OEM and fleet challenges

Paul Meijers, executive vice president - commercial transactions at Airbus, says that after a “very challenging period” in 2022 with suppliers saw some stabilising in 2023 that reflected in Airbus meeting its delivery objectives last year with 735 aircraft.

“Airbus is monitoring its supplier base more deeply to anticipate problems but a number of concerns persists, including with BFE suppliers, shortages of spare engines and logistical issues,” he says.

A proliferation of entry-into-service (EIS) issues with new equipment, predominately engines but also airframe manufacturing issues, especially with the 737 MAX, has plagued the industry in recent years.

Airframe manufacturer Spirit AeroSystems – which constructs fuselages for Boeing MAX aircraft and the Airbus A220 – has dealt with a number of so-called “quality escapes” over the past year that have resulted in a number of manufacturing problems.

In April 2023, Boeing identified a manufacturing issue with the MAX’s vertical stabiliser fittings caused by a subcontractor to Spirit AeroSystems. The repairs were quickly addressed but caused delays to deliveries during the summer season. Then in August 2023, Boeing disclosed a manufacturing defect in its 737 MAX aft pressure bulkhead caused by incorrectly drilled holes by supplier Spirit AeroSystems. 

Spirit AeroSystems confirmed that its 737 fuselages, shipped from its Wichita facility, had been affected by a problem involving elongated fastener holes on the aft pressure bulkhead but noted that only certain units were affected. Spirit AeroSystems inspected its inventory of 60 aircraft relatively quickly, despite having to extend inspections to a greater section of aircraft.

Boeing had 250 completed aircraft to inspect that was targeted for completion by the end of November. The company implemented changes to its manufacturing process and resumed delivery of MAX 8 fuselage units to Boeing by the end of October.

Boeing’s 787 was also hit by production delays when a flaw was discovered in June 2023 to its fitting for the aircraft’s horizontal stabiliser.

Spirit Airlines is the largest operator of GTF-powered A320neo-family aircraft, with the highest number of engines produced during that affected period between 2015 and 2021.

Chief executive Ted Christie updated investors on how the issue was impacting the airline on an third quarter earnings call at the end of October 2023. He confirmed that all the GTF neo engines in Spirit’s fleet, including the engines slotted for future aircraft deliveries, are in the potential pool of engines subject to the inspection and possible replacement, of the powdered metal high-pressure turbine and compressor discs.

Spirit said it anticipated an average of 13 Neos in January 2024 rising to 41 in December, “averaging 26 grounded for the full year 2024”, which has impacted the airline’s near-term growth projections. For the full year 2024, Spirit estimated capacity will range between about flat to up mid-single digits compared to the full year 2023.

Spirit said it had begun discussions with Pratt & Whitney regarding “fair compensation for financial damages related to the GTF neo engine availability issues”, adding that the amount, timing and structure of the compensation that will be agreed upon was “not yet known”.

Wizz Air is also badly impacted. Chief executive Jozsef Varadi announced in November 2023 that the airline had “just entered into an operational support and financial settlement agreement with Pratt & Whitney”, which had created “predictability for operations” and “predictability for the offsetting of the financial impact”.

The financial settlement was not disclosed but Varadi noted that the real impact was operational since the airline is facing the grounding of 25% of its fleet in 2024.

Varadi said that the airline had taken a number of actions to protect capacity going forward, including extending existing aircraft leases, continuing with accepting new aircraft deliveries – with

30 aircraft due for delivery in 2024. “We are expecting to ground around 45 aircraft as of January,” Varadi said. “We will certainly learn how exactly the programme is going to unfold in terms of induction times of engines and recovery times in the shop, but this is a pretty good estimate”. Modelling the workscope times for each engine, Wizz Air expects the disruption to last 18 months, subject to MRO shop and materials availability as well as turnaround times (TATs).

Air New Zealand, which has 17 A320/321neo aircraft in its fleet of 108 aircraft, said that the RTX fleet management plan would “further reduce engine availability” and has caused it to revise its flight schedule. Air New Zealand has cancelled two international routes to Hobart and Seoul from April 2024.

