Record production rates at Boeing Co. and Airbus SAS have spurred investor interest in valuable aerospace parts that are becoming increasingly available as less-efficient jets are retired years earlier than previously.
Apollo Aviation Group last month raised $595 million for its Sciens Aviation Special Opportunities Investment Fund II, more than double the size of the initial SASOF pool in 2010, as investors bet that returns from scrapping planes will jump.
Boeing and Airbus increased deliveries 18 percent to a 1,189 planes in 2012, with output set to gain further as the U.S. company ramps up 787 Dreamliner production and its European rival introduces the A350 wide-body. David Treitel, Apollo’s managing director, said that’s causing planes to be scrapped after 15 to 20 years, once considered midlife, leading to a surge in availability of recyclable parts for current models.
“We are disassembling aircraft at younger ages than before,” Treitel said from Apollo’s Miami office, citing the recent break up of its first Airbus A321 and second Boeing 747-400. “It’s not a huge number, but it doesn’t need to be.”
Apollo, jointly owned by principals William Hoffman and Robert Korn and an affiliate of Sciens Capital Management LLC, buys planes that have already been grounded or are still flying under lease, retiring them when the operating agreement ends.
The company arranges for the planes to be scrapped, then sells the pieces to parts distributors. Life-limited components in engines, such as fan blades that are required to be replaced after a certain amount of use, are among the most attractive items. The earlier fund ended up buying more than $400 million of used jets, partly using re-invested proceeds.
More retirements are happening now because Boeing and Airbus sustained production through the global recession as airlines clamored for fuel-efficient models following a surge in the price of crude oil, Treitel said. That’s led to an imbalance between demand and capacity, pushing carriers to retire older planes that are still being made and have valuable parts.
“We’ve been able to buy, dismantle and sell parts for numerous in-production models,” he said. “The desire to save money on maintenance by reducing the cost of materials is sufficiently great.”
Apollo, which also has offices in London, Dublin and Singapore, is the most active investor in the area, though hedge funds and private equity groups with aerospace expertise are also engaged, Treitel said.
Returns from the initial SASOF fund are still being paid to investors after distributions began in 2012, he said, declining to give a figure. Apollo began managing third-party investor capital in 2004, buying engines for its own account before that.