Opinion: Uncertainties Abound In Engine Leasing Market

The commercial engine leasing market is growing, though entry of new models and OEM involvement in MRO are creating uncertainty.

Opinion is divided concerning the size and value of the engine leasing market. Some of the uncertainty comes from the involvement of OEMs and their large engine-lease pools that support their respective aftermarket maintenance packages. As a result, identifying the true market is difficult because so much trading and maintenance activity is ring-fenced. 

However, both OEMs and operators potentially benefit from such arrangements via guaranteed cash flows through flight-hour agreements for the OEM and reduced risk for the operator.

The engine market is well-stocked, notably with the much-talked-about CFM56-5B, CFM56-7B and V2500-A5, expected to have significant shop visit activity over the next 15 years. These markets have been much more open, so competition is strong across OEMs and independent MROs. Such throughput allows for the spare engine leasing mechanism to reduce aircraft downtime, and with it, extended lease terms and good short-term lease rentals, as the compound impact of shop visits occurs across many operators.

While these scenarios focus on the single-aisle market, the twin-aisle engine market has long carried a question mark for many independent lessors given the risk profile around depreciation and exposure to parked aircraft. While engine populations are linked heavily to how many of those lessors stock them, it could be argued that lessors are a little more cautious about which twin-aisle engines they would add to these portfolios.

Whether the twin-aisle engine is a Rolls-Royce, GE, Engine Alliance or Pratt & Whitney, the most recent powerplants for Airbus A330s and A380s and Boeing 747-8s and 777s, all have a high cost base. Shop visits are expensive, albeit infrequent, and life-limited parts (LLP) stock costs continue to escalate at levels never seen before. For twin-aisles, LLPs are perhaps less of a concern as some modern twin-aisle engines will struggle to surpass many of the LLP lives within their lifespan, and reserves will be paid with few replacements on many engines. However, shop visit costs, especially for overhauls, can be high relative to engine value. The International Bureau of Aviation (IBA) expects continued parking and retirements in some twin-aisle sectors as 787 and A350 deliveries continue. With these deliveries, the twin-aisle market will need order activity to meet future demand.

In the single-aisle market, however, orders are being made, and backlogs will allow for many years of production. More orders are expected, as the Chinese aircraft market is predicted to grow dramatically. IBA, by analyzing the outstanding orderbook for these types, forecasts that Pratt & Whitney PW1000 and CFM Leap engines will far surpass the quantities of the CFM56 and V2500 engines today. While OEMs seek to secure more maintenance agreements for engines, the overall number of engines is expected to grow and thus, by engine count, the OEM and independent leasing/MRO markets are expected to increase their stocks.   

To do so, especially with a large number of orders expected from China, the infrastructure to support leasing will have to improve. Expertise and involvement in China is still very much in its infancy, and IBA is aware of the difficulties involved in both leasing and returning an engine from China. Compliance with engine record-keeping and even finding local personnel to manage return of an engine to a lessor remains difficult. 

IBA sees much interest from leasing companies in making deals with OEMs and airlines for the latest generation of engines, and more Leap 1A, PW1000G and eventually Leap 1B engines are expected to enter independent lessor portfolios.

Further on, OEMs will still be very present in this market. For example, CFM spent $4 billion in research and development on its latest Leap engine programs. Capturing more of the maintenance market allows OEMs to invest more heavily in the next generation of engines and helps offset the discounts offered to airlines for the latest A320neo and 737 MAX-family engines. Independents, tear-down entities and MROs all stand to lose out from this shift in strategy.

For independent lessors, IBA fully expects the strongest market players to remain. Current engine lessors can manage any stage of the lease, including delivery, technical management, lease returns, remarketing and part-out. There are also some aircraft teardown entities that are not only stockpiling material from aircraft, but are also gradually building their engine portfolios. In the future, it will be interesting to see whether such diversification in what has traditionally been seen as an aircraft teardown market shows some longevity for engine leasing.

For some entities, this has not been the case despite building healthy engine portfolios. Whatever the mix of companies in the market, IBA envisages a greater OEM share of spare engines and increased engine populations within the large independent lessor portfolios. 

Kane Ray is head analyst for commercial engines at London-based consultancy the International Bureau of Aviation.

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