June 2010 – www.avitrader.

com

SPARE ENGINE LEASING

Availability, Low Risk,
Peace of Mind

MRO Success in
High-Tech Singapore

IATA: Future looks bright

for airline industry
 COVER STORY
Spare engine leasing
Availability – risk = peace of mind
Scheduled engine maintenance, foreign object damage, faults, campaigns and
other unscheduled engine removals– all are among the reasons that airlines
need to access spare engines to keep their fleets in the air.

In the past, airlines owned their own spare en- Current estimates suggest there are between 1,100 Why such dramatic growth in the market? According
gines, and many still do. But over the last two and 1,300 leased spare engines in the market, with a to Jon Sharp, president and CEO of Engine Leasing
decades, operators have increasingly turned to total combined value of around $8 billion – although Finance Corporation (ELFC), the sheer cost of new
leasing as the most cost-effective way of ac- with no central database tracking when engines are generation aircraft engines is making leasing more at-
cessing spare engines, and as the business has installed, removed or decommissioned, it is difficult to tractive. ‘The GE90 engine built for the Boeing 777
grown, so have the variety and scope of pro- know exactly how many spares there are in the market. costs $32.5 million. 20 years ago when I started in the
grams available to them. business, that’s what you’d pay for a new aircraft.’
With the leased spare engine population forecast to
As recently as 20 years ago, only around 1 per cent double in the next 15 years to over 40 per cent – some Cash-rich airlines like Singapore Airlines and Emirates
of spare engines were leased. By the turn of the cen- estimates even go as high as 60 per cent – of all spa- can raise money fairly easily to buy their own engi-
tury, that number had grown to 10 per cent and now res, its overall value, boosted by the addition of new nes, but investors are not as comfortable with smaller
stands at close to 25 per cent of the total spare engine generation engines, could break through the $20 bil- companies and start-ups. But even the top airlines will
population. lion barrier. struggle to finance engines, particularly with banks ta-
king a much more conservative approach to aviation
lending in the wake of the global downturn.

The global commercial airline business reported record

profits of close to $13 billion in 2007 – and record net
losses of more than $15 billion a year later, according
to figures from IATA. Two years of record orders follow­
ed by a massive downturn in 2008 led to a scenario of
too many engines and an awful lot of planes parked
in the desert.

The downturn wasn’t all bad news for the leasing

companies, however. Moving engines off the books in­
creases an airline’s profitability, and a long-term lease
is considered an ‘off-balance-sheet’ method of finan-
cing an airline’s portfolio of spare engines. As one se-
nior executive at a prominent national carrier said: ‘Our
aircraft are strategic assets, but our engines are not.’

Nevertheless, spare engine availability is a key factor

in every airline’s first and foremost priority – staying
in the air. Spare engines need to be available imme-

‘The GE90 engine built for the Boeing 777 costs

$32.5 million. 20 years ago when I started in the
business, that’s what you’d pay for a new aircraft.’

 Jon Sharp,
 President and CEO, ELFC

diately, at every airport the airline serves and at the

lowest possible cost. The traditional model of owning
spare engines has changed to a growing preference for
leasing as new business models have been adopted,
calling for a greater focus on investment in core activi-
ties and improving cash flow.
Rolls-Royce engine undergoing pre-lease servicing Courtesy of RRPF

AviTrader MRO – June 2010

Companies offering engine leasing coming in a variety
of shapes and forms, with leasing packages determin­
operative engine sharing pools, launching its Chinese
program in 2003 and its North American pool three
COVER STORY
ed largely by the airlines’ financial considerations. Air- years later.
lines prefer low-risk spare engine provision, and will
pay a premium to secure an availability guarantee or to While the company does While the company does not offer a 100-per-cent avai-
join an engine pool. Long-term or operational leases not offer a 100-per-cent lability guarantee, Willis noted that because of ‘our
and purchase-leaseback programs are the most cost- availability guarantee, Wil- close relationships and candid information sharing
effective – but only if the lessee achieved 70-per-cent lis noted that because of amongst pool members, the Willis pools have never
utilization. ‘our close relationships and failed to provide engines when requested’.
candid information sharing
Short-term leases are costlier but necessary for unplan- amongst pool members, Members are strongly supportive of the sharing ar-
ned shop visits and emergencies, as well as for airlines the Willis pools have never rangement. Bill Caravello, Product Manager - En-
with small fleets. In the end, most airlines cover their failed to provide engines gine Leasing at Delta Airlines, said that the Willis
spare engine needs with a combination of long-term when requested’. pool ‘has been a great benefit to Delta. Willis has
and short-term leases to reduce operational and finan- continually provided engines when needed. They are
cial risk. The North American pro- extremely knowledgeable and a pleasure to do busi-
gram supports a combined Charles Willis ness with.’
Let’s take a look at the various solutions available to fleet of over 700 B737 President and CEO, Willis Lease
airlines, from leasing pools and independent lessors Next Generation aircraft, Willis Lease is not part of another financial institu-
to financier-backed leasing firms and the OEMs and and its charter members tion, unlike other lessors which are backed or even
MROs that have extended their services to offer spare include American Airlines, Southwest Airlines and owned by banks, so while the company’s funding
engine coverage as well. WestJet, which have since been joined by Delta, Air- costs may be higher, it has greater freedom of opera-
Tran, Alaska Airlines and EnerJet. The China program tion than its competitors, which often have strict co-
provides support to over 300 Boeing 737 Next Gene- venants imposed on them by their financier partners.

Leasing options
ration aircraft, with members such as Air China, China
Eastern Airlines, Shanghai Airlines, Shenzhen Airlines Nor is it linked to or owned by an OEM, like many
and Shandong Airlines. Together, the two pools sup- of its rivals – giving it a more diversified asset base.
port over 1,000 aircraft. The company’s current portfolio, which represents a
market share of around 11 per cent, comprises 180
The engine leasing pool owned and managed engines from all major OEMs,
‘Because of our close relationships and candid with an estimated value of at least $1.1 billion.
Rising demand for leased engines has spawned an in- information sharing amongst pool members, the
creasing array of options for airlines to cover their spa- Willis pools have never failed to provide engines
re engine needs. US-based Willis Lease is the leading when requested.’ Guaranteed Availability
independent lessor in the business, having launched  Charles Willis,
over 30 years ago when engine leasing was virtually  Willis Lease Finance Corporation While a number of companies offer 100-per-cent avai-
unheard of. The company pioneered the model of co- lability, the Guaranteed Availability or GAF program of-
fered by Shannon Engine Support (SES), a wholly-
‘Our pools allow members to work together to re- owned subsidiary of engine manufacturer CFM, is the
Willis: evaluate their spare engine acquisition plans and best known. 
Portfolio: 180 owned and managed to re-deploy capital, to achieve better utilization of
Market value: $1.1 billion expensive assets and to gain access to a wider pool
Types: All major OEMs of spare engines than they otherwise would have by
working alone,’ said company founder Willis. Shannon Engine Support:
Portfolio: 260+
Type: CFM56
Clients: 150+ airlines/lessors/MROs
Availability guarantee: Yes

Described by SES as ‘an insurance-type product de-

vised to protect airlines against the risk of an AOG’,
the program requires clients to pay an annual access
fee based on the technical details of their fleet in ex-
change for a guarantee of availability for one or more
engines at pre-agreed terms and conditions.  Engines
are made available within 24 hours of the customer
request.

While the GAF product is unique to SES, Susan Kea-

ting, SVP Sales at SES, is quick to point out that ‘SES
has developed expertise across a wide range of en­
gine leasing solutions over the past 20 years. Today,
our expertise is as much in longer-term operating lease
solutions; engine sale and exchange programs; asset
management services and shorter-term ad hoc lease
solutions.’  
Aeroturbine spare prepped for leasing. Courtesy of Aeroturbine