Air New Zealand chief executive officer Greg Foran called the impacts of the Pratt & Whitney servicing schedule change “significant” that could impact services for “up to two years”. Due to engine availability as a result of the P&W maintenance issues, he confirmed that the airline would have up to four aircraft grounded at any one time.

“Leasing additional aircraft is an option we are looking at closely,” Foran said in November. “Our latest leased Boeing 777-367ER aircraft is about to enter service and we are considering other lease options.

Lufthansa has a total of 73 A320neo and A321neo aircraft are currently flying in the Lufthansa Group. Of these, 64 are flying with this engine at Lufthansa Airlines, CityLine, Austrian Airlines and Swiss. This means that around 146 engines are affected within the Group.

“We currently expect around 20 A320neo family aircraft to be unavailable every day in 2024,” a spokesperson told Airline Economics. “This represents less than one-third of the Lufthansa Group’s A320neo fleet and less than five percent of the Group’s total A320 fleet of more than 420 aircraft.”

Lufthansa has been extending the service of existing A320 Family aircraft, procuring additional spare engines and looking to wet lease arrangements. The company also has been aided by the fact that it also operates LEAP-powered A320 Family aircraft as well as the added benefit of its captive MRO shop, Lufthansa Technik.

Lufthansa chief executive Carsten Spohr has confirmed that thanks to the group’s countermeasures and its “direct access to the scarce and extremely in- demand MRO capacities” there was no impact to the group’s capacity outlook for 2024. The group still intends to take delivery of 30 aircraft this year and Spohr says that the company is “better positioned than others to grow profitably in this environment”.

IAG has identified 32 affected aircraft (less than 10% of IAG’s short haul fleet) and said it was “taking steps to mitigate prospective time out of service of those aircraft over the next three years”.

Delta Air Lines CFO Dan Janki commented that although the impact of the required inspections to the airline would be minimal since its A321neos were later in the delivery cycle, he voiced concerns about the knock-on impact of the disruption to the production cycle for new engines and new aircraft deliveries considering the still fragile supply chain.

All impacted airlines have been negotiating with their existing lessors to extend current lease agreements to cope with the AOGs and capacity constraints while their engines are inspected and parts replaced. For the most part, airlines are reporting that their leasing partners are being accommodating but there are also reports that while lease rates may be holding steady, lessors are strengthening maintenance reserves and lease return conditions for lease extensions leading to potential increased costs further down the line.

Availability of leased aircraft was already reduced but this issue has added further pressure on the leased fleet. Airlines are reporting premium prices for new leases of in-demand narrowbody aircraft.

This is good news for lessors since lease rates have been lagging behind two years of interest rate rises and additional demand will help to correct that market dynamic. However, the fallout from older aircraft flying for longer means both fewer used serviceable material onto the market, and once they come off lease, more engines requiring shop visits, exacerbating the already strained MRO capacity.

GTF customers are commenting that P&W is working with them to both fix the issue with their engines and providing compensation but such a large maintenance issues is already causing knock-on issues.

Delta Air Lines chief Ed Bastian commented that P&W’s providers and suppliers had put all of their resources against the GTF issue noting that situation also “strips away resources from maintenance work on their existing business with us”. He added that Delta was “working through as efficient a manner with Pratt” also commenting on the state of the parts and repair side of the business that are still struggling with a skills gap since the pandemic that is impacting turn times.

“All of the suppliers in our industry lost a tremendous amount of experience due to the pandemic; it is taking time to get that back, to get the turn times down to where they need to be” said Bastian, adding that higher turn times translate into delays and higher costs.

The more positive industry observers hope that in the best case scenario airlines would emerge from this crisis with a healthy bank balance boosted by compensation payments along with engines fresh from the shop with full greentime, enhancing residual values. The more pessimistic observers are predicting this enforced AOG could push some airlines into bankruptcy.

“For once the OEMs are facing the issue but the scale is so big it could push some airlines into bankruptcy,” said one lessor.

