Boeing Weighs Buying Parts Recycler to Profit From Junkyard Jets

Aug 07, 2014 10:28 am ET

Aug. 7 (Bloomberg) -- Boeing Co. sees potential riches in the aircraft that land in aviation’s junkyards as airlines ditch older jets for models that burn less fuel.

The world’s largest planemaker is exploring ways to make money from the end of a jetliner’s life. It may be in the market for a salvage company that recycles engines, landing gear and other components stripped from scrapped jetliners, said John Wojick, a senior vice president for global sales and marketing.

Buying such a business would allow Chicago-based Boeing greater control over how its jet components find a second life. For now, the commercial aviation services unit, which manages maintenance, repairs and spare-parts inventory for airlines around the world, contracts out the job of dismantling the used planes Boeing buys to spur orders of its new 747-8 jumbos.

“That’s been a profitable business for us,” Wojick said in an interview at the Farnborough International Air Show in England last month. “The question becomes should Boeing get into that business ourselves.”

The $3.2 billion market for used parts is growing as airlines and lessors discard planes a decade or more before the end of their 30-year service lives. The sum of the pieces can outweigh a jet’s depressed resale value, and owning a so-called parting-out company would give Boeing more control of its own components.

“Boeing has a strategic decision to make,” said Kevin Michaels, global managing director of aviation consulting and services with ICF International, a Fairfax, Virginia-based consultant. “This is one of their Achilles’ heels.”

Industry Overview

The scrap-aircraft industry is a mix of closely held operators such as Aircraft Demolition LLC, which operates at the Pinal Airpark in Arizona known for open-air storage, and publicly traded companies like AAR Corp., with a market value of $1.07 billion.

In January, Fort Lauderdale, Florida-based GA Telesis LLC said it raised $500 million from clients advised by Wafra Capital Partners, an investment adviser controlled by the government of Kuwait, to invest in dissembled aircraft and other engine and aircraft-part opportunities.

Michaels said he sees a “strong possibility” Boeing will change its spare-parts strategy and may make a major purchase. The stock’s 13 percent decline this year through yesterday was the most on the Dow Jones Industrial Average. A complicating factor: Acquisition targets may be overpriced as investors flock to the secondhand market for aircraft parts, Michaels said.

Problem/Opportunity

There’s a risk for Boeing, too, because dealing in used parts that are certified to be as good as new -- and as much as 50 percent cheaper -- could undermine its Aviall subsidiary, according to consultant Robert Mann of R.W. Mann & Co. in Port Washington, New York. Aviall is the largest global seller of new aircraft parts.

“It’s a problem and an opportunity,” Mann said.

The lure is the 6,000 jetliners that are expected to be driven out of service over the next decade by new arrivals promising leaps in fuel savings, like Boeing’s 737 Max and Airbus Group NV’s A320neo, according to a study commissioned by the Aircraft Fleet Recycling Association. Boeing co-founded the Washington-based trade group in 2006.

Parts stripped out of the frame of a single-aisle jet like a 737 are valued at an average $1.5 million while components from a wide-body are typically worth $2.5 million, according to a study by the trade group and Atlanta-based consultant TeamSAI. Engines are valuable, yielding an average of $1.5 million for the smaller jets and $6 million for twin-aisle aircraft.

Even Windshields

“Parts are in high demand and people are looking at ways to save money,” said Tim Zemanovic, co-founder of Burnsville, Minnesota-based Aircraft Demolition. It dismembers about 25 planes annually, from older-model Boeing 737s to Airbus A320 and Boeing 747-400 wide-bodies, in a process that can take up to six weeks. Popular components for resale include propulsion systems from engines, auxiliary power units, actuators, black boxes, cockpit instruments and even windshields, Zemanovic said.

“Those are big, very expensive items,” Zemanovic said. “One windshield could go for $25,000.”

About 1,000 planes are expected to be retired annually by 2023, more than double the average of 410 a year that were grounded from 2000 through 2009, according to an analysis by ICF International.

The retirement wave is the flip-side of an order binge over about the past decade. Boeing and Toulouse, France-based Airbus have amassed a record combined backlog of about 11,000 jets with a list value of almost $990 billion, according to data compiled by Bloomberg Intelligence.

Bustling Units

Some Boeing competitors and clients already have bustling dissembling and parts-trading units.

Airbus owns a stake in Tarmac Aerosave, a French company that stores, repairs and tears down aircraft. Montreal-based Bombardier Inc. works with Magellan Aviation Group to dismantle old aircraft like the CRJ100 regional jet, and the two largest lessors, AerCap Holdings NV and General Electric Co.’s aircraft leasing arm, are also involved in the parting-out of planes.

Delta Air Lines Inc., the world’s third-largest carrier, is trimming maintenance costs by acquiring older planes on the cheap for parts. The Atlanta-based airline bought 23 MD-80 aircraft last year from Sweden’s SAS AB for this purpose and has selectively purchased others, said Michael Thomas, a spokesman.