Uptick Expected In Short-Term Engine Leases
The short-term leasing of engines will be the first part of the engine lease segment to recover as carriers look to offset expensive shop visits over the next 12-18 months, according to a panel discussion at Aviation Week’s Engine Leasing Trading and Finance Virtual.
Speaking in a state of the market discussion at the virtual event on May 18, Tadhg Dillon, senior vice president and head of sales and marketing at Shannon Engine Support, says that following a challenging past year for the COVID-19 impacted industry, he believes the segment will bounce back quicker and faster than expected and it will be the short-term leasing of engines that will first see signs of recovery.
“Airlines will most likely lease engines instead of actually spending large amounts of money on shop visits. It’s cheaper from a cash perspective in the short-term,” he says.
Responding to a question about whether these deferrals were simply kicking the can down the road and whether lessors wanted to ensure their asset wasn’t at the back of the queue for maintenance, Dillon says: “If you have an engine with an airline that needs a shop visit, mature lessors will be talking to the carrier to ensure a way to get that engine maintained and back on-wing again. From the airline’s perspective for their own engines, do they go and spend $5 million on an engine or lease an engine for short-term to preserve cash for 12-18 months before the crisis is over? Many airlines are heading down the short-term leasing route.”
Julian Jordan, executive vice president and head of new business at Engine Lease Finance, which has the largest share of its engine portfolio is on long-term lease, says the market was affected dramatically in the wake of COVID-19.
“The immediate effect was short-term lease stock was redelivering on scheduled expiry and demand for those short-term engines dropped through the floor, while demand for long-term leases the whole year was pretty much nonexistent,” he says.
More recently, as the market begins to ponder a recovery, Jordan is seeing similar trends to Dillon in the short-term engine lease market.
“We are seeing some signs of recovery in the short-term in terms of shop visit avoidance,” he says. “Demand is coming back in certain markets, especially in big domestic ones such as the U.S. and China. Long-term we hope for a bit more normalization—we’ve seen some relatively crazy deals happen in the new sale and leaseback space. Once we see some supply building again, we hope for more normalization and [to] get back to a point where returns are more acceptable.”
The crisis led to many engine lessors reevaluating their business, including GECAS Engine Leasing, the global engine lessor which has a portfolio of close to 700 engines. “We realized that we had to re-plan the business for last year and again for this year, and in 2021 we are still a bit behind where we thought we would be,” says Denise Mangan-Fahy, the company's senior vice president, portfolio planning and rental operations, who cites the third wave and slower than anticipated recovery from the novel coronavirus.
“When you look at what is happening in India, Asia-Pacific and Latin America, there still needs to be a recovery,” she says. However this isn't deterring investment plans for the year, Mangan-Fahey says. “We’re continuing to invest money and be active for the year…the fundamentals haven’t changed,” she adds.
Patrick Biebel, managing director, MTU Maintenance Lease Services, which centers more on short-term leasing primarily focused on support the customer base of its MTU Maintenance affiliate, says that pre-crisis, finding assets in the market that were financially viable was among the company's biggest challenges, but during the downturn it was able to mitigate due to its business structure.
“We were quite lucky in the sense that we consciously planned our engine portfolio with a 50% flex rate—half was owned, and the other half was leased ourselves,” he says. Biebel adds that the integration with its MRO business also helped it protect residual values on assets during the crisis. He sees the company being increasingly proactive in the green-time engine market and predicts an upturn is on the horizon.
“From our perspective, demand will eventually pick up for short-term leases," he says. "From the MRO perspective, we expect an increase in shop visit activities towards the second half of the year, which would naturally trigger a higher demand for alternative thrust which could either come from swapping engines on parked aircraft or using spares and leased engines from the market. The question is how steep will the recovery be and how quickly will those parked aircraft be reintegrated or retired from the fleets?”