Monday, October 19, 2015

Rolls Royce: Aircraft and Engine retirements

Roll's recent profit warning was due to the transition from old engines to new one.  Old planes are being retired, reducing maintenance income, while Rolls is still waiting to ramp up production in new engines.

I need to get some idea of the numbers of aircraft being retired in the future.  Is there more to come?

First, lets look out the different aircraft models based on range and payload:

Ignore Narrow body aircraft at the bottom left, which are irrelevant to Rolls.

Jumbos, in the top right, are large 4-engined planes.  They are now a niche product: for polar flights, freight, or busy slot-constrained airports.  They are only profitable when full, which is risky for airlines as they can't scale down.  Passengers also prefer greater frequency with smaller planes.  B747s are being phased out for passenger use, and the is A380 only successfully used by mid-east carriers.

Soonest to be replaced will be the B747s and A340s, due to their fuel-guzzling 4 engines.  Followed by the B757, now also out of production.  They will be replaced by the B787, A350, future B777X and future A330neo.

Its not a 1-1 replacement.  Larger aircraft are more profitable (when full), but more risky to operate.  For example: an A350 gives better per seat fuel milage, but may be harder to fill, so could be substituted by 1.x B787's, allowing the airline to scale down the route when necessary.

How long do planes last for?  The lifespan of a Wide-body averages 25 years.  It depends on the individual plane's model and milage - some last 35 years.  Freighters tend to last longer.

(Source: Avolon white papers 2015 and 2012.

To estimate the number of aircraft retiring, I searched the production list for all aircraft in the "Wide Body" and "Jumbo" categories above.  I only took currently 'Active' aircraft, ignoring 'stored' ones and did not distinguish between passenger or freight (or the occasional military).  Then I added 25 years to the each plane's first flight year, to estimate when it would retire.  The resulting graph gives the number of Rolls Royce engines due to retire in red and non-Rolls engines in green:

Again, it is number of engines, not planes.  And its only a rough estimate, as each plane could retire up to 10 years earlier or later.  So we can't predict the timing of any more earnings surprises in the future.

What we can tell is:
  • The numbers expected to retire are around 50 engines from 2014-2016, 150 engines from 2018-2022, and 150-200 engines from 2023-2026.
  • The predicted retirements match favourably with engines coming on line in the next few years.  Around 780 A350's are on order, but their rollout is constrained by Airbus' production rate.  Its currently 3 A350's per month (i.e.: 72 engines per year), expected to raise to 10 per month (240 engines per year) in 2018.  And maybe 13 planes/month (or 312 engines per year) after that.
  • Plus another 350+ B787 planes (700+ engines) from the current order book, lets say over the next 9 years.
Based on the order book and the projected number of engines retiring, Roll's problems of retiring engines are temporary.  In the long run, there is no evidence that the number of engines maintained will drop, and it will probably increase.

No comments: