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Air Finance JournalAir Finance Journal
19 September 200619 September 2006,, LondonLondon
Key issues in Engine Key issues in Engine Leasing: The Leasing: The LessorLessor’’ss perspectiveperspective
Bruno Bruno CastolaCastola,,ViceVice--President Sales President Sales and Marketingand Marketing, SES, SES
www.ses.ie
• A spare engine leasing company
– CFM56 only: > 180 engines
– About 100 customers worldwide
Shannon Engine Support: Who Are we?
The Spare Engine Solution
Key issues in Engine Leasing – The lessor’s perspective
• A wholly-owned subsidiary of CFM International
•We offer customized solutions - From Ad Hoc leasing per day to operating lease- The only company offering a guaranteed availability
• Pool locations on 3 continents
• Fast & easy re-delivery with a dedicated 24-hour technical support
www.ses.ie
A brief introduction:
The spare engine dilemna:
Key issues in Engine Leasing – The lessor’s perspective
A growing need for spare engine leasing
Before: the legacy airlines used to purchase spare engine as recommended by the manufacturers
Success in Aviation led to small fleet Airlines operating with no or few spare engines created a need for spare engine Lessor
Engine & Aircraft reliability + expansion of airline business (deregulation …) multiplication of airline fleet fragmentation competition cost control reduction of investment
www.ses.ie
AOGUnscheduled
removals
Acquisition costsUnderused assetsOverhead costs
A Constant Balancing Act
Spare engine investment Dilemma
From an airline’s perspective
Key issues in Engine Leasing – The lessor’s perspective
www.ses.ie
Key issues about spare engine leasing
Why is engine leasing attractive ?
What are the attractive engines?What is specific about engines leasing?
The advantages of engine leasing
Key issues in Engine Leasing – The lessor’s perspective
www.ses.ie
Why is engine leasing attractive ?
Key issues in Engine Leasing – The lessor’s perspective
Demand for aircraft is very strong• Increasing number of operators • Fragmentation of fleet from legacy carriers• Air travel booming in emerging countries • Record orders for both Boeing and Airbus narrowbodyaircraft
Traffic growing steadily• 6% in 2005/2006• to remain strong at 4.5% over the coming years
www.ses.ie
• World demand for spare engines is strong – Significant Engine Shop Visits (maintenance) growth– Increasing need for spare engines
• Airlines’ drive for cash make leasing attractive– Resulting from Airline competition– Don’t want to tie the cash in the assets
• Airlines considering less engine investment as the result of an increasing reliability
- Why investing in an under-used asset?
Key issues in Engine Leasing – The lessor’s perspective
A favourable context for spare engine leasing
www.ses.ie
What are the attractive engines?
Key issues:
• Life cycle of the Aircraft / Engine (production engine or retirement engine?)
• Operator base (number of operators, large engine production, presence worldwide)
• Interchangeability / intermix of engines (to use on a large Aircraft application range)
• High reliability (airlines are looking for trouble free engines)
• Maintainability (easy line and shop maintenance, MRO network worldwide)
Key issues in Engine Leasing – The lessor’s perspective
Easy marketing / re-marketing
www.ses.ie
All Aircraft models appear to follow a similar cycle of 3 phases
1. Production phase:typically first 15 years
2. End of production / Maturity phase: about 10 years
3. Phase out or cargo conversion:after 25 to 30 years (at about 3to 5% of total fleet/year)
0
20
40
60
80
100
120
1 4 7 10 13 16 19 22 25 28 31 34 37 40
years since introduction
% o
f fle
et in
ser
vice
Aircraft Life Cycle modelling
0
20
40
60
80
100
120
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41
years since introduction
%
B737 NG (-7)A320 (-5B)B737 Cl. (-3) B737 OG (JT8D)B727 (JT8D)DC9 (JT8D)MD-80 (JT8D)
Contributors to phase out:• Age of Aircraft• Market price of New Generation Vs old Aircraft• Economic downturn
Key issues in Engine Leasing – The lessor’s perspective
www.ses.ie
CFM56-3Application: Boeing 737 Classic
1969 A/C deliveredTotal SES Asset: 88 Engines
CFM56-5AApplication: Airbus A320 family
529 A/C deliveredTotal SES Asset: 16 Engines
CFM56-5CApplication: Airbus A340
236 A/C delivered Total SES Asset: 16 Engines
CFM56-5BApplication: Airbus A320 family
1045 A/C deliveredTotal Asset: 29 Engines
CFM56-7BApplication: Boeing 737NG
1941 A/C deliveredTotal SESAsset: 34 Engines
SES Asset Base Vs Operator Fleet base (as of 31 may 2006)Key issues in Engine Leasing – The lessor’s perspective
We are investing in current / high production engines
www.ses.ie
•CFM56-5B familyA318 / A320 / A321
• CFM56-5B1• CFM56-5B2• CFM56-5B3• CFM56-5B4• CFM56-5B5• CFM56-5B6• CFM56-5B7• CFM56-5B8• CFM56-5B9
Thrust ranging from 21,600lbs to 30,000lbs
• CFM56-7B familyB737-600/-700/-800/-900
• CFM56-7B18• CFM56-7B20• CFM56-7B22• CFM56-7B24• CFM56-7B26• CFM56-7B27
Thrust ranging from 19,500lbs to 27,300lbs
Same hardware engines that can be used at the requested thrust
upon request
Key issues in Engine Leasing – The lessor’s perspective
www.ses.ie
Purchase Price
Value Depreciation & Residual Value
Maintenance Costs
Financing Costs
Other Costs
What is specific about engine leasing?
