, heaven forbid, an accident. After Boeing’s attempts to hide the multiple MCAS (automated flight system) problems on the MAX, no one wants to be caught hiding information.
Airlines have the alternative option of using another engine, the CFM LEAP-1A Turbofan (LEAP – Leading Edge Aviation Propulsion, since you were wondering) which has won a 60% market share of Neo orders because its proving marginally more reliable. (It also had some maintenance issues in hotter operating zones.) CFM is a joint-venture between French firm Safran and GE. It is trying to ramp production to 1700 engines per annum – still resulting in a massive bottleneck in terms of delivering new aircraft. All Boeing MAX are powered by the CFM engine – meaning its likely to be a massive success for GE.
Bottom line – the rationale for buying/leasing older aircraft to fill flight requirements just got even stronger. If you want to talk about aviation investments – you know who to call! (But its the not the only thing I do… modular housing, fermentation, new batteries, petrochems, clean railway tech… all on my desk at the moment!)
Five Things To Read This Morning
Out of time, and have a great weekend… back to the day job!
Strategist – Shard Capital