From the Cockpit with MTU’s Les Cronin

In addition to building its engine inventory to meet growing freighter demand, MTU Aero Engines has expanded its facilities in Dallas and Zhuhai and launched training programs that will add up to 100 mechanics at each of the company’s major MRO locations. The company expects to launch its training program in the United States this year. Cargo Facts recently spoke with Les Cronin, vice president of sales and marketing of MTU Aero Engines North America, at Aero-Engines Americas 2024 in Miami to discuss the outlook for engine supply and demand, and their impact on the air cargo industry. What follows is an edited version of that conversation. Cargo Facts : How does increased demand for the CFM56-7Bs, -5Bs and V2500s impact the CFM56-3C1 market? Les Cronin: I would say at the moment the asset values for the CFM56-7B, -5B and even the V2500 are increasing astronomically, and the sweet spot for those aircraft in terms of passenger-to-freighter conversion I think has passed. For now, it’s hard to get feedstock for conversion at the rates that make it economical to do it, equally on the engine side. We all know the majority of the asset value is not on the airframe, it’s actually on the engines’ pedigree. You could take a step back even further on that and say, with the 737 MAX deliveries being delayed, for example, with the thirty-eight unit production cap per month enforced on the 737 MAX by the FAA. Then you have the 737 MAX 7 being delayed, along with the 737 MAX 10 delays. For example, the first one that’s going to come into service is the 737 MAX 10, then the 737 MAX 7. We’ve got some aircraft that were built in 2018 and have not been delivered yet — they’re sitting in storage. Speaking to the operators who ordered those airplanes, they’re not going to be delivered at least until 2026, maybe 2027, making them nearly a ten-year-old airplane before it’s delivered to the customer who ordered them originally. Cargo Facts : What does that mean for freighter conversion feedstock? LC : When you look at all that’s going on at the moment, it has an exponential effect on the aftermarket for the CFM56-7B and -5B. Now you have passenger operators who want to keep their legacy airplanes — their 737NGs or their A320/321ceos — longer because they don’t have any new airplanes to replace them with. And that then pushes the value of the engines up as well and it also pushes up the demand for the shop visits. In return for that, then the 737-400F comes back in vogue, because all of a sudden that’s an economic solution for CFM56-3C1s. The problem with that is: Can you get -3C1s with green time? Everybody has been pushing -3C1s out and trying to burn green time — during COVID for example — and now there’s no green time available. Everybody’s been kicking the can down the road during COVID. The reality of it all is that now we have to build life back into the engines to extend them, making it even more expensive. We are quoting out engines at the moment, and CFM56-7Bs, -5Bs, for full life-limited parts (LLP) stack replacements with 20,000 cycles on the core are anywhere between $8.5 million to $10 million for the shop visit. The asset value now for someone to trade in that asset is going to be somewhere in the region of $11 million to $12 million. That’s the price for a new engine itself and you still got to replace the low-pressure turbine and you still got to replace the low-pressure compressor. All these events, particularly starting with the 737 MAX, are black swan events that lead to other upticks in demand for the aircraft, and the net effect of that is probably pushing the sweet spot for freighter conversions now. [caption id="attachment_56867583" align="aligncenter" width="2560"] Les Cronin, vice president of sales and marketing of MTU Aero Engines North America. (Photo/Cargo Facts)[/caption] Cargo Facts : Are you seeing a lot of the owners of the 737-800 freighter conversions taking those measures to lease the engines out because the type is basically in oversupply? LC: I think the feedstock for the 737-800 freighter at the moment is dwindling and what I’ve noticed, even with 737-800Fs, is that several are parked. There are surplus 737-800Fs and people are realizing that they can lease the engines out for more money than the aircraft is worth. It's in oversupply at the moment and yes, we are seeing some owners of aircraft take advantage of the market. You can get higher lease rates for CFM56-7Bs, for example, leasing those out for a far greater value to market than leasing out a 737-800 freighter. Cargo Facts : What are the long-term effects of that, from your perspective? LC: What they're trying to do is generate cash from the engines themselves and maybe they might reinvest back into the engines themselves when the green time is burned up on the LLP limit, or they have an unserviceable condition. If that’s the case, they will probably short-build their engines to meet their platform, and hopefully, the freighter market will pick back up. We’ve seen encouraging indications that the freighter market has shown more growth out there, particularly with the crisis that’s going on in the Suez Canal, the issues that are happening in the Middle East, for example. I do