- 21 Feb 2022
- Chris Kjelgaard
- Engines - BizAv
There’s a good reason for business aircraft owners and operators to think long and hard before buying into, or adjusting engine maintenance coverage levels. Chris Kjelgaard discusses some of the ‘gotchas’ with the experts…
People need to understand the ‘benchmark’ of what 100% engine maintenance coverage provides, and the considerable potential financial risks of declining it, before deciding whether or not to contract for a comprehensive plan, according to Sean Lynch, Program Coordinator for Engine Assurance Program (EAP).
“It includes rental engines, at $40k a month. It includes shipping, which is $12-17k internationally, and $3-7k inside the US, depending on how fast you need the engine,” he elaborates. “It covers LLPs [the replacement of which could cost well over $1m per engine] and on condition parts. It even includes engine removal and replacement, anywhere from $19-39k each.
“Don’t assume you have 100% coverage,” just because you have an hourly engine maintenance plan contract, he warns. Do not assume you are saving money by taking the engine off the program. “You are losing value in the asset if you do,” Lynch stresses.
“If the aircraft is financed, you could be ruining bank covenants by unenrolling the engines. Banks mandate that engines should be on a program — otherwise they have no collateral,” he explains. “Without engine coverage, the aircraft the banks are financing have little resale value.”
Ultimately, engine programs are good for the entire industry, Lynch asserts. “A lot of aircraft scrapping is occurring because a lot of engines are not covered”.
Optional and Comprehensive Coverage
When a provider offers different engine maintenance program coverage levels as options, some plans may offer “cycle only” coverage, which covers the costs of replacing life-limited parts (LLPs) and other parts only when they are replaced during scheduled maintenance events, says Steve McManus, one of two Senior Sales Directors for the OnPoint program in GE Aviation’s Business Aviation division.
Such plans leave the costs of replacing those parts during unscheduled maintenance to the owner.
In today’s overheated used-aircraft market, “owners are over-paying for aircraft, so now the dumbest thing to do is to put it on a cheap engine program,” Greg Ryan, Senior Sales Director in GE Aviation’s Business Aviation Division says, adding this can be a real “Gotcha”.
Comprehensive coverage has particularly important and positive repercussions for aircraft resale values, Ryan says, adding “if you have light coverage, it makes a big difference in resale value.”
It is even more important if the owner is relying on a bank loan or lease to pay for the acquisition of the aircraft. “Ninety percent of financed aircraft are required to have a program, and the financier would want to have more complete coverage,” says Ryan.
“We are seeing banks require an assessment on the [engine] program, and to have it assigned to them. They want to understand what is covered in the program.”
The Importance of LLP Coverage
Similarly, notes P&WC’s Delray Dobbins, “buyers need to exercise due diligence” when deciding whether to buy a plan that covers the cost of LLP (Life Limited Parts) replacement during unscheduled or scheduled maintenance, or one that does not.
For example, if an owner is buying an aircraft with engines that have LLPs requiring replacement at 13,000 hours, but the LLPs in the engines have several thousand hours’ operating life left before then (in other words, many years of operating life for a typical privately operated business jet), then the owner might decide it is worth chancing not having LLP replacement costs covered.
However, warns Dobbins, “one significant ‘Gotcha’ I’m seeing occur over and over right now is when ex-fractional [ownership] aircraft enter the used market, usually in the $1-2m range. The Gotcha is the LLPs in the engine.”
Such aircraft are often offered with engines containing LLPs which have accumulated as many as 11,000 cycles and 12,000 hours, so if the aircraft is to be operated at a utilization rate anything higher than 200-300 hours annually, it is quickly going to need a major overhaul, so the LLPs can be replaced..
If the new owner hasn’t paid to include coverage of LLP replacement in the hourly maintenance program, Dobbins estimates it will cost $1.5m per engine to replace them when they run out. The owner either has to cough up $3 million for replacement LLPs on a pair of engines, or scrap what had been an aircraft investment of up to $2m not long before.
Taking seriously the idea of LLP replacement coverage is all the more important because “the biggest variability in engine programs is LLPs,” says Dobbins. In many pre-purchase inspections, “even appraisers tick a box and don’t go into details” on checking remaining LLP life. “Those details are going to bite you hard,” if they aren’t taken into account.
Replacement Parts Versus New Parts
While it should be the goal of every plan provider to keep each covered engine on wing as long as possible, for reasons both of cost (in this case of paying for unscheduled maintenance) and also of market reputation, sometimes oversight by a plan provider might falter.
McManus cites an example known to GE of a business jet owner whose CF34-3B1 engine plan had catastrophic coverage, which was invoked because a part failed. In this case the plan provider, which wasn’t GE, had a used serviceable replacement part installed in the business jet engine, but didn’t notice that the replacement part had come from a CF34-3B1 engine which had been on a regional jet.
That engine had been operating on an 18,000-cycle airline-operations cycle, but the replacement part was now installed in an engine operating under a 3,000-cycle private-operations cycle.
The owner had no idea this had happened until he contacted GE about coverage and found that the value of his aircraft had fallen by $2m as a result of an unsuitable replacement part being installed in one of its engines.
McManus says that in 90 percent of the cases where GE Aviation has to install a replacement part in an engine, it will install a new part. The only exceptions are when aircraft are grounded in parts of the world where it would take days for a new replacement part to arrive. In such cases GE will always install a business jet-cycle used serviceable part of the latest operational specification and configuration.
“We know how a new part will perform, but not a used part,” says Ryan. “Time on wing is everything — it is really a focus of ours.”
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