The larger airlines are working to secure additional capacity and work through maintenance challenges but smaller airlines may find the disruption too great to withstand. With less purchasing power and influence with lessors than the larger airlines, there is some concern that smaller airlines will disproportionately suffer from elevated levels of aircraft groundings for maintenance issues.

SKY’s Wiley commented that the company was spending more time discussing contingency plans with its airline customers such as whether they have sufficient spare and/or the right mix of aircraft that will enable them to continue to operate. “Smaller airlines have less access to spare engine solutions to manage the operational costs that come from [these] significant groundings,” he says.

P&W is working with all operators but the scheduling of the work from the largest to the smaller operators, as well as the work needed on new engines, is unknown. Austin Willis says that although P&W is “doing what it can to support the customer base”, he adds that “Willis Lease is going what we can to get the engines into the hands of the airlines that need them to try and support the whole process and lessen the impact.”

Willis also posed the question of what the long-term implications will be from the GTF engine maintenance issue once the issue is resolved. “What the GTF market looks like after this subsides is still to be determined but although there is the potential for oversupply of engines in the midterm, the expectation is the fleet will grow its way out of it.”

Firoz Tarapore, who heads DAE, which owns a share in MRO business Joramco, said that the fact the P&W GT maintenance issue now has a fix and a “finite time horizon” is a positive development and hopes it will result in more reliable and more efficient engines. “The OEM has owned the problem, they have a plan and they are fixing it,” he says. “We are getting there slowly but airlines have been given a planning horizon now so they can source alternative capacity to deal with the shortage, which is much better than uncertainty.”

Rob Morris, Cirium’s global head of consultancy, says that the GTF issue will have a fundamental impact on the industry for some time, affecting both capacity and lease rates, noting that the demand and supply imbalance is already having an impact on lease rates. “This issue will have a fundamental impact on supply and demand,” says Morris.

“With 3,000 engines needing inspection – an average of 300 aircraft on the ground at any time between now and 2026 – that’s 2% of the global capacity of single-aisle aircraft with a peak of around 680 in the first half of this year. That is driving positive value pressure especially for spare engines – if you could find one because airlines need the asset flying to generate revenue.”

The latest engines issues are driving many airlines to rely on older kit for maintaining or growing their capacity. The trend is benefitting the MRO market, with slots filled for years ahead. “During Covid, airlines were delaying shop visits and burning their greentime, grounding airplanes,” says Meijers.

“When the market picked up, a lot of engines had to go through the MRO shops and the turnaround times had increased. With the problems we are seeing now with the durability of some of the new tech engines, there is even more stress on the supply side. For the next few years, this is going to drive up used asset values. We are seeing that already quite extensively on the older technology aircraft but on new technology as well.”

Cirium’s Morris said that he had heard of “a 24-year old A320 family aircraft that was scheduled for part out that will now probably go through a heavy check, another engine shop visit, to return it to service for a while longer”, adding that the trend to delay retirement will enable continued growth of the fleet even in the face of such production and maintenance delays. 

Demand for older equipment is a common observance made by aircraft lessors. “Demand is very strong,” says Aircastle’s Inglese. “Because of the supply chain and engine issues in the market, we are seeing neo operators looking for ceo aircraft to help them with lift as they grapple with how they’re going to deal with the groundings and their engine repair work.”

This sustained impact on demand will impact capacity and potentially constrain growth. Rob Morris notes that growth will be slower than in recent years, but adds that this is a positive for airlines since constrained supply enables them to continue to “manage price upwards”.

The importance of engines parts was thrown into sharp relief this summer when it was revealed than a parts supplier had been providing engine parts with falsified certification documents for CFM56 engines.

On July 28, all CFM56 MRO providers received a notice from CFM International informing them about certain falsified documents had been identified for certain CFM56 engine component parts.

CFM noted that it had been contacted by an MRO provider regarding the authenticity of an EASA Form 1 document allegedly issued by Safran Aircraft Engines for a new CFM56 part. The MRO provider had received the document from AOG Technics Ltd. Following an immediate investigation, CFM confirmed that the EASA Form 1 in question “was not issued by Safran Aircraft Engines”.

