Jetrader - January/February 2012 - 13

powered by its products. The true engine operating lease hardly existed back in the late 1980s, despite the burgeoning growth in aircraft operating leasing. The first drivers for change came about at that time. Aircraft operating leasing had become popular, rising to some 20 percent of all aircraft in service being owned by leasing companies by the end of the ‘80s, and minds turned toward applying the same financial product for engines, as the JT8Ds became replaced by increasingly expensive models: this rise in unit value had two effects. Firstly the lessors saw an opportunity with the new ticket size making economic sense of the necessary transaction complexity. Secondly the OEMs started taking a hard look at the costs of maintaining their product support pools and realized that some of this service should be charged out on a true economic basis. Those two factors together started the early development of the present commercial engine operating lease business. With Willis Lease also heading in this direction, Engine Lease Finance (ELF) was founded in 1989 and wrote its first long-term leases in early 1990. At the same time, the short term lessors’ business opportunity started to change as engine reliability increased dramatically, with the likelihood of a short-term lease requirement falling back as requirements became much more predictable for the new models. More and more the short-term leasing product became one that was typically offered for older engine types more readily available in the secondary market and which lend themselves to a business model which burned off “Green Time” and then committed a time expired engine to be reduced to parts, which are refurbished and sold back into the maintenance and overhaul (MRO) market. The short-term leasing companies were (and largely are) typically traders who look to turn over their capital on a regular basis, unlike operating lessors who will typically invest in a product with a view to holding it for 10 years or so. This market sector has since moved on with the much bigger populations of engines, and GA Telesis is a good example of the modern growing companies in this market sector. ILFC have acquired Aeroturbine, apparently with the intention of using this company’s competence in successfully extracting the value from older engines. It will be interesting to see how that develops.

So then the operating lease companies grew, and after a few years of operation, had to prove their business model by remarketing those engines that were now five or six years down the line, having been returned from their first leases. Any operating leasing company whose business model is based around longer term leasing is anxious that as soon as an engine finishes its lease, it should be placed immediately on the next lease, but unfortunately in the real world the availability for the second long-term lease may not be so immediate. Therefore, rather than having an engine sitting in a warehouse incurring storage and finance costs, the lessor looks to place it in the short-term market until a long-term lease is found.

A Maturing Industry
The “new” breed of operating lessors also became short-term lessors. With the growing sophistication within the engine leasing community, this line has become blurred and the mature companies of today offer a mixture of products, often combining them to offer the airline a “one-stop shop” for all their leasing requirements, which is where ELF is now positioned. Thus it has become that the short-term leasing product has become more commonplace for modern engines, which may or may not be characterized as a pool. The next development arose as the operating lessors became more financially sophisticated and saw opportunities to syndicate packages of engines with revenue-earning leases attached to them. Nowadays most engine lessors have sold off such packages, taking profit and raising cash while continuing to participate in the income stream as a minority shareholder and earning lease management and engine remarketing fees. These syndication platforms also provide a vehicle for portfolio management. For example, GEEL concluded “Blades,” and Willis, “WEST.” ELF currently has 74 engines part-owned and/ or under management, with mandates for a further 17, all with a variety of investors although we continue to own outright the great majority of our engines. Therefore there existed by the turn of the first decade of this millennium a sophisticated and well-rounded engine leasing market. I like to think that we at ELF have been instrumental in leading the

charge. But a lot more has been going on. The OEMs have greatly expanded their aftermarket product offerings, notably in providing all inclusive maintenance and overhaul services, some of which are combined with spare engine support. GE Engine Leasing and R-R Partners Finance are now the two largest engine lessors in the world by dollar value and have rapidly grown their in-house maintained portfolios. SES, a subsidiary of CFMI, are also significant in this mix, offering pooling services for the CFM family of engines, as well as some operating leases and non-club short-term leasing. The airlines have an unprecedented choice of service providers. It is the operating lease market that represents the core business for ELF. The company acquires a large proportion of its assets through the medium of sales and leaseback since this is the relatively risk-free acquisition of the engine and its simultaneous placement on lease and therefore commencement of revenue earning life. This part of our business has been extremely strong in the years following the financial meltdown of 2008. This is driven by the fact that the financial crisis had the “double-edged sword” effect of reducing airlines’ revenues and therefore cash at the same time as closing off some of their potential sourcing of funding as the banks ran for cover. It should be recalled that the years 2006 and 2007 were record years enjoyed by the airframe and engine manufacturers for orders of their products. As has been repeated in economic cycle after cycle, those record numbers of engines and aircraft then roll off the production lines just when the airlines don’t need them (and can’t pay for them anyway). It has always been important that leasing companies, as asset investors, correctly anticipate the economic cycle. Another set of record orders in Paris 2011... The demand for operating leasing is obviously driven by the airlines’ desire to raise cash and/or remove the assets from their balance sheets, a common feature during times of economic hardship, and a growing business at the time when the perceived “funding gap” in aviation finance has risen. Also the trend has been toward the airlines being driven more by the desire to source specialist funding for its aircraft engines. Again the driver for this is the increase in engine prices over Jetrader 13

Jetrader - January/February 2012

Table of Contents for the Digital Edition of Jetrader - January/February 2012

A Message from the President
Aircraft Financing Ahead
Q&A: Bertrand Grabowski
Evolution of Engine Leasing
ISTAT Closes Out 2011 in Style
Aircraft Appraisals
ISTAT Members on the Move
Aviation History Index
Jetrader - January/February 2012 - cover1
Jetrader - January/February 2012 - cover2
Jetrader - January/February 2012 - A Message from the President
Jetrader - January/February 2012 - 4
Jetrader - January/February 2012 - 5
Jetrader - January/February 2012 - Calendar/News
Jetrader - January/February 2012 - Aircraft Financing Ahead
Jetrader - January/February 2012 - 8
Jetrader - January/February 2012 - 9
Jetrader - January/February 2012 - Q&A: Bertrand Grabowski
Jetrader - January/February 2012 - 11
Jetrader - January/February 2012 - Evolution of Engine Leasing
Jetrader - January/February 2012 - 13
Jetrader - January/February 2012 - 14
Jetrader - January/February 2012 - ISTAT Closes Out 2011 in Style
Jetrader - January/February 2012 - 16
Jetrader - January/February 2012 - Aircraft Appraisals
Jetrader - January/February 2012 - 18
Jetrader - January/February 2012 - ISTAT Members on the Move
Jetrader - January/February 2012 - Aviation History
Jetrader - January/February 2012 - 21
Jetrader - January/February 2012 - Index
Jetrader - January/February 2012 - cover3
Jetrader - January/February 2012 - cover4