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Irish Leasing Companies Expanding Aftermarket Options

With steady growth in commercial aircraft leasing, Ireland-based lessors still dominate the global market, though MRO to support leases may be done elsewhere.

Tony Ryan’s body may lie a molderin’, but his spirit lives on in Europe’s most successful airline and in the world’s most intense concentration of aviation leasing companies and supporting firms. The collapse of Ryan-founded Guinness Peat Aviation (GPA) in the early 1990s spawned by one count up to 75 companies that lease aircraft or engines, do legal or accounting work required by leases, know the tax rules that govern them, or are experts in technical aspects of aviation assets.

It’s not just the local expertise that counts, of course. The Irish government has encouraged aviation leasing with some very favorable tax rules. There’s a corporate tax of 12.5%, very attractive compared with rates in other major financial centers. And there are special incentives for locating in industrial centers near Irish airports.

EU membership also helps, as does the fact that the Irish, despite 12 years of Gaelic instruction, still speak the world’s business language quite beautifully. In any case, success breeds imitation, and Ireland dominates not just aircraft leasing but leasing of all the world’s mobile assets. Investors are planning to build a $1.5-billion complex dedicated to ship leasing in Dublin’s lower Liffey financial district. This section of Dublin’s famous river is beginning to look like Wall Street, only low-rise, cleaner and much newer. The leasing companies and their ancillaries are chiefly located here, in a business campus west of Dublin or in the Shannon Industrial Estate.

For example, Engine Lease Finance Corp. (ELFC) has a variety of engines—CFM56s, GE CF34s and CF6s, GE90s, Pratt & Whitney PW4000s and Rolls-Royce AE3007s and Trent 700s—in its portfolio. “We are notcommitted to particular OEMs,” notes Joseph O’Brien, executive vice president-sales. “We are independent.” Most of ELFC’s engines power narrowbody Boeing 737s and Airbus A320-family aircraft. The company may handle the larger Trent engines, “but we struggle to place them,” O’Brien says.

Although ELFC will lease over any term, from aircraft on ground to long term, its specialty is the long-term lease. Only one-sixth of the current portfolio is on short-term lease, the rest is sale-leaseback for the long term.

O’Brien says short-term leases have increased significantly in the last three years and only recently stabilized. He attributes the increase to several factors: More-reliable engines need fewer spares; cost-conscious carriers are willing to take more risks on spares; and there is a short-term oversupply of some engines. “They take fewer because they know plenty are available.”

Traditionally ELFC has sold older engines and let other companies break them up. O’Brien says the company is looking at getting into the tear-down business itself, either as a partner or by buying into a disassembly company. “It could be an OEM or independent firm.”

Although O’Brien works out of Boston, ELFC is headquartered in an industrial estate adjacent to Shannon Airport. Partly that is due to the favorable corporate 12,5% tax rate and partly to the abundance of local expertise in lease law, sales, accounting and finance that became available when GPA folded in the early ’90s, shortly after ELFC started up. O’Brien estimates that up to 75 leasing-related companies grew out of GPA.

O’Brien says Irish maintenance shops are mostly irrelevant to ELFC’s business. For long-term deals, airlines choose maintenance options, and the lessor monitors work scopes. For short-term purposes, ELFC goes to Lufthansa Technik, SR Technics, MTU and “the usual suspects.” It has only occasionally used Irish engine shops.

The ELFC executive says different regulations among jurisdictions pose continued difficulties for lessors. “Netherlands poses problems, and Turkey has no proper mortgages.” ELFC works with local authorities to manage these difficulties. O’Brien says efforts at harmonizing are “perpetual, with some progress, but there are still countries very reluctant to give up jurisdictional rights. Some counties have not ratified the Cape Town Convention.” c

The conflict between engine flight-hour agreements and engine leasing causes “thousands of hours of discussions,” O’Brien says. OEM flight-hour deals also differ widely. “Some give cash, some give credit, and they all have different programs, PurePower, OnPoint, Total Care.” As a result, transfers of support to new lessees must be highly customized.