AviTrader MRO – June 2010

SES is unique in that is supports only one engine type,
the CFM56 product line.  ‘By focusing on one asset
world ready for immediate deployment through flexible
programs tailored to each individual client.
COVER STORY
type, our customers benefit from our in-depth product
knowledge and real expertise in this area’ says Keating.   The company’s AeroTurbine Flexible Engine Care So-
The company manages a portfolio of over 260 CFM56 lutions service provides the financial and operational customer business model and its creative solutions
engines from pools in 11 cities on 3 continents, inclu- advantages of engine overhaul through the company’s to drive cost savings and operational efficiency in the
ding 3 pools in China and 5 in Europe. engine management group, engine exchange with an aerospace industry”.
immediately available serviceable engine or an imme-
diately available engine lease flexible terms and condi- Also a provider of ‘crade-to-grave’ services through
‘Cradle to Grave’ Services tions – comprising, in the words of company president its aircraft and engine leasing, parts and component
and CEO Michael King, a ‘powerful cost-saving tool. repair divisions, Florida-based GA Telesis is equally
Yet another model available to airlines is the compre- Speed and flexibility equal success for airlines, MROs bullish about its future in the changing marketplace,
hensive ‘cradle to grave’ service offered by companies and lessors in today’s complex economic conditions.” with the company reporting strong growth over the
like the US-based Aeroturbine and GA Telesis. past two years.
“We see ourselves as offering an ‘out-of-the-box’ way
of thinking, as opposed to a typical lease company that The company’s presi-
says: ‘sign here, pay this and we’ll see you when the lea- dent and CEO, Abdol
Aeroturbine se is over’. We have a close relationship with our clients Moabery, says that
Portfolio: 80+ and custom tailor each solution to meet their needs.’ ‘airlines need cash,
Type: CFM56, CF6, PW2000, PW4000, V25000, and leasing spares
JT8D-200 AeroTurbine’s purchase-leaseback program provides brings liquidity. There
Service: Leasing, sale, exchange, MRO much needed capital and an exit strategy for airlines. is a growing trend for
Purchase-leaseback gives them the opportunity to have airlines to take en­
cash now with no effect on the operational require- gines off their balan-
ments of the airline. ce sheets.’
AeroTurbine is a global supply-chain solutions com-
pany, with services including engine/component lea- AeroTurbine has withstood the financial downturn of He believes there is
sing, engine/component material sales, engine ma- the last two years well, reporting solid growth through­ Abdol Moabery also a trend for air-
nagement and engine exchanges. The firm has been out, according to King, because of its “close-to-the- President and CEO, GA Telesis lines to move away
owned since 2006 by the Netherlands-based AerCap
Group, a global aviation company with total assets
of $8 billion and $3.6 billion of lease assets under
purchase contract.

The AeroTurbine engine lease portfolio includes en­

gines from all the most common engines in service to-
day; including CFM56, CF6, CF34, PW2000, PW4000,
V2500 and JT8D-200.

AeroTurbine offers a portfolio of over 80 engines for

immediate sale, lease or exchange, located across the

‘We like to see ourselves as offering an ‘out-of-the-

box’ way of thinking – as opposed to a typical lease
company that says: ‘sign here, pay this and we’ll see
you when the lease is over’
Michael King,
President and CEO, Aeroturbine GA Telesis’ Fort Lauderdale headquarters

from OEM-related programs, because they ‘want inde-

pendence. The bigger OEMs are divesting from non-
core activities and moving increasingly towards their
own products.’

GA Telesis:
Portfolio: 50+
Type: all major OEMs
Service: Leasing, sale, exchange, parts,
component repair

GA Telesis is part-owned by Bank of America Merrill

Lynch, the world’s largest brokerage, and offers a wide
range of jet engines. ‘We cover virtually all commercial
engines,’ said Moabery, adding that the company’s
portfolio of 50 engines includes the range of CFMI
Aeroturbine’s Miami facility and V25000 engines, as well as Rolls-Royce, GE and

AviTrader MRO – June 2010

PW, and its range of tailor-made lease services covers
the spectrum from short-term to long-term, purchase-
through pooling arrangements or long-term leasing.’ COVER STORY
leaseback, sales and exchange. ELFC is first and foremost a long-term operating lessor.
With 240 engines in its portfolio and average lease terms
‘Our lease programs are very flexible,’ said Moabery. of five years, around 42 engines per year are returned. The economic downturn has meant greater competition in
We’re not limited financially – we have the ability ‘That’s a lot to re-lease, about one a week’, said Sharp. the short-to-medium term leasing sector from the MROs
to do transactions of all sizes and we’re capable of ‘We would like a rapid turnover, but the real world doesn’t themselves, which have been offering low-cost lease en-
pulling them together quickly. We also have the lar- work like that, so we’ve finessed our program by offering gines to incentivize shop visit work coming their way, as
gest engine part-out in the world, allowing us to come short-term leases. We currently have 10 to 12 engines out well as OEMs and companies like Aeroturbine. Unical,
up with strategies for airlines looking to phase out on short-term leases. ‘ AAR and Kellstrom compete on the materials supply side,
and which don’t want expensive end-of-term capital while firms like Royal Aero and SGI are rivals for technical
expenditures.’ The company’s third line of activity is portfolio manage- service provision.
ment. Through its five joint-venture partners, Mitsubishi
The firm is headquartered in Fort Lauderdale, yet the UFJ Lease & Finance, Sumitomo Corporation, DVB/Deuca- But Rees maintains that TES has very few competitors able
vast portion of GA Telesis’ leasing business is interna- lion Funds, Volvo Aero and GSI Fonds, it has created vari- to offer all three services as a package. Furthermore, the de-
tional, with clients ranging from Air France, KLM, TAP, ous ownership sharing structures on packages of leased velopment of the company’s engine fleet management soft-
Air Baltic and to Air Transat, among others, as well as engines, with ELF remaining as managers and maintaining ware package, EFPAC, has given it the edge and is currently
US carriers Delta and Continental. the direct customer relationship. being used by a range of airlines and lessors worldwide.

The global downturn has proved a boon to TES, with air-

Financier-backed leasing The green-time lessor lines turning to leasing over ownership and asset values
dropping – meaning the company has been able to further
Another option for aircraft is the long-term leasing option Another financier-backed company in the market is TES its acquisition strategy as well as move into a new state-
offered by financing companies such as the Shannon- Aviation Services, a ‘engine risk management’ firm of-the-art 130,000 square foot facility in Wales last year.
based Engine Lease Finance Corporation (ELFC) and headquartered in Brigend, Wales, and owned by Frank-
Australia’s Macquarie, both of which are owned by banks furt-based DVB Bank.
and specialise in providing flexible engine support programs. Here come the OEMs
TES has carved out a niche
ELFC is the biggest bank-owned engine financing and in the market as a ‘green- OEMs have moved strongly into both the leasing and
leasing company, with 240 engines in its portfolio and time lessor’. According to MRO sectors and their market share in both sectors
a market share of at least 12 per cent. The company is the company’s lease mana- has tripled in the past 10 years, according to a seni-
headquartered in Shannon and is owned by BTMU Capi- ger, Julian Rees, TES acqui- or industry executive, in no small part because of the
tal of Boston, a wholly-owned subsidiary of The Bank of res engines with the intent price concessions that airlines will receive on their or-
Tokyo Mitsubishi UFJ – one of the world‘s largest financial of ‘tearing them down into ders from the manufacturer.
institutions. a supply of serviceable used
material for our fleet ma-
Because of its financier backing, ELF has access to exten- nagement customers’.
GE Engine Leasing:
sive funding at favourable rates, allowing it to provide Julian Rees
Portfolio: 400+ engines
individually tailored low-cost flexible financing for its cli- ‘When we acquire engines
Lease Manager, TES Aviation Group
Type: All major OEMs
ents, which have included over 120 airlines over the years, that still have useful life re-
Service: Short/long term, sale-leaseback, exchange
including major carriers like Virgin and low-cost carriers maining, we lease them out. The majority of our leases
Guaranteed availability: through SES
such as EasyJet and Spice Jet. are short to medium-term, usually to cover shop visits’.

