Aviation Finance – Vol. 4 No. 3
The pulse of activity in the engine lease sector picked up significantly after 2010 as a result of the aviation cycle itself, new Japanese entrants, and changing demand and supply dynamics. Jon Sharp president and CEO of Engine Lease Finance Corporation surveys the cycle since 2008. He says, ‘All this at a time when new entrants have flooded in; the industry as a whole should hope that there has been no return to those days of ‘irrational exuberance.’
The downturn of the cycle following the global financial crisis of 2008 had been very slow in showing signs of recovery. During this protracted recession the only significant movement in the providers of engine leasing was the acquisition by Engine Lease Finance (“ELF”) of the Macquarie Aviation portfolio of leased engines, a transaction which completed in 2010. This must have sparked some interest in the aviation finance community because without real evidence of an upturn in the market, the next three years saw more new entrants and joint ventures into this small market than in the entire previous decade, when there had been pronounced signs of an ‘irrational exuberance’ of financial institutions and investors clamouring to enter the aviation finance space, any aviation finance space, all of which helped cause and prolong the downturn.
Prominent amongst those investing in these new engine leasing ventures has been the Japanese institutions. Japan’s re-entry into the aerospace finance arena is welcome but one has to question whether there has been too much of a headlong rush to follow the leader. Marubeni entered into a joint venture with ST Aero to create a one-stop-shop for engine leasing and overhaul for the CFM56 series of engines (as we shall see below, this was not the only venture to mix MRO and leasing, designed, no doubt, to counter the growing OEM domination of the aftermarket). Mitsui launched a JV with Willis Lease Finance, originally announced to be for V2500-A5 and CF34 engines only, but since expanded into other types. Mitsubishi Corporation and Development Bank of Japan each acquired a stake in TES. Mitsubishi Corporation has also extended its JV with ELF, as has MUFG Lease and Finance. Century Tokyo has latterly acquired 20% of GA Telesis and most recently Sumitomo Corporation (who also has an existing JV with ELF) has announced the formation of a JV with MTU combining MRO and Leasing.
Whilst there is some crossover between all of these ventures, some are primarily designed to combine engine MRO with leasing, e.g. Marubeni/ST Aero and Sumitomo/MTU. That is also the product behind the emergence of SANAD, owned by Mubadala, the Abu Dhabi investment fund, as a vehicle to link with their MROs, ADAT and SRT in a single strategy.
On the other hand, some are angled towards end of life solutions, e.g. Mitsubishi Corp./DBJ/TES and Century Tokyo/GA Telesis. Also in the latter market sector is Aeroturbine who were sold by Aercap to ILFC some years back, but with Aercap’s purchase of ILFC, is now back in the latter’s fold.
The two biggest engine lessors in the market remain those under an engine OEM banner – GE Engine Leasing and Rolls-Royce Partners Finance. PW Engine Leasing and Shannon Engine Support, a CFMI subsidiary, also pack the market with the OEM offerings. They are not only able to provide combined maintenance and lease packages but also to do so at point of sale of the aircraft/engine, a significant advantage that all the others mentioned in this article do not. It is estimated that the OEM lessors between them pick up 50 per cent of the new spare engine leasing market, leaving about a billion dollars per annum for the independents to fight over, pretty small stakes when compared to the aircraft leasing market.
That there used to be a greater distinction between the different types of engine lessor – e.g. short term v. long term, MRO-based v. asset acquisition-based, new equipment v. secondary market – is a function of the changing market so that the lines between these once quite separate products is increasingly blurred. As for the driving forces behind this, the first is the obvious growing maturity of engine leasing resulting in a more sophisticated industry offering a wider range of products. However it is also as a result of the airlines themselves recognising that they can pick and match from a variety of menus to suit themselves.
One increasingly important factor for airlines is the need to avoid residual value risk. In the first couple of decades of engine leasing, up to say 2005, engine residual values provided a good safety net for those who invested in what, dollar for dollar, is a more difficult and costly asset to manage than an airplane. However times have changed with a host of new types available on the market challenging the depreciation conventions of existing but older engines still in production. Add to this increasing OEM control of the aftermarket through MRO and part-out activity and residual values are under pressure.
All this at a time when new entrants have flooded in; the industry as a whole should hope that there has been no return to those days of ‘irrational exuberance’. Jon Sharp, President and CEO, Engine Lease Finance Corporation.