Maintenance Lease Services MTU Maintenance
MTU Maintenance Lease Services, a joint venture with Sumitomo Corp., specializes in short- to medium-term leases for engines such as this V2500.

Could Lease Returns Finally Be Getting Easier?

Aircraft and engine lease returns can be costly and complicated, but lessors of new-generation engines might be simplifying the process.

When airlines lease spare engines to cover scheduled and unplanned shop visits, the return conditions can be onerous, essentially mandating that the asset go back to the owner as it was when the operator took delivery. But as a new generation of digital engines enter service, and the market becomes more competitive, that is becoming less true.

“Lease-return conditions are changing, depending on the time remaining on the engine’s life cycle and the engine type,” says Bernhard Kruger-Sprengel, Lufthansa Technik vice president for engine services. He says lessors of relatively new engine types, such as the CFM56-5B/-7B, require lessees to fulfill contractual conditions that can include half-life—generated by a performance restoration shop visit—on top of OEM-imposed product standards, like PMA/DER avoidance, to secure the perceived market value.

But for older engine types, residual value weighed against overhaul costs and surplus availability can make a difference. “Typically, aircraft operators and lessors can negotiate the return conditions down in exchange for financial compensation for the engine owner, such as maintenance reserve fund withholding,” notes Kruger-Sprengel. “When residual value is not a dominant issue anymore, we see agreements becoming less strict when it comes to lease returns. These engines end as green time or part-out units. We are seeing this take place mainly on the CF6 family and the CFM56-5A/-5C.” 

MTU MaintenanceMaintenance Lease Services

MTU Maintenance Lease Services, a joint venture with Sumitomo Corp., specializes in short- to medium-term leases for engines such as this V2500.

Technical, Not Contractual

He also observes growing interest among aircraft lessors to avoid additional engine overhaul costs in lease returns by using aftermarket service-inclusive lease rates on the engines. That, he says, has been facilitated through partnering arrangements with MRO facilities. “By doing that, the underlying engine contract with the MRO is transferred from one aircraft lessee to the other. Overhauls then only take place for technical, rather than contractual reasons,” Kruger-Sprengel explains.

Ian Malin, chief investment officer of UK-based AJW Group, with its leasing portfolio focused on the GE CF6, CFMI, CFM56 and Pratt & Whitney V2500-A5, reports that over the past five years, “a very interesting evolution” in engine leasing has taken place.

“At first, we imposed very strict return conditions that the lessee had to meet, or pay very costly penalties,” he says. “But for the current generation of engines, we found that it would be commercially more viable to structure the leases so that the lessee would simply pay for the usage of the engine.” For the lessee, he notes, the only commitment is to return the engine in serviceable condition so that it can be transferred to another user without requiring extensive repairs.

This “green time” agreement, according to Malin, takes into account remaining time on serviceable components. “The lessee turns back the engine the way it was when received, minus normal wear and tear,” he says.

It was the convergence of two main trends since about 2012—a significant drop in fuel costs, coupled with major delays of new aircraft deliveries—which Malin says gave impetus to the green time concept in engine lease-return conditions. “Many airlines found they would be flying their legacy aircraft longer than originally planned, although they weren’t sure exactly how much longer that would be,” he says. “For this reason, the airlines did not want to commit to long-term leases, or the strict return conditions those leases had, so we made a competitive response to the way the engine leasing market evolved.”

GecasCFM56-7B

Lessors of relatively new engine types, such as the CFM56-7B (pictured) typically require PMA/DER avoidance.

At the AJW Group, the average engine lease term runs for as little as three months to as long as three years, says Malin. “Green-time features are becoming more common for short- as well as long-term leases today,” he says.

Eliminating Waste

Along this line, Alistair Dibisceglia, vice president and head of global engine leasing at MTU Maintenance Lease Services in Germany, points out that “doubled-up” maintenance is something that the MRO avoids upon engine returns.

“End-of-lease terms often state that the engine should be redelivered in the condition of pre-delivery. The specification of remaining hours and cycles can mean that parts such as life-limited parts that still have time remaining—but lower serviceable flying time than contractually required—are being exchanged and replaced at high cost to meet [lease return] requirements,” says Dibisceglia. “This exchange process is more than what is necessary in terms of airworthiness and a waste of whatever green time might be remaining.”