President and CEO Jon Sharp explains that the business is ‘We have a number of customers with whom we are
based on long-term operating leases of up to seven years, able to supply ‘platform solutions’ as we offer materials The two biggest OEMs, GE and Rolls-Royce, both have
with a certain degree of flexibility. ‘We believe we’ve pro- supply and asset management services in addition to engine leasing outlets that have prospered in recent
spered as a company because we’ve got the model right. engine leasing. Customers like Air Astana in Kazhakstan years, thanks to the leverage they have through their
Flexible long-term leases are the most efficient model for and Sriwijaya in Indonesia, for whom our technical connection to the larger parent company and the con-
airlines, because they don’t know when they’re not going services team provide fleet management service, have sequent range of services they can offer.
to need a certain type of engine. We can hold an asset for en­gines out on lease, and we also keep their shop
15 years and manage the cycle, whereas airlines cannot visit costs down by being able to supply LLPs and other GECAS Engine Financing is a financing unit of General
afford to. We take the risk away from them. Good compa- serviceable material for their shop visits.’ Electric Capital Aviation Services (GECAS), a wholly-ow-
nies can do this and still make money.’

ELFC:
Portfolio: 240
Type: All major OEMs
Services: Long & short term leases, portfolio
management
Clients: 120+ airlines

‘The best model for airlines,’ continues Sharp, ‘and the one
they prefer, is to aim for 85 to 90 per cent of their spare
engine requirements to be achieved through long-term
leases, with the remaining 10 per cent or so managed TES Aviation Services’ new facility in south Wales

