As airlines seek to free up cash, the engine leasing business is forging ahead. Manufacturers, maintenance operations and lessors are all in the game
The leasing of spare engines has gone from a niche market a few years ago, to a mainstream activity for many of the world's carriers. It is now a multi-million dollar business in its own right, and one that is increasingly being linked with maintenance deals as carriers seek to outsource the servicing of their engines and free up cash by not having to own their spares.
Between them, the top five engine leasing companies own over 1,000 powerplants with a book value in excess of $5 billion. In a move that mirrors their aggressive expansion in maintenance services, the engine manufacturers are bolstering their leasing operations. The two are complementary. Engine leasing is a key part of the heavily promoted full-service package deals on offer from General Electric, Pratt & Whitney and Rolls-Royce.
The market has changed from one in which airlines typically only leased engines for short periods - if they did not hold spares and their own required servicing. "Now people are using engines as an asset - over the past two to three years there has been an explosion of financing based on spare engines," says Chris Cantwell, senior vice-president and head of marketing for GE Engine Leasing, a unit of GECAS and GE Aircraft Engines.
New funding
In October, for example, Air Canada performed an engine sale-leaseback with GE Engine Leasing and CFM International subsidiary Shannon Engine Support covering 11 spare engines, including two Rolls-Royce Trent 700s, four Pratt & Whitney PW4000s and five CFM56s. The deal provided Air Canada with C$100 million ($66 million) in new funding.
The industry crisis has seen airlines increasingly turn to such alternative forms of financing, says Cantwell. GE's engine portfolio has doubled over the past three years to 300 engines, with most growth coming from sale-leasebacks and finance leases. The deals have involved a large number of GE and CFM engines, but it also has a growing number of Rolls-Royce Trents and AE3007s, International Aero Engine V2500s and PW4000s on its books.
The rapid expansion of GE's leasing business has seen it overtake Rolls-Royce & Partners Finance, which manages over 160 engines, as the largest market player. P&W is making its own push into the field. Last year it brought together the P&W Lease Group and UT Finance Corporation, a unit of parent United Technologies, to form P&W Engine Leasing. They had a combined fleet of 50 engines. The new venture has quickly more than doubled this to 125 units, concentrating mainly on adding PW4000s and PW2000s, says its director Bob Merrill. The development of leasing goes hand-in-hand with P&W's desire to expand its services sector, he says. It will deal mostly in its own engines, including the V2500, although it will buy CFM56s to support its growing Norwegian and Singaporean engine overhaul subsidiaries.
Like many others, P&W has seen the industry crisis cause an accelerated change in its portfolio, as demand falls for older powerplants such as the JT8D and JT9D and they move out to be replaced by new types.
There has also been a general fall in lease rates across the board since 11 September, but, although difficult, the market has not been as badly affected as the aircraft leasing sector, according to Charles Willis, chairman of independent lessor Willis Lease Finance. He estimates that today rates have recovered to within 10% of pre-11 September levels. Roger Welaratne, managing director of Shannon Engine Support (SES), agrees, and notes that falling interest rates have meant prices dropping another 10-15%.
In addition to facing falling prices, lessors have been coping with the desertion of many banks and finance houses from the aviation market, in what is now regarded as a more risky sector than ever before. This is less of a problem for the engine makers, which either have strong credit or use that of their parents. Independents with a proven track record are standing their ground, especially as the barrier to entering the market has been raised.
For example, the UK's Barclay's Bank has added $50 million to the $200 million credit facility it provides to Willis Lease Finance. This will help fund the company's plan to add $150 million worth of engines per year to its 125-strong portfolio, says Willis. He is also seeking a strategic partner, possibly a manufacturer or a maintenance provider, to take up the 15% stake in his company owned by the receivers of the Swissair Group.
The industry's largest independent lessor, Engine Lease Finance Corp - which is owned by BTM Capital, a subsidiary of the Bank of Tokyo Mitsubishi - is another preparing to add engines during the downturn. It will increase its 140-engine fleet by 20-25 units per year, with the aim of reaching a portfolio value of $1 billion within a couple of years, says president Jon Sharp.
But the drive by the engine makers to offer an integrated services/leasing product means the independents sometimes do not get a look in. "If a deal includes a lease engine at the point of sale, then we don't even get to participate," says Sharp.
Accordingly, ELF is discussing a venture with a maintenance provider to offer its own full-service product as an alternative to those from the manufacturer.
Added value
Germany's MTU Aero Engines entered the engine leasing sector two years ago, as it realised this product would add value to its core maintenance business, says Ulf Godehardt, director of operations engine-pool services. "We now have 20 engines in our portfolio and use them to support our customers when they need spare engines," he says, often working closely with lessors to obtain the engines it does not have itself.
MTU will add those engines it maintains, such as the CFM56 and V2500, at the rate of around 10 a year to support the growth of its full service business. The development of engine pool deals is another attractive prospect. Last year MTU signed its first such arrangement with German carrier Hapag-Lloyd for the CFM56-7 engine that powers its 30 Boeing 737 Next Generation types. This power-by-the-hour service deal includes the provision of spare engines whenever the airline needs them with a guarantee of availability within two days, says Godehardt.
Although pooling arrangements can save airlines 15-25% over the average monthly lease rate, the concept is a hard one to sell, says Godehardt. Carriers are attracted to the cost-sharing side of apool deal, but are reluctant to give up ownership and share engine use.
However, he is confident other airlines - particularly small operators with one or two aircraft - will join as they become confident of the guarantees on availability that MTU gives. According to Merrill of P&W, which has one pool deal with a European carrier, it is important for both sides to be clear on the cost advantages and the risks of engine pooling.
The development of this type of pool - where the engines are owned and managed by the service provider - differs from those created between some airlines in the past. The airline-run pool concept is now almost dead, believes Welaratne of Shannon's SES. His operation runs three pools around the globe - in China, Europe and the USA - with CFM56s available on a 24-hour delivery basis to members on short-term lease.
Premium service
SES concentrates on the engines of its mother company, and now has 145 CFM56s of all versions. According to Welaratne, carriers will pay the premium for the SES concept because of the service level it offers. To run the pool effectively it does mean having idle engines on standby ready for delivery to customers in an emergency. Scale, therefore is important, as SES must spread the cost of the idle engines across a large number of engines and customers.
Cantwell of GE believes this latest generation of pooling will grow in popularity. He also believes engine leasing could be used for operational and not just spare engines. Most lessors dismiss this prospect, saying that no one will finance an airframe without engines, as one is effectively left with an expensive glider. But GECAS and GE have discussed an engine sale and leaseback deal with one mid-sized carrier. "Because we are really the same company, we can manage the risks," says Cantwell. "An airline would only do it if it has an exit strategy for the airframe, for example breaking the aircraft up or as a cargo conversion."
While GE believes such exotic deals will be seen in the next couple of years, the general leasing market still has room to grow. According to Welaratne, today only 25% of spare engines are leased. "This will move to 50% meaning that 25% of all engines currently with airlines can be transferred to lessors," he says.
REPORT BY MARK PILLING IN LONDON
Source: Airline Business
