Three key trends for spare engine leasing in 2017

This is a brief overview of the aviation finance market for aircraft spare engines and my view of three key trends affecting lessors and airline customers in 2017.

Spare engines are vital. They keep aircraft constantly in operation during periods of engine maintenance. Although engines are increasingly reliable, they are complex and when they are removed from aircraft for maintenance, repairs can take several months to complete. Also, some events such as bird strikes cannot be predicted. Airlines trying to achieve high utilisation of their aircraft will need a spare engine readily available to keep their flight schedules intact.

According to Ascend, there are over 2,400 new aircraft of all types including business, regional and military support aircraft planned for delivery in 2017. Most asset managers and MROs, are focused on supporting the popular narrow-body and wide-body types (737 and A320 families, A330, A350, 787, 777), which make up over 1,600 of the planned deliveries and the majority of our industry’s 2017 order book. These new aircraft will drive the requirement for new spare engines. Approximately 200 engines will be needed in 2017 with a list price value of over US$3bn.

Spare engines are a small segment of the total aviation finance market. In 2016, new aircraft valued at c.$127bn were delivered whereas the value of new spare engines at c.US$3bn represent only 2% of this sum. This is because on average only one spare engine is required for every ten installed aircraft engines delivered, although different engine types require different levels of spare engine coverage.

There are some key trends affecting the spare engine market over the next few years and we will start to feel their impact in 2017.

Trend #1: Digital technology will help airlines reduce their spare engine ratios

The first trend is the use of digital technology to accurately predict engine removals and support the further improvement of mechanical reliability. The latest generation of engines delivering in 2017, such as the Rolls-Royce Trent XWB, will have significantly more sensors on the engine which are capable of producing vast quantities of data about engine performance during flight. At the same time, manufacturers are investing heavily in data analytics to make better use of this data.

The increased quantity and quality of data combined with powerful analytics capability will enable manufacturers to monitor and communicate accurate predictions of engine removals and take steps to further improve the reliability of their engines in service to a level that will eventually reduce the spare engine coverage ratio over time.

Trend #2: Spare engine leasing competition will drive more innovative services

The second trend is the increasing maturity and efficiency of the spare engine leasing market. The spare engine leasing business will be well into its third decade in 2017. This now well established market is a very competitive space with an increasing number of better financed lessors.

The manufacturer linked lessors, Rolls-Royce & Partners Finance and GE Engine Leasing, are increasingly competing for all types of engines including each other’s equipment, especially when it comes to the new technology engines supporting the wide body types. The independent lessors such as Engine Lease Finance and Willis Lease are focused on competing for the new technology narrow-body types. All of the established market players are competing against the new Japanese backed lessors on new engine types as well as aircraft part out companies with “green time” engines on older engine types. This means that there are more lease managers today and ultimately more choices available to airlines seeking finance for spare engines than during any previous economic cycle.

In this context, it is not surprising to see that airlines are increasingly looking to spare engine leasing companies to carry the cost of holding additional engines to provide “top-up” coverage during periods of engine maintenance through the spot market or non-dedicated lease engine services. Cost focused airlines would ideally like to reduce the required number of dedicated spare engines and where possible rely on the spot market, pooling or engine availability services. These non-dedicated