Professional Statement: Airbus A340-500/600 Product Life Cycle and Nacelle Components Final Report
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- 2008 Apprised value (Avg. three transactions) = $120.1 m
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MD 11 RESIDUAL VALUES
CEC = Cash equivalent or acquisition cost. With no freighter future in sight and it becoming increasingly clear to owner/operators that the aircraft cannot compete on a seat by seat basis with the B777-200LR and ER, there will likely be a migration to 2nd and 3rd level carriers who generally fly at far lower utilization than their major counterparts. Indeed, the near collapse of the worldwide financial system in late 2008 and the concurrent worldwide economic recession points toward an air cargo market that would have little to do with the A340-500/600.
2008 mean list price = $237.1 m 2008 Estimated manufacture realized price = $141.0 m 2008 Apprised value (Avg. three transactions) = $120.1 m This amounts to a value decline of 14%. That is easily the greatest valuation decline of any production wide body aircraft for 2008. However, that decline doesn’t tell the whole story. The realized price of $141m is a 32% discount to list. Such discounts are now typical on narrow body orders but not very long range aircraft such as the 777-300ER/LR whose performance is so superior that the discount level is significantly below that of other aircraft. In order to sell the A340-500/600, Airbus resorted to discount levels not seen in the very long-range sector since introduction of the A330 and B777 in the early 1990s. Finally, we expect many owners to park aircraft in the hopes of selling or leasing out to other customers and the number of “parked” aircraft will greatly impact the future spares market for the aircraft and its major systems including the Trent 500 and nacelle system. In short, the future of the A340-500/600 is poor at best. Among those expected to park aircraft (or sell), are Thai with four A340-500s, Qatar with 4 Dash 600s, and ILFC (operated by Cathay) with 3 Dash 600s as well. For suppliers including Aircelle and its component “partners”, they share a similar fate. Propulsion Maintenance Outlook – The Trent 500 was developed solely for the A340-500/600. It uses the fan of the Trent 700, a scaled down core, and a five stage LP turbine versus the 4 stage turbine of the Trent 700. Therefore, commonality with other members of the Trent family is very low, on the order of 30-40%. The nacelle, including the engine “plug”, or hot components of the nacelle and engine nozzle, were also specifically designed for the Trent 500 and Airbus A340-500/600. In other words, there is NO commonality of Trent 500 nacelle components with any other Trent engine. The Trent 700 uses a Common Nozzle Assembly or CNA. Trent 500 uses a primary nozzle, forward plug and aft plug. As anyone in the engine business knows, commonality is one of the key’s to long-term financial viability of an engine/nacelle program and assurance that parts will stay in service far beyond the end of the life of their initial host aircraft. Those parts will eventually need to be replaced or repaired. A large installed base of engines provides significant long-term spares and services revenue with high commonality within engine families providing support for higher engine residual values. CF6-80C2, one example, is used on the B747-400, A300-600, A310-200/300, B767 and MD-11. In some cases, modules are interchangeable. In most cases, parts from one engine can be used on another. The Trent 500 is a “one off” utilized ONLY on the Airbus A340-500/600 aircraft. That means that it can’t be used on any other aircraft and while RR will see Trent 500 parts common to other Trents used on other Trents in the future aftermarket, the nacelle maker will not see such use as, again, there is NO commonality with any other Trent nacelle. The MB Strategy turbine industry forecast model is used to forecast spares material consumption/demand for nearly all the world’s aircraft and industrial engines. The model is based on known engine installed bases, utilization and material maintenance cost per hour, adjusted for percent of parked fleet, and availability of used parts. The model’s forecasts are in then year (escalated) dollars. The specific Trent 500 model is as follows in two forms, the Blue bars projecting spares sales on a per hour basis under Long Term Maintenance Agreements (assumes 100% on LTMA), and shop visits. The red bars show our forecast based on total annual hours divided by shop visit rate. The first 3-5 years of service are generally provided free under warranty or in the case of this particular aircraft, as part of the initial sale “discounting” procedure. As you can see, RR benefits from “hour one” while its suppliers generally have to wait for a specific shop visit to take place before receiving revenue from RR or RR partner/JV service ventures. Most importantly however, is the curve of both forecasts. We expect utilization, LTMA and spare revenue to peak in about seven years with a steady decline thereafter. In addition to lower annual utilization affecting these curves are parking aircraft for extended periods of time, and occasional scrapping leading to cannibalization of engines which reduces new parts sales. (Next Page) 
Nacelle Maintenance/Spares – A nacelle requires substantially less maintenance than the engine it encloses. As mentioned earlier, the Trent 500 is seeing around 20,000 hours “on wing” before major service. The nacelle in this application will see 40,000 hours, says Magellan. Comparatively, short haul wide body and narrow body engines see 6,000-15,000 hours while nacelles and thrust reversers see 12,000-25,000 hours. The reason for the difference is quite obvious. Very long range aircraft generate far fewer cycles. High hour/to cycle ratios generate higher on wing life as the engines are operating at cruise power and lower temperatures and stresses for far longer periods than their short/medium haul counterparts. The following chart shows the MB Strategy nacelle spares model for the Trent 500/A340-500/600 application. (Next Page) 