think that the freight market will recover, and probably near-term, and we already see the evidence of that. Economically, things are improving here in the U.S. as well. From that perspective, I think this is maybe what I'm seeing with the lessors, who are taking those engines off those airplanes and looking for short-term lease opportunities. That’s where the higher value is on them. So, to do short-term lease opportunities, they can pull the engines back and put them back on the wings of the airplane when the cargo market recovers. It’s just a play to generate cash at the moment for those lessors who will eventually put those engines back on wing again. Now I'm looking at shop visit costs that are disproportionately not the same as what they were probably two years ago with the OEM escalations as well. If you look at this year, the CFM has increased over 8% on escalations, for example, in materials. Year on year, 2023 was a hybrid year, and 2024 was a return to normalization. But it wasn’t normalization in regards to inflation percentage, because when you look at the Consumer Price Index, for example, it’s around 2%, and we’re still at 8% and above in aviation. It’s a fine judgment at the moment and it’s certainly an opportunity for people to cash in on green time. Is that a long-term solution? No, and I think they place these engines purposely on short-term leases for that opportunity to put them back on wing when the cargo market upticks, and when lease rates recover for the 737-800F. Cargo Facts : Could this create a potential tug of war for the engine between the passenger and the cargo sector? LC: Most definitely. 737 valuations are increasing at the moment and A320s are increasing as well, all because of these production issues. 777s are increasing astronomically and A330s are recovering now, regardless of the powerplant that’s on them. The Trent is lower and the GEs are higher in terms of valuations. But yes, I think there’s going to be a tug of war. We already see 777s that were destined for conversion are being leased back out to passenger operators while they are waiting for the conversion slots. I think that will have a knock-on effect, even on the 747 platforms as well, where we probably see the same effect on that. If we can’t get the 777 feedstock, then there’s nothing to replace the 747Fs. I seriously think that the younger freighters will stay longer with the 747s, and if you have a nose-loader, it will stay forever. That’s how I see the market playing at the moment. Both widebody and narrowbody, it will have a knock-on effect. Cargo Facts : What are your thoughts on the CF6s and the remaining serviceable life the engines have? LC: We see a long future in the CF6. We’ve captured quite a large market share on this, particularly during COVID and particularly with Amazon, for example. We don’t see any short-term reduction. What I do see on some fleets at the moment is a dip, and that’s because we’ve actually gone through the whole fleet and now we're in that dip at the moment or quiet period, where we may have lower inputs for this year, but next year, it goes back up again. But we’re able to supplement that with other customers that I have in other regions, so we’re not concerned. The CF6 we think has a long time to go and we see at least another probably ten to fifteen years on that platform. Some of those airplanes, 767s, are still being converted today, so anyone who converts a 767 today into a freighter, it's a ten-year payback, they are going to fly for another ten years. With the 767-200F platform and the CF6-80A, that’s a different situation. But with the CF6-80C2 we see, as I said, another ten to fifteen years minimum on that engine platform. Cargo Facts : What market challenges do you expect to face going forward? LC: We’re just paying a higher price for engines now. For us, we're walking both sides of the fence: passenger and freighter. The build spec for a passenger engine is higher than it is for a freighter, because obviously cycle-wise you build them differently. It's opportunity cost. Whoever wants to pay the price, we’ll get it, but we’re able to pass on that price issue when we have the MRO shop visits. From my perspective, it’s the yin and the yang, and whoever wants to pay, we’ll deliver. For us buying assets, we’re just playing the market, we want to be cautious about it and don’t want to overpay for an asset. We’d like to see that we only have a 10%, 12% or maybe 15% acceptance of our offers because then we know we’re paying the right price and not overpaying for an asset. There are people out there who will pay more for an asset, and it’s going to be harder for them to get their money back out of it. And the beauty about MTU is, from my perspective, that we’re able to turn the water into wine. So we’re able to turn the broken parts into something serviceable. Don’t miss our two upcoming events that are essential for stakeholders in Asia and Latin America: Cargo Facts Asia 2024 , taking place April 15-17 in Singapore, and Cargo Facts LATAM 2024 , taking place May 13-15 in Panama City. Register by March 29 to take advantage of early-bird pricing for CF LATAM.

From the Cockpit with MTU’s Les Cronin

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