The increase in both engine leasing and flight-hour support is thus causing major headaches for long-term lessors. Nevertheless, O’Brien sees some progress. “I think the OEMs would prefer to do nothing, but they cannot because so many carriers are taking leases on engines.” 

Shannon Engine Support (SES) works with CFM56 and Leap engines for its owner, CFM, explains Managing Director Julie Dickerson. It owns, manages or services 200 CFM56s, largely -5Bs and -7Bs, including management of Gecas engines. In 2016 SES will take the first of 48 Leaps it has ordered, at first to support the new engine’s entry in service, provide product support and cover warranties. Later SES will get into commercial leasing of Leap powerplants.

SES does not do long-term leases, but handles AOGs, short-term operating deals and a “little trading,” Dickerson explains. It specializes in customizing programs for carriers that find themselves short of spares for shop visits but do not want to buy engines. “We work to support them, as and when needed with the right engine.”

The business is global, with 10 pools in seven countries and offices in Beijing, Brussels, Budapest, Shannon and Singapore supporting more than 150 CFM operators, MROs and aircraft lessors. SES will stick to customized short-term leases and let Gecas, which is co-located with SES, handle the sale-leaseback market.

The SES director says Shannon enjoys the leasing expertise built up by GPA and is “a nice place to live and much cheaper than Dublin.” Local maintenance is not relevant, as SES engines are stored around the world to facilitate their delivery. Many SES technical employees do come from local shops, however.

Dickerson says shop visits are increasing on the CFM engines SES supports and lease rates are firming. She sees a growing appetite for customized leasing as more aircraft are owned by lessors. Differing national regulations have not posed much problem, except for age limits in some countries. “We have a very portable fleet of engines, I don’t think different regulations affect us as much as aircraft lessors.”

If an airline has flight-hour support for its engines, SES works with the carrier to ensure its spares meet requirements. Dickerson believes that CFM’s new Portable Master Lease may help SES by making OEM support more attractive.

Among aircraft leasing companies, SMBC Aviation Capital is Dublin-based but owned by Sumitomo Mitsui Banking Corp. and Sumitomo Corp. It now has more than 400 aircraft, almost all A320s and 737NGs, worth about $12 billion and supported by 150 employees in 50 countries. That makes SMBC the third-largest aircraft leasing company in the world, according to CEO Peter Barrett.

The company generally does operating leases, although it has done a few sale-and-leasebacks on A350s and 787s. SMBC looks for aircraft with long-term value and has an order book of 200 composed entirely of A320neos and 737 MAXs, in about equal proportions. These new assets will be delivered from 2017 through 2021. Barrett says he is aiming for growth, but wants to keep it “prudent.”

The SMBC chief says Dublin enjoys low taxes, a stable EU business environment and the leasing resources originally built by GPA. “We lease aircraft to many different countries, but we know their tax regimes. These tracks are well-trodden, and we have the right skills in accounting and technical areas. And Dublin is in between Asia and the U.S., so we can do business anywhere.”

For maintenance, SMBC looks globally for the best deals it can get. It has sent aircraft to nearby Dublin Aerospace and some local engineering companies. Neighbors Aer Lingus and Ryanair are major customers.

Barrett notes that aircraft leasing, a “poor man’s solution when I started 25 years ago,” is large and growing now, because it aids airlines’ finances, fleet planning and flexible operations. He expects leasing’s share of the aircraft market, which is itself growing at 3-4% annually, to continue increasing.

Lease rates are stable now, but the major factor influencing them, interest rates, will turn upward “sooner or later,” Barrett notes. The supply-demand balance is healthy now, and SMBC has placed all of its old and new aircraft well in advance.

SMBC leases average five to seven years in length, and Barrett does not see that changing much. He says differing regulations are a cost of business that just has to be managed. Extensive experience with shifting many aircraft around the world helps SMBC do that very well.

So Dublin dominates aircraft and engine leasing just as Antwerp dominates diamonds. But will this dominance last? Asia has the fastest-growing demand for jets and plenty of capital. Singapore is copying Irish policies that favor leasing to help bring demand and capital together locally, and Irish leasing companies are expanding their presence in Asia. But there is still a need for all that expertise in Dublin and Shannon. c

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