Jetrader - Autumn 2018 - 41

A little over six years ago, I wrote an article for this magazine's January/February 2012
issue titled "The Evolution of Engine Leasing." Given the amount of time that has passed,
I wanted to revisit the topic - a project that I have found interesting (while fervently
hoping that not too many of my predictions were proven wildly wrong).
For the original article, which can be found in the Jetrader archives on the ISTAT
website, I looked back over some 30 years and traced the industry's development from
being a principally OEM product support function into a commercially sustainable
short-term leasing business and ultimately into a very sophisticated long-term operating
lease business. I identified several key features of the industry, and below I use some
of these as way points to consider what has changed.

Engine Design and List Prices
Engine designs have changed dramatically in just the last five years. For example, CFMI's LEAP engine is much more than
just an evolution of the CFM-5B and -7B
series - with this complex motor using
new materials in its construction, as well
as embracing significant design changes.
Radical change in architecture is even more
evident in Pratt &Whitney's geared fan, the
GTF or PW1000G series. Complexity and
'radicality' are both driven by the search
for reduced fuel burn and noise; the challenge has been to do so while maintaining
reliability and reducing operating costs.
The same is true of the widebody engine
market, although the volume of engines
is much lower. The OEMs have invested
billions in these new designs, and that's
reflected in the list prices they are posting, justified by the improved fuel burn.
So, with the new narrowbody engine prices
reaching up to $20 million a copy including QEC, the demand for leasing engines is
driven forward simply by the higher prices.
Furthermore, the sheer volume of orders for
the new narrowbody types in particular,
forecasts a continuing stream of equipment
that will need long-term financing.

Airline Profitability and
Market Competition
What I did not foresee in the article
written in the early part of this decade
is that the airlines would enjoy such a
long, sustained period of prosperity following their recovery from the financial crisis of 2008. This prosperity has
meant that despite the increasing dollar
value of spare engines, the airlines have
placed less focus on leasing their smaller
ticket items - i.e. engines - and have
instead concentrated on the big-ticket

items, namely the aircraft themselves.
Some have gone so far as to deliberately
under-order spares and rely on the OEM or
the independent aftermarket to bail them
out if they face an AOG situation.
The improved credit ratings that the airlines have been enjoying has also meant
that more financial institutions have
become comfortable with providing facilities for airlines and equipment in general,
and engines in particular, which has meant
that the already stiff competition for leasing engines has become materially more
heated in the past five years, with some
notable industry players having withdrawn
from the sale and leaseback market altogether on the basis that the economics no
longer make sense.
A similar phenomenon has been witnessed in the new aircraft leasing market, where lessors are much more likely to
place orders directly with the OEMs. This
is evidenced by the fact that while some
45 percent of the world's aircraft fleet is
leased, in the past couple of years, approximately 65 percent of all orders have been
placed by leasing companies. Lessors have
therefore been taking upon themselves a
proportionately higher risk of the burden of
the next downturn by assuming orders for
equipment that may be delivered just as the
market dives, even though the long-term
forecasts remain healthy.

OEM Market Activity
and the MRO Lessors
The march toward the OEM's dominance
of the aftermarket continues unabated,
with GE and Rolls-Royce, through their
respective leasing arms, easily heading the
market share for leasing their own products, while increasingly developing portfolios of other manufacturers' engines.
Jetrader * Autumn 2018 41
Jetrader - Autumn 2018

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