Aircraft Engine Leasing

When things come at an astronomical cost in the aviation industry, aircraft engine leasing is a cost-effective alternative for direct ownership. Despite the size of the fleet, many operators around the globe rely heavily on leased aircraft engines.

Unforeseen events such as Unscheduled Engine Removals (UERs) or predicted events such as engine shop visits for Line-Limited Parts (LLP) could ground an engine from hours to days, if not for months. In such circumstances, leased engines come to the rescue as they keep the airplanes flying.

What does leasing bring for the airlines?

Leasing, taken as a whole, can be considered the lifeline of an airline, especially for small to mid-size operators. More than 50% of the world’s airplane fleet is on a lease, and the figures should be pretty similar for the aircraft engines as well.

Rolls Royce Trent XWB powering the Airbus A350 series comes at approximately $35 million per unit, making it a staggering $70 million for one aircraft. An A350 is listed at little more than $350 million per the list price. Doing the math gives a share of 20% for the engines compared to the total aircraft price.

If an operator buys new engines for a start-up or an expansion, the financial expenditure is unbearably high. Only a few airlines in the world could pay for such a heavy price tag. When leased, the same engine comes at a fraction of the cost, relieving the operators from indebtedness and allowing more financial agility to widen their operations.

What does aircraft engine leasing bring for the investors?

Investors in the aviation leasing industry are believed to play a crucial role in pumping money into the industry. Aircraft engine leasing is different from aircraft leasing and is considered a stable asset class for investors. The majority of the investors who tend to invest in aircraft leasing are urged to diversify their portfolio by moving into a different asset class, such as aircraft engines.

Increasing demand

In 2019, 4.5 billion passengers took their flights, and at an average Compound Annual Growth Rate (CAGR) of 3.6%, IATA predicts a whopping number of 7.8 billion passengers by 2036. More aircraft should enter the industry in correlation to the passenger traffic demand. More engines and spare engines are expected to join the service with respect to future aircraft requirements. With that said, aircraft engine leasing services will gain more momentum in the years to come benefiting its investors.

Ease of reconfiguration

When delivered to an operator, an aircraft engine does not go through a vehement reconfiguration process. Hence lessor companies or the operators are free from the burden of reconfiguring between the customers.

Engine configuration data that dictates how an aircraft engine will perform is governed by the data entry plug, which is a part of the aircraft. The airline configures the data entry plug to control the engine performance. Hence, aircraft engines undergo a minimal reconfiguration when absorbed into an airline, and the same is true for a lease return.

The role of low-cost carriers in the engine leasing

LCCs have emerged at a historically brisk phase to claim a 35% share of the world’s total seat capacity by the end of 2020. LCC market has become a prominent user of leased aircraft engines as LCC operators tend to lease a more significant fleet share.

With the positive demand for air travel, it is expected to experience more LCCs entering the industry and acquiring a more significant share of the total passenger traffic. Subsequently, demand for the leased engines increases as well.

Low-cost carriers with a greater block hour aircraft utilization compared to the legacy carriers should undergo more frequent maintenance. Even a short-term shop visit significantly affects the schedule and turn-around times. When operating under a point-to-point service peculiar to LCCs, cutting the turn-around time is more prominent. In such a setting, lease engines cater a significant role in making airline operations seamless.

Understanding the economic life of an aircraft engine

While this asset class secures robust returns for the investors, a considerable amount of hard work should be done to understand the underlying factors that decide the financial value of an aircraft engine. The firm understanding constitutes both technical and financial know-how.

At any given point, the value of an aircraft engine dictates by the condition of the engine, mainly the timely maintenance carried out by the operators. As an example, LLP shop visits increase the value of a machine as it restores the asset’s service life.

Ending the lease agreement – the most trying part of the process

Ending a lease agreement is never an easy task. Both the parties, the lessor and the lessee, must work hand-in-hand during the lease return to expedite the work. Leaving the aircraft engine in transit does not generate any revenue for the companies who hold the engine ownership.

Lease companies offer their fullest support for the operators during the delivery while sticking to the lease agreement. The operator is responsible for maintaining the engines on par with the industry standards while keeping proper records on them. Before the lease return, operators should perform specific maintenance activities on the leased engine as stipulated by the agreement. Still, the operators are reluctant to undertake them due to the additional expenses.

Typically, there is an involvement of the operator’s Quality Assurance (QA) department at the lease return phase to make sure everything is taking place within a regulatory framework. The QA department offers their guidance mainly with the maintenance records. It eliminates any risks by ensuring non of the maintenance tasks were done in haste to expedite the lease return. Typically the lease return processes exceed the expected time constraints.

Proper records are another hassle for both the airline and the leasing companies during the lease return. Aircraft engines are assets that abide by stringent regulations, and records on maintenance activities are used to prove the airworthiness of the equipment in upcoming sales.

Residual value evaluation

The residual value of aircraft engines is a significant concern in this asset class, and lease companies evaluate it by considering a few key factors.

• The engine’s condition mainly focuses on the maintenance carried out and the status of life-limited parts installed in the aircraft engines.

• Airline utilization – A widely utilized engine is more likely to rank higher in value. A longer life cycle could be achieved with the availability of airframes that support the engine type.

• The amount of depreciation – Unlike a leased aircraft, an engine can hold its value longer. Engines inherit reduced residual value risks compared to the other assets.

• Original Equipment Manufacturer (OEM) support

• Proper records – An operator or a leasing company dig into the records before sealing a deal. Availability of all the records, such as inventory and modification status of the assets, often leads to a higher price tag.

• Trend monitoring data – With access to trend monitoring data, operators can yield maximum out of the engine during the operations.

The finance behind aircraft engine leasing is backed by many factors that require a great deal of experience and knowledge. Despite the financial factors, the involvement of technical aspects should also be understood when making a sound decision on engine leasing.

A tailor-made course, Engine Finance and Leasing by Aeroclass, is intended for people who require a firm understanding of aircraft engine leasing and finance. This 2-day course boils down years of experience of the industry experts into a few sessions accompanied by case studies and real-world examples.