Why more aircraft lessors are looking into engine leasing

Why more aircraft lessors are looking into engine leasing

More aircraft lessors are exploring the spare engine leasing market on the back of rising engine prices and lease rates due to MRO delays and parts shortages.   Ishka understands at least two asset managers are currently looking at spare engine opportunities.

Traditionally, aircraft lessors have stayed clear from spare engine leasing, focusing instead on the core business of leasing and marketing aircraft which have longer leases and higher rentals.

In contrast, spare engine leasing has historically favoured firms with access to large pools of spare engines, heavy technical expertise, ready access to MROs, and extremely accurate pricing models to help model the maintenance costs associated with keeping a large fleet of engines operational.  Some aircraft lessors with spare engines have used independent engine lessors to white-label lease their engines.

Some of the largest aircraft lessors are already active in spare engine leasing via key subsidiaries or sister firms. SMFL the shareholder behind aircraft lessor SMBC Aviation Capital is also the shareholder for SMBC Aero Engine Lease B.V. (SAEL) while AerCap, through its acquisition of GECAS, now owns a 50% stake in SES, the largest CFM engine lessor but also has its engine leasing unit, AerCap Engines.

But the recent constraints around MRO capacity and the rising demand for parts and spare engines have prompted other aircraft asset managers to seek to invest more in spare engines.

“Lessors are definitely looking at engines more now as a commodity. Some lessors are focused on putting performing engine assets onto good leases and making that a more tradable asset which is a way to squeeze more value out of their assets. The other thing is by building a bit of a lease pool of engines, it gives them flexibility on their aircraft portfolios. If you've got an engine that's going in for a performance restoration you can take an engine from your lease pool, stick it in, and then simply take off the old engine, scrape the reserves, and just sell the core. You can start becoming a lot more creative. Where the challenges will be with some lessors is how they manage the different tools of capital and the leverage that they put on them,” explains one experienced asset manager.

The rise and rise of MRO costs


Maintenance costs and turnaround times have dramatically increased in the last 12 months, confide lessors. MRO facilities have been buffeted by a "perfect storm" of increased raw material costs, a trained labour shortage following staff departures during the pandemic, and unusually high demand, according to one source. This places an unusual demand for spare engines to help airlines potentially avoid and manage lengthy and, increasingly costly, engine overhauls.

One source states that a basic performance restoration without LLPs now costs roughly $4.5 million for a CFM56 5B. 18 months ago that same shop visit would have cost just $3.5 million. Cost is not the only issue.  Aircraft and engine lessors confirm MRO shop visits are taking longer for all aircraft and engine visits, but appear to be particularly significant for new-tech engine restorations.

“So, the delays are quite widespread. All OEM MROs have issues. It is not just the turn time delay, which is what the OEMs will quote you, it is the induction delays that are the big issue. You could have your engine in a queue for six months,” explains one senior aircraft lessor. 

Speaking with Ishka, lessors indicate that before the pandemic removal and installation for a full-performance restoration engine shop visits would take roughly 60 days for current-gen issues. One aircraft lessor confides that number has now increased to between 90 to 120 days for a V2500 and around 90 days plus for a CFM56-5B/ CFM56-7B.  

However, maintenance delays are notably worse for new-tech engines.  To date, Ishka is aware of only one full-engine restoration for a LEAP engine but a lessor tells Ishka a heavy maintenance visit for a LEAP engine would take over 100 days and anywhere between 200-250 days for a GTF engine. “There is a lot of noise about the GTF but there are issues with the LEAP too, and engine induction is taking a while.”

Engine lessors state that the various MRO bottlenecks were resulting in airlines seeking longer spare engine leases extensions for CFM56-7B and 5Bs. "Before you might see airlines go for six-nine months now that is 18, 24, or 36-month leases and it is more like an operating lease," reflected one senior engine lessor speaking with Ishka in April.

“Now is the time to sell”

The various MRO constraints have led to a seller’s market for common and even niche engine assets. One parts firm chief states there has been tremendous interest with engine owners of "good assets" seeing prices double compared to last year.  Panelists argued that the current MRO market disruption would mean current-tech engine investors could see premiums for another three to four years.

However, another parts trader disagrees. “Now is the time to sell,” he explains arguing that MRO shops will work hard to expand capacity, and reduce turnaround times which will inevitably impact current-gen engine values. But others questioned how easily, or quickly, the MROs or OEMs will be able to fix their various issues.

One engine lessor chief stated that these uncertainties are driving airlines to look for two-year lease extensions, adding that there remains a huge question mark over how long it might take the OEMs to sort their new-tech engine reliability issues. “It is not a question of a few months it is going to be a few years.”


The Ishka View


Engine leasing and aircraft leasing have different but overlapping business models dictated by the length of the lease, the cost of the assets, expected investment horizons, and the differing maintenance requirements needed to manage a leased aircraft compared to a leased engine.

However, they also share many commonalities, including customers, financing sources, trading partners and overlapping technical expertise. This is particularly true for end-of-life lessors many of which have experience in monetising engines via part-out.

It would take a considerable level of investment for any asset manager to try and take any meaningful market share from the incumbent engine lessors. However, the various MRO woes have resulted in a dynamic and fast-moving market for engine owners creating potential opportunities for smaller firms. Lessors believe that there is likely to be continued MRO disruption for at least the next three or four years. This may also offer a chance for lessors, several of which have been frustrated by the lack of investment opportunities for newer aircraft, to pivot to other areas of the market. In the meantime, airlines, parts companies, and MROs hunt for increasingly expensive serviceable engines and parts.





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