As a general rule of thumb, nacelle maintenance cost is around 5% of the total engine maintenance cost. Nacelles also can carry a higher percentage of repaired components since there are few if any life limited parts. Major nacelle produces Goodrich and SAFRAN (Aircelle) will confirm a very small percentage of nacelle sales being in spares or repair services. In short, a nacelle is very much like the airframe itself; it generates far less service and parts sales revenue than aircraft equipment (electric power, hydraulics/controls, avionics, environmental controls) and engines. And, the components that generate the highest maintenance burden of all are the inlet cowl, thrust reverser and thrust reverser actuation, and exhaust plug. The plug is the second highest cost component of these four but is also subject to airline repair schemes. Magellan Beta21 Testing – In order to determine suitability of Beta21 titanium (Proprietary Timet material) for the Magellan Aeronca nozzle and plug assembly, and to support future spares sales estimates for the Trent 500, Magellan (Orenda), in 1999, performed a coupon furnace test of Beta21 Titanium sheet samples and individual components used in that assembly. The test was conducted for 300 hours at 1300F10. The test ultimately resulted in recommendations as follows: Change braze alloy to allow for lower brazing temperature. This would require full qualification of the new braze. This will avoid excessive beta grain growth. Evaluate new custom designed braze alloy compatible to Beta21S and new heat cycle which would reduce the amount of time over the beta transus temperature. Reduce oxygen diffusion to bulk of the foil by utilizing oxygen diffusion barriers as protective coatings. Increase foil thickness from 0.003” to an optimum thickness (0.011”??). This is expected to considerably extend the service life of the honeycomb foil but there will be a weight penalty associated with this. We know that Magellan made those changes as we have seen the published overweight condition of delivered assemblies. At that time, Magellan Aeronca would have assumed 100,000 hours of ultimate life. Therefore, we have reviewed all other testing information including various emails and reports dating from October 2005. We can find no specific reference to a known 40,000 hour life but only a projection. Now, the resultant data was used by Magellan to also forecast spares but later the company reduced life expectancy from 100,000 hours to 40,000 hours. They used their “assumption” derived from the test. There is no statement in the test report concerning a specific life in hours. A prediction of 1/3 of the original 100,000 hour life came in a note from Raj Thamburaj to Richard Neill, dated March 12, 2007. The 40,000 hour life prediction came later, March 14, 2007 in a note from Richard Neill to Stephen Moore of Pratt & Whitney Canada of a forwarded note from the Thamburaj note of March 12, 2007. The 40,000 hour prediction was used for “conservatism” in forecasting spares and was attributed to a former Director of Engineering at Aeronca, Dave Tack. In conjunction with the new 40,000 hour life, Magellan used Forecast International forecasts for additional aircraft and the very high annual utilization (5,000 hours annually) to project spares/repair sales. We believe both the FI forecast and utilization data are suspect. This is based on the FI data provided to Magellan (through 2007), and MB Strategy acquisition of an FI A340 report from April 2007 which had 213 A340-500/600 combined history and forecast through 2016.11 We now know Forecast international now projects less than 170 aircraft in the A340-500/600 program. Teal Group, Bank of America - Merrill Lynch, and others do not project totals of more than 135. On the issue of utilization, fleet data has the A340-500/600 at between 4200 and 4800 hours depending upon customer with one lone operator, Singapore, seeing 5000 hours annually on its Singapore/LA route (This figure may decline as Singapore cuts capacity through April 2009). Using 5,000 hours across the fleet inflates the spares requirements, as does the forecast for upwards of 170-213 total aircraft from Magellan’s forecast provider. More importantly, if, as Magellan claims, the nacelle plug/nozzle is good for just 40,000 hours, then we would expect them to have informed any customer who is getting close to that figure. One that we know of is Virgin which we are told are in excess of 30,000 hours on 3 airframes this year. THERE IS NOTHING ON ORDER. Based on the aircraft in service from 2002-2004 according to Magellan assumptions, there would be as many as 100 NACELLES COMING UP ON REPLACEMENT over the next 24 months. If this is true and Magellan expected replacement spares work on those components, they would have had to order Beta21 material from Timet due to the long lead time associated with this proprietary material. More over, normal industry practice would have Magellan informing the airlines well in advance, at last two years, prior to any recommended inspection. If Magellan were aware before March 2007, I have no doubt that the company would have informed Aircelle, Airbus, and the airline customers. Even if Magellan had good forecast and utilization data in 2007 when it conducted the Beta21 test, the test itself was not representative of what that component actually sees in service. It is most unusual for a financial forecast of such importance to be based on such limited testing involving the replacement spares value of several hundred aircraft. Life of a component cannot be easily projected based on data derived from this one test. There must be far more empirical data (from other similar Beta21 applications), and there must be more representative tests which replicate an A340-500/600 flight cycle of take-off, climb, cruise, descent, and landing at typical weight and cruise speed. Each of the components of a flight cycle has far different temperature and stress characteristics that simply cannot be replicated in a 300 hour coupon test. Such a test could be accomplished only on the aircraft itself or complete engine in a high altitude test cell. Magellan was not in a position to do this due to the enormous cost. As such, the company’s analysis of component life cannot be relied upon as a factor in forecasting spares sales. Additionally and very importantly, Magellan constantly references “repairs” in its documentation including the Guarantee Letter which is covered later. This implies strongly that there would be many more repairs then new spares. Finally, the Rich Neil memo of March 29, 2007 states that Magellan choose to “ignore” the probability of airlines repairing these components in forecasting aftermarket sales. |