It is a safe bet that the market for engine leasing will grow. Citing data from industry surveys, Tom Slattery, senior vice president and manager of powerplant for GECAS in Ireland, comments that the worldwide commercial airline fleet is forecast to reach 35,000 aircraft by 2035, factoring in retirements, with Airbus and Boeing accounting for 85% of the market. “Most of the aircraft will be twin-engine, and about 78% will be narrowbody,” Slattery explains.

On that basis, he says, there will be a need for about 7,000 spare engines, or roughly 10% of the installed fleet. “Today’s modern aircraft engines are about 5-8 years away from scheduled engine removals post-delivery. That means that spare engine deliveries will steadily ramp up but lag the aircraft-deliveries curve. There will be a peak in deliveries of spare engines 10-15 years after entry into service of each type,” Slattery says.

As the newer, heavily digital engines come into the market, lease-return requirements such as inspections and expected life can be better monitored with analytics. Both lessors and lessees will benefit. And the structure of aircraft and engine lease agreements could be positively affected, as Slattery explains.

“Return conditions have not changed much over the years. What has changed is that today’s engines are all-digital, and all records of the engine’s operations, such as vibration and exhaust-gas temperatures, are preserved. By downloading the data after the engine is returned, the leasing company can see the engine’s maintenance trends and determine its future on-wing, predicting when inspections will be needed, and seeing any problems that need to be addressed,” says Slattery.

At the same time, digital data will help the leasing company determine if all of the engine’s modules are meeting the redelivery standards from the last operator, while providing more tools to assess the engine’s quality for the next operator.

Brian Ovington, GE Aviation’s marketing director, reports that the big data generated by the new-generation engines could also benefit engine lessees upon return.

“Because of the greater capabilities data and analytics provide, leasing agreements could provide for greater relief on return conditions because the lessors will get a better understanding of how the engine performs,” he says. “However, I think this will evolve over time.”

Engine Values

Luthansa Technik’s Kruger-Sprengel says that mastering the digital revolution will be key to maintaining engine values and an important factor in engine leasing.

“For lease periods, the airline or MRO will have to have the tools to secure the digital-based monitoring and troubleshooting of the engine, and this will become a prerequisite for lease returns,” he says.

However, Kruger-Sprengel observes that OEMs are also trying to dominate this field via their engine condition software, limiting access to the necessary data, even at times to the owner of the engine. “Lufthansa Technik is investing in independent tools for engine condition monitoring and data analytics, which will become much more important in the future,” he remarks.

GE AviationCFM56-5A

Lease-return agreements for older engines, such as the CFM56-5A (pictured) are becoming less strict, as these engines are transitioning to green time or part-out units.

In that regard, MTU Maintenance Lease Services’ Dibisceglia reports that “the largest way that big data will affect the aftermarket” is that it will take MRO management and condition analytics into the predictive sphere. “Negative trends can be caught early and rectified, and MRO providers will be able to analyze larger patterns, better predict performance in the field and plan shop visits, parts logistics and fleet management,” he says. “This may well lead to adjustments in lease-return conditions down the line—however, it is too early to tell at this time.”

Dibisceglia notes that the industry is entering what he calls “a phase-in of change” regarding lease transitions. That change, he says, stems from “the various parties becoming more aware of lease transition challenges” and becoming more active in the planning of the transition.

“Lessors, for instance, want to take a more active role in MRO and MRO-related decisions, so as to ensure maximum residual value and minimize their exposure to risk,” Dibisceglia says. “This means they are more involved in transitions than before and very interested in the technical management of their assets.” 

He adds that lessees also want to minimize their risk during a lease transition and to minimize cost. “So in ideal cases, they are planning their lease return-related checks much earlier than before, ultimately avoiding any late redelivery,” he says.

Notable & Quotable

“From a lessor perspective, the various points negotiated in the lease-return agreement have to do with ensuring asset value retention. It is also about being able to ensure sufficient engine performance remains for the lessor to carry out its planned follow-on strategy for the engine once it has been returned. The lessees have different concerns. They want to reduce operational cost and minimize exposure at the end of a lease.”

—Alistair Dibisceglia, vice president and head of global engine leasing, MTU Maintenance Lease Services

 

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