AviTrader MRO – June 2010

ned GE subsidiary, and it is cur-
rently one of the larger players
funding with relative ease and
more cheaply than our com-
COVER STORY
in the leasing sector, with more petition’.
than 400 owned, serviced and
managed engines in its portfo- RRPF also provides a ‘cradle mers.’ MTU provides spares from its own portfolio of
lio. Although it’s part of the GE to grave’ service, offering a about 40 spare engines, most of which are leased from
family, the company leases and wide range of leasing services, major engine leasing companies.
finances not only GECAS pro- from flexible operating leases,
ducts but CMFI, Rolls-Royce, purchase-leaseback and en- The company is able to leverage its relationship with pa-
Pratt & Whitney and IAE engi- gine sales, coupled with over rent company MTU Aero Engines, a joint-venture partner
nes as well. Julie Dickerson 20 years of accumulated tech- in IAE, which manufacturers the V25000 engines.
Senior VP and General Manager, Bobby Janagan nical, financial and leasing
The company offers eve- GE Engine Leasing Vice President, RRPF expertise. Furthermore, the
rything from one-day short- company provides a short- LOOKING AHEAD –
term leases to operating leases, sale/leaseback, engine term leasing program on V2500s to cover urgent spare
exchanges, guaranteed availability (for CMFI engines engine needs, in case of, for example, bird strikes or other 2010 AND BEYOND
through SES, a GE joint venture company), structured, unforeseen emergencies.
long-term financing options and asset management.  All the players in the spare engine leasing sector are loo-
Because of its large stock of V2500 engines, the company king to 2010 for a return to equilibrium, after the bumper
does offer availability guarantees and has rarely encounter­ years of 2006 and 2007 and the ensuing downturn that hit
ed problems in serving its clients. ‘In 2007, the market the airline industry hard. In fact, the industry’s meltdown
was very tight,’ said Janagan, ‘and we didn’t have any may not have been as bad as previously thought, now the
spare engines – they were all leased. Now, after the down- dust is settling, with stronger-than-expected results pos-
turn, fleet utilization is down and there’s excess capacity.’ ted in the early months of 2010. Earlier this month, IATA
announced a complete about-face to its previous prediction
Janagan adds that RRPF has done well throughout the finan- of $2.8 billion losses for 2010, forecasting profits of up to
cial downturn of the past two years, due to continued growth $2.5 billion on the back of a strong recovery in Asia and the
in the leasing market, as tighter lending policies mean more Americas, rising fares and increased business-class book­
airlines are opting to lease spares rather than buy. ings. Although activity in the sector is clearly picking up,
IATA director general and CEO Giovanni Bisignani warned
GECAS Engine Leasing technical team inspecting a GE90 spare ‘The market value of spare engines has grown from that oil is a ‘wild card’ and over-capacity is still a danger.
around $10 billion a few years ago to $20 billion now,
For airlines looking for more than just an engine to lease, and it will be worth $30 billion over the next 10 years. For the spare engine lessors, the recovery is good news
the appeal of GECAS Engine Leasing is its broad range of Prices are going up in line with inflation and the cake indeed. ELFC’s Sharp says he can see that ‘oversupply
products and services, coupled with a huge global reach, is getting bigger, with emerging markets like China and is beginning to peter out and the demand for leaseback
the depth of experience and the reputation offered by India. New growth in the leasing market will boost the finance is going down. Short-term demand is picking up
parent company GE Capital. market value of the leased engine population to as high too’, while Rolls-Royce’s Janagan commented that the
as $20 billion.’ changes were far less severe than expected: ‘we were ex-
‘We have great customer relationships, engines from pecting many more airlines bankruptcies but we haven’t
a variety of OEMs and specialised teams all over the RRPF is well-poised to take advantage of that growth on seen it happen – partly because of lower fuel costs and
world,’ says Julie Dickerson, senior vice president and the basis of its long-standing brand recognition and its very low interest rates.’
general manager at GECAS Engine Leasing. ‘We’re able track record as a lessor. And unlike rivals Willis and ELFC,
to leverage being part of the GE family; we work closely which specialise in the narrow-body leasing sector, RRPF One of the hurdles the lessors are facing is the issue of
with GE Aviation to offer customers the whole package.’ also offers a range of Trent twin aisle engines and plans pricing. Although oversupply is diminishing, it’s still a
to further boost its portfolio of wide-body spares to cater lessee’s market to some extent, particularly in the short-
Rolls-Royce’s leasing subsidiary, Rolls-Royce & to growing demand, particularly in emerging markets. term sector; Aeroturbine’s Bridges points out that one of
Partners Finance (RRPF) is a joint venture between the most notable changes in the past two years has been
Rolls-Royce and US-based financier GATX, and has 340 ‘the premiums for short-term leases, which have all but
engines in its portfolio, with a market value in excess of The MROs offer a ‘one-stop shop’ been washed away in the recession. There’s not much
$2.5 billion, serving 45 customers in 22 countries. The difference now between long- and short-term leasing’.
company is the world’s largest spare engine lessor of Engine leasing is also offered by MRO providers such
Rolls-Royce and IAE engine. as market leaders MTU Maintenance, Lufthansa Other concerns include the issue of green legislation on
Technik and Delta Tech Ops as an additional support emissions, which could accelerate the obsolescence of
service for their customers. current models in the spare engine portfolio, and whether
the OEMs will develop new engines – a challenge for the
Rolls-Royce:
Unlike the traditional lessors and financier-backed com- lessors, given that as a new engine is launched, there will
Portfolio: 340 engines
panies, primarily interested in long-term leasing, the be none floating around the leasing market.
Market value: $2.5 billion+
MROs specialise in short-term leases to cover shop visits,
Type: RR, IAE
for both scheduled and unscheduled maintenance. Europe’s economic recovery remains tenuous, and could
Service: Short/long-term, purchase-leaseback, sales
be devastated by higher fuel prices. If oil rises above $100
Dr. Margot Gräfe, director of engine leasing CF34 at MTU per barrel, the continent will be hit hard by its higher
Maintenance, the largest independent provider of com- taxes on fuel and increased pressure on consumers, who,
The company only invests in Rolls-Royce and IAE engines, mercial engine MRO services in the world, says that ‘we facing higher prices on air travel and on the home front,
because, according to RRPF vice president Bobby Jana- are an MRO first and foremost – that is our core business.’ will stay firmly at home. But double-digit growth in emer-
gan, ‘our superior technical knowledge of Rolls-Royce ging markets, particularly China, India and Latin America,
designed engines, and our extensive knowledge of cus- ‘But we also offer short-term leases as an additional is the best news in a long time for the industry as a whole
tomers who operator RR and IAE equipment and utilize support. The core business of an airline is to fly, not – and while it’s not quite full steam ahead for the les-
RR’s used parts trading division to exit from engines at to source OEMs, MROs and spare engines. By leasing sors, it’s certainly a case of ‘proceed with caution’ – and
the end of their investment period, allow us to source engines, we can provide a one-stop shop for our custo- a good dose of optimism.

AviTrader MRO – June 2010