Engine Lessors Navigate Pricing Equation

AMSTERDAM—As engine lease rates escalate, lessors are trying to balance pricing considerations with strategies to alleviate customer pain. During a recent panel at Aviation Week Network’s Aero-Engines Europe conference, lessors shared perspectives on the factors that are impacting the market.

“We’re seeing a fairly unique set of circumstances,” said Darren Wormwald, chief operating officer at Engine Lease Finance Corp. (ELFC). “We’ve got a very strong demand for our product, the engine piece, but we’ve also got a difficult geopolitical environment. We’ve got interest rates at their highest relative to recent history, and I think in terms of the investment strategy that dictates, that really is the question of looking at your customer base and working back from that.”

Wormwald said ELFC’s long-term investment strategy hasn’t changed, but the company will focus its future investments on newer technology engines. “At the moment we’re not transitioning out of old tech into new, but in the long term, we want our focus to be on the new technology to meet customer demand.”

Fabrizio Laurenti, head of MTU Maintenance Lease Services, says the company’s average lease times pre-pandemic were between 4-6 months, but in the last 18 months, these lengths have been trending upward. “We see many airlines looking for 2-3 years,” he said. “We need to, of course, keep the utilization of the pool high, but at the same time, we also need to support our MRO customers. So, we need to make sure that the utilization is not at 100% of the time because we always need to have a good bunch of engines to support our MRO customers.”

Martijn de Vries, vice president of KLM Engine Services, said supporting shop visits for short-term leases has become challenging due to supply chain and workforce issues. “We try to anticipate as much as possible, but we’re also hurt by unexpected surprises. You also don’t want to have too many engines in stock which are not being used, so you want to have an engine when needed and not too much on the shelf,” he said.

De Vries also noted ballooning costs as a challenge for the company’s parent airline. “If you look at the prices this year for us at KLM, the amount of lease fees we pay is extreme, and we want to limit that as well,” he said. “There’s a balancing act. You want to avoid having an aircraft on the ground, but at the other end, paying too much for having an engine on the shelves.”

Dan Coulcher, senior vice president and chief commercial officer for the EMEA region at Willis Lease Finance Corp., noted that high interest rates are impacting costs and lessors are trying to get pricing right on engines that have finished production but have not yet started retirements. He noted that this phase has been extended longer than usual for engines such as the CFM International CFM56 and IAE V2500 due to the COVID-19 pandemic, “but it doesn’t go on forever. CFM56-7B rates are very good right now, but our trading department is not analyzing things going forward at those rates.” Coulcher added that pricing on CFM Leap engines has been driven up because stakeholders are building their pools in anticipation of the engine type’s dominance over the coming decade.

According to Jeff Lewis, CEO of Hanwha Aviation, an airline’s level of desperation factors into engine lease rates. “You have to feel bad for the airlines right now. “[They’re] faced with an impossible scenario,” he said. “You have brand new airplanes or newer generation airplanes with engine issues, and to keep those airplanes flying … you’re going to be desperate to go source engines on lease. When lessors see that and the phone rings on Saturday night, the price is higher than on Tuesday. It’s very challenging for the airlines and it really skews the market.”

Lewis said the landscape has been tricky for Hanwha Aviation, which was launched in May by Korean conglomerate Hanwha Group. “The number one challenge is pricing. You make the money in the buy, so you have to find the assets at the right price, and when you’re building the portfolios, be very realistic on your residual values,” he said. “I think today if you’re buying a CFM56-7B for $10-12 million and you’re modeling a $90,000 a month lease rate with a $5 million residual, that’s just unrealistic. That does not generate a positive return.”

Although pricing has been challenging, Lewis said he is starting to see the market “come back down to earth.” He added: “What I’m seeing today is kind of a normalization of the market where people are asking some pretty spicy pricing for their assets, but deals aren’t happening. There are parties who are placing letters of intent (LOI) and small deposits. After that LOI is signed, they’re trying to go out and raise financing or capital to do the transactions. Sellers are getting frustrated by that. And even though, on a lot of the transactions that we’ve closed on, we’ve not been the highest bidder, we’ve been the most reliable bidder and people have come back to us closer to the numbers where we felt the assets should trade.”

Several panelists noted strategies they are using to help limit costs. For instance, de Vries said KLM is deploying used serviceable material and repairs as often as possible. He noted that customers are also signing multi-year contracts that include price safeguarding measures. Coulcher said Willis swaps in its pooled engines to prevent customer shop visits when needed and the company can perform its own overhauls or teardowns as necessary. MTU has been building up shop capacity to support both sides of the coin, such as developing more quick repair shops and on-site services to support airlines. Laurenti said MTU’s artificial intelligence-powered Cortex engine fleet management software is also leveraging data to reduce costs.