Key issues in Engine Leasing – The lessor’s perspective
www.ses.ie
New Engine Prices are driven by OEM Catalogue Price
No significant deviations
Used Engine Prices
Significant deviations can be observed (+ or -10 to 15%)
Especially in turbulent times (high growth or high contraction in the cycle)
Strong supply and demand impact
Purchase PriceKey issues in Engine Leasing – The lessor’s perspective
Paying the Right Price is Key
www.ses.ie
Value Depreciation and Residual Value
Key issues in Engine Leasing – The lessor’s perspective
Residual Value Assessment is the biggest Risk
Engines and Aircraft values behave similarly in the early phase
Then Engines outperform Aircraft value retentions
At the end (after 15 – 20 years in some cases) the Aircraft is worth the price of the engines
• Aircraft last over 30 years
• Engines last much longer : over 40 yrs
Virtually all the parts would have been replaced after 3 shop visits.
What is the Residual Value?
Too long a time to test who has the right answer
Main stream lessors will not keep the engine that long
www.ses.ie
Honeymoon periodFirst 4 to 5 years – up to 7 / 8 years depending on
utilization
Airworthiness Directives (AD) risk
Long Term Maintenance Costs are well understood
First Shop visitsHeavy maintenance in specialized repair centres
OEM Warranties would limit any huge exposure
Mature EngineLong run maintenance costs are rather well assessedBut require engine expertise
Maintenance Costs (Shop visits, SB, Ads…)
Key issues in Engine Leasing – The lessor’s perspective
www.ses.ie
Interest Rate
The lower the better!
But does the airline have enough equity and enough security
Lessors would have better rates than Airlines
Loan terms
Duration
Balloon
Financing Costs
Key issues in Engine Leasing – The lessor’s perspective
www.ses.ie
Storage and Management
Hangar, Security system
Engine paperwork, traceability…
Transportation
Insurance
Other Costs
Value can leak out with bad or lack of management
Key issues in Engine Leasing – The lessor’s perspective
www.ses.ie
Provides operational solutions to Airlines
Asset management type service
Requires engine expertise
Provides financial services
From standard to highly structured type services
Based of Lessee/airlines credit rating
The advantages of engine leasing
Asset Manager or Financier type of service ?
Key issues in Engine Leasing – The lessor’s perspective
www.ses.ie
Operational Solutions• Rentals
– Short-term (30-90 day) rentals– Medium / long term leases
• Guaranteed Availability– Spare engine available within 24h
• Advance Reservations– Reserve future spare engine
rental• Engine Exchange
– Trade used engine for ready-to-install engine Low
Standard
Highly Structured
FinancialProducts
Medium-Term Operating Lease and Loans
Long-term Operating Lease
Finance Lease
Investments in Asset Securitization
Lease In / Lease Outs
Tax-Based Financing
Sale-Leaseback
HighLessee’s Credit Rating
Financial Solutions
Maximising Customer Benefit with Tailored Solutions
Increased offerings by lessors
Key issues in Engine Leasing – The lessor’s perspective
www.ses.ie
Asset ManagementTechnical and specific market
Knowkledge
Core business
Remarketing SpecialistAccess to a Broader market increases
utilisation helping reduce rental
Financing AdvantageStrong connection to a finance
institution
Better understanding of risk and rewards
Advantages of Leasing Companies Asset Manager
Financier
Purchase Price
Value Depreciation & Residual Value
Maintenance Costs
Financing Costs
Other management costs
Key issues in Engine Leasing – The lessor’s perspective
www.ses.ie
• A growing demand for engine leasing as a Value AddedService
• Engines are very attractive assets, providing they are properly managed and maintained - quality of maintenance is essential to keep the value !
• Good engines = liquid engines
• Operational support and asset financing are two different jobs
• Engine technical expertise + accurate asset management on the right engines = key success factor.
Conclusion
Key issues in Engine Leasing – The lessor’s perspective
www.ses.ie
Shannon office Aviation HouseShannon Industrial Estate Shannon County Clare Ireland
+353 61 36 0056 phone +353 61 36 0614 fax
Sales Enquiries: [email protected] Technical Enquiries: [email protected] General Enquiries: [email protected]
Contact Information
SES: The Spare Engine Solution
Key issues in Engine Leasing – The lessor’s perspective
