Jetrader - January/February 2012 - 14

time; for example, in the  year 2000, a General Electric CF680-C2 B1 had a sticker price of $6.5 million, and this increased to $13 million by 2010. Similarly we have seen the introduction into service of very large engines—notably the various manufacturers’ offerings powering the Boeing 777: the GE90-115 B today sports a stratospheric list price of $32.5 million, including QEC. Whatever the economic climate, airlines are keen to close out residual value risk, which has become more and more important concomitant with this increase in engine values. The lessor is better positioned to manage this risk as it has the opportunity to lease the engine for subsequent terms after the first period; it can short-term lease, burn off the green time and then liquidate the asset—options not open to the airline.

Looking Ahead
What is well-recognized is the very thin profitability of the airline community; IATA keeps on revising its 2011 estimates for the industry’s profits as oil prices change, since fuel is the major spend and has a directly dramatic effect on the bottom line. We have recently seen two French banks announce their exit from air finance, no doubt because they see it as too cyclical and so risky. However where banks are staying the course is in funding the lessors, for the above-mentioned reason, namely that the lessor can take a longer-term view—a small wonder then that some 35 percent of all current aircraft orders are with aircraft leasing companies. This trend of major order placements has not been followed so much by the engine lessors due to uncertainty both over engine performance and over OEM market support intentions, however.

It appears the industry is set for very significant long-term growth, even with the current concerns about the Eurozone and the U.S. debt. Despite such inevitable cyclic market perturbations, the backbone of this belief is the received wisdom that air travel is fundamental to the world’s economy, its politics and its society. The major forecasts such as the well-respected Boeing publication predicts that in the years 2010 – 2029 there will be about 31,000 new aircraft delivered in order to support both growth in the world’s fleets and replacements of obsolescent aircraft. It would make the jobs easy for those of us involved in investment decision-making if this was a steady flow, but the ups and downs do present an opportunity for the engine lessor who really understands its market, engine type by engine type; there is little macro thinking in engine leasing. Nevertheless, looking at the big picture, these aircraft delivery forecasts lead us to the conclusion that some $2 billion of spare engines will be funded every year on average by the means of the operating lease. A very large proportion (50 percent?) of this will be provided through some form of maintenance-related packages provided by the OEMs. That leaves a billion dollars a year for the five or six specialist engine lessors in the market. In aircraft leasing terms therefore it is a small market and so more of a niche role for the active players. However the market does appear to be robust in the long term, and it is perhaps for that reason, rather than any potentially large-scale offering significant opportunities, that new players are constantly expressing interest in joining the market. (Irrational exuberance or just poor research?) It is however very tough for new entrants to develop

critical mass in a business, which dollar for dollar, asset management is more complex and overhead heavy than aircraft leasing. A company has to go through all of the stages of sophisticated development I referred to in the opening paragraphs before they can get there. Add to that the fact that competition is fierce and new business placed on the books, whether by sale and leaseback or by order placement and subsequent lease, is now written at historically low lease rates (and significantly lower than aircraft) resulting in a negative yield curve for the early years. It is only by the means of a mature portfolio spread sensibly over new and older engines, that a lessor will run a successful and profitable “mixed economy.” It also means they need deep pockets. ELF’s efforts are greatly supported by our parent company in the U.S. and its ultimate parent, The Bank of Tokyo-Mitsubishi UFJ, Ltd., and it is that financial strength that has allowed us to pursue a successful strategy of growth to achieve our current position of maturity. That has recently culminated in our agreement with Macquarie Aviation Capital Finance Limited to purchase its engine assets. This represents the acquisition of 47 engines with 18 different lessees, plus the servicing rights and obligations for an additional seven engines owned by an investor fund; this allows ELFC to continue to grow its owned and managed portfolio of modern aero engines toward nearly 300 engines and provides for the addition of seven new customers to our portfolio. The acquisition of these engines allows ELF to step up its growth plans with immediate effect during 2011. We have now consolidated our position as the third-biggest engine lessor on the planet, and by a significant distance the largest not affiliated with an OEM (although we continue to work closely with them), and estimate that our share of the true engine operating lease market is somewhat in excess of 20 percent. We will continue to aggressively pursue revenue and portfolio growth through sale and leaseback transactions, engine order positions and other portfolio opportunities in line with our strategic business objectives. ELF looks forward to continuing to lead the charge in this compelling market. Jon Sharp is President and CEO, Engine Lease Finance Corporation.

14 The official publication of the International Society of Transport Aircraft Trading


http://www.ISTAT.org

Jetrader - January/February 2012

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

A Message from the President
Calendar/News
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
Advertiser.com/Advertiser 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 - Advertiser.com/Advertiser Index
Jetrader - January/February 2012 - cover3
Jetrader - January/February 2012 - cover4
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