Analysis

Situation stable: new technology and engine leasing

Bob James, Managing Director at AerFin, talked to MRO Network at Engine Leasing, Trading & Finance about why the adoption of new technologies will have a minimal impact on engine lease agreements.a

The impact of new technology on conventional mid- and long-term engine lease agreements is a difficult subject to comment on because it is too early in the development of these engines to assess what the overall impact is likely to be on lease agreements. 

 

I cannot think of many examples where new technology has had a major impact on a lease agreement. It certainly would have an impact on the re-marketability of equipment, the technical and performance aspects of the engines, the MRO market and the technical content such as delivery and redelivery conditions, but in terms of the overall commercial structure of an engine lease agreement there is almost no impact. 

Technology tends to be less significant on the structure of a lease agreement because the requirements for engine leasing are typically financially driven. An airline may no longer wish to hold the asset on their balance sheet, but still wishes to enjoy the benefits of use the equipment. A typical engine sale and leaseback transfers residual value risk from the airline owner to a lessor as the new owner,. The rental cost of an operating lease passes through the airline company’s profit and loss account and  the engine would not be seen on the balance sheet as an asset. It is effectively an off-the-balance-sheet asset available to the airline. 

Considering the rental of a car, at the end of the lease term provided the car is in the required return condition, a leasing customer can hand the keys back and walk away. Whether the customer had leased a car with a standard aspirated engine, or one of the very latest low-emission or hybrid vehicles, the terms and conditions of the lease would not generally differ. Newer technology is not likely to impact lease agreements themselves. 

Technology would impact the rental to reflect the capital costs and it may well impact the maintenance reserve calculations to reflect the actual operating maintenance cost of the new technology engine and the type of maintenance work required to achieve the return delivery conditions. However,  the actual structure of the lease agreement should not change with technology. 

Engine re-marketability may be impacted through technology changes for a number of reasons. There may be certain operator sub-fleets where technology differences are present and which necessitate specific modification standards be incorporated in to engines before they can be brought in to their fleets. This was the case with the CFM56-5B where the introduction of single annular and double engine combustors affected aircraft interchange ability and thus marketability. 

Those airlines who took advantage of the environment benefits offered by the double annular combustor option became a minority as more operators selected the single annular combustor. When engines with a double combustor come available, they were inevitably discriminated against due to the limitations of the market.

There are many other examples where the configuration of an engine affects marketability, such as CF6-80C2 engines with FADEC being more popular than those with PMC control. Without doubt the introduction of newer technology will continue to add to the complexities of engine management and residual value assessments, but in terms of the engine lease agreement, the general terms and conditions should not be affected.

One exception where technology might influence the structure of a lease agreement could be with the introduction of ever large fan cases and fan modules where the core engine and the propulsor may be sold or leased separately, as is the case with the GE90-115B. Effectively the engine might be considered as two parts and it is not uncommon to see a lease for the propulsor under one agreement and lease the core engine under another.

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