Aero Engine Leasing

In the business of aero engine leasing, there are small, medium and large players, each with their own market niches. Some specialise in short-term engine leasing whereas the majority concern themselves with medium- to long-term leasing; some deal in low value engines and others deal in very high value engines; the business boils down to risk-taking. Aero engine leasing is a relatively new business, changing quite rapidly as new partnerships and alliances are formed and as new players arrive.

Rolls-Royce Capital has a portfolio primarily available to support Rolls-Royce and Rolls-Royce affilliated products. It consists of Rolls-Royce engines, Allison, International Aero Engines and BMW Rolls-Royce. Engine Lease Finance Corporation (ELF), together with its associate company Aviation Lease Finance (ALF) owns 50 fan engines ranging from the CFM56,V2500 and RB211-535 to the CF6 and PW4000. Additionally, The Ages Group,which is ELF’s joint venture partner in ALF, owns approximately 160 engines, most of which are JT8Ds and JT9Ds.Typical lease terms for ELF and ALF are between three and five years, whereas the engines leased by The Ages Group are for short-term leasing in the region of 30 days or so.

GE, with all of its different trading companies (GE Aircraft Engines, GEES and GECAS) together with its CPC joint venture, is probably the largest engine lessor but this is masked by the fact that the engines are not managed by one single corporate entity. CPC sets a target lease term of between two and seven years, although it is prepared to consider other terms on an exceptional basis. The other GE divisions are typically involved in shorter-term (30 to 90 days) activities such as the supply of emergency spares and pool support engines.

When the risk does not pay off, the parting out of aero engines can be the only way of making money. What has been unpredictable was the recent fall from favour of widebody aircraft in general and B747 aircraft in particular. To a large extent, this was precipitated by the Asian financial crisis, although, in the case of the B747,it was the frequency requirements of the airlines which made them look toward smaller aircraft. As a result, some aircraft and engine lessors have ended up owning equipment which will be worth substantially less than they bought it for. Older Stage 3 engines such as the JT9D-7, which were a favourite of the engine leasing companies some time ago are now likely to be candidates for parting out. From the manufacturer’s point of view these retirements and partings out are bad news.

Pratt &Whitney, for eample, has been depending upon the sale of new parts to engines such as the JT8D and JT9D for a number of years now. Furthermore, it is nteresting to note that of all OEMs, only Pratt & Whitney has steered clear of engine leasing on a commercial basis, a decision which could still be reversed even at this late stage.

The deal between Delta Air Lines and Pratt & Whitney, whereby the OEM has acquired rights to 119 B727-200s, is not considered to be a pure engine leasing arrangement, however, there is no doubting the fact that the OEMs are attempting to gain greater control of their respective aftermarkets and engine leasing would appear to be another very good way of doing so. Airlines concentrating on outsourcing services such as engine maintenance and overhaul together with engine spares support, are now moving towards power by the hour contracts with engine maintenance providers who also assume the role of spare engine providers, thereby creating a lease market.

OEMs are in an excellent position when it comes to providing a comprehensive range of aftermarket services. OEMs have needed to become more involved in their respective aftermarkets over the last few years and this will continue as long as they are competing so ferociously on the sales front. With the move to twin engined aircraft, the total number of engines available for lease is not growing significantly. With the increased number of aircraft being taken on lease, it is anticipated that the market will grow in the longer term.

Engine leasing had its roots in small airlines which were quite frequently start-ups, even the very large airlines are now becoming engine lessees. Large airlines see the engine leasing alternative as a means of increasing liquidity. Most debt providers have been reticent to finance spare parts and engines due to security concerns. Engine leasing has changed this, however, and airlines these days are frequently seeking refinancing through sale and leasebacks. Looking at the engine lessors themselves, it would appear that many of the more recent entrants have a background in spare parts trading.

For some, the move up the feeding chain is perfectly logical as they seek an early claim to the ownership of engines prior to parting them out. Whether there are too many players in this arena or whether there are too many engines falling into the parting out category is a matter of debate. The economic downturn will be the likely means of determining the serious players. The OEMs will continue to grow their engine leasing businesses as part of the total support concept,seeking joint ventures and making acquisitions as the opportunities arise.