The letter shares that further EASA Form 1 documents provided to the MRO provider covering multiple CFM part numbers offer for sale were found to have “significant discrepancies” including EASA Form 1 documents attributed to Safran Aircraft Engines that were not issued by the company, as well as a memo of shipment documents that were also not issued by Safran. As a result of these findings, Safran filed a Suspected Unapproved Parts (SUP) notification with EASA that identifies 29 EASA Form 1 documents that were raised for 22 separate CFM56 component part numbers.

The CFM letter also revealed further findings of a “FAA Form 8130-3 document received by an MRO provider from AOG Technics LTD attributed to GE Engine Services Distribution LLC that accompanied GE CF6 engine parts but was not issued by GE Engine Services Distribution LLC”.

Headquartered in the UK, AOG has supplied parts globally for the world’s best-selling passenger aircraft engine (the CF56) and most- used cargo aircraft engine (the CF6) since 2015. The parts were mostly sold to overseas companies that install airline parts, as well as some UK airlines, maintenance providers and parts suppliers.

In August 2023, UK Civil Aviation Authority (CAA), the United States’ Federal Aviation Administration and the European Union Aviation Safety Agency issued alerts to aviation businesses that may have bought or installed AOG’s parts. Some planes were grounded in the UK and US, with several airlines confirming they had suspect parts in their engines. Some 145 engines are reported to have been affected.

The use of unapproved parts in a CFM engine invalidate CFM warranties and guarantees and other obligations. Operators were forced to undertake unscheduled maintenance work to verify all parts in their CFM56 engines supplied by the parts suppliers and/or fitted by the MRO company. 

Several weeks later the news was picked up by the mainstream press and the criminal investigation into AOG Technics reached a new high point in December 2023 when the UK’s Serious Fraud Office (SFO) announced that it had arrested one individual following a dawn raid on premises relating to the supplier. SFO investigators, accompanied by officers from the National Crime Agency, revealed that they had seized material from a site in Greater London and that one individual was currently being questioned.

The SFO said in December that it was working closely with the CAA and other regulators to examine the information obtained as it advances its criminal investigation into suspected fraud at this firm and determines whether there are grounds for prosecution.

CFM launched civil action against AOG Technics and its sole director and shareholder Jose Zamora Yrala in September 2023 in the London High Court. The case is continuing. 

Sustainability goals are driving the move to refleet. Production delays have made is arguably even more essential for airlines to secure their delivery slots with large orders sooner rather than later to delivery on sustainability targets.

Lufthansa’s Spohr noted that “every new model aircraft uses up to 30% less kerosene” saving carbon emissions. By 2030, Lufthansa group airlines will take delivery of more than 200 new fuel-efficient aircraft and the company is also retrofitting older kit with new technology such as AeroShark – the bionic film covering the aircraft that optimises airflow and saves fuel. Lufthansa says it makes the aircraft 1% more efficient but has the potential to save up to 3% with future development.

New equipment is only one part of the sustainability journey for airlines, many securing contracts for the supply of sustainable aviation fuel (SAF) and some are also finding other creative ways to meet their sustainability targets, such as carbon capture and carbon offsets.

The lack of supply of SAF has been widely discussed but airlines, manufacturers and oil refiners are working together on myriad ways to scale production. One such concept it the development of power-to-liquid aviation fuels. Lufthansa is collaborating with Airbus, Munich Airport and MTU Engines to research P2L fuels.

The commercial aviation industry seems to be beset on many sides by a series of major challenges: manufacturing defects, supply chain and maintenance delays caused by a shortage of resources and labour, as well as higher interest rates, higher inflation, a volatile geopolitical situation, the constant pressure of decarbonisation in a worsening international picture in a year of elections.

Despite all of that, the delays, the shortage of capacity, consumers with less disposable income, air travel will continue to grow in 2024 and for the near-term future - another global exogenous shock notwithstanding.

Optimism levels are high - albeit with cautious of the many headwinds building on the horizon but after the deep downturn of the pandemic, there seems to be just relief that the challenges and issues ahead are of more “normalised” nature and one that the aviation industry is confident it can meet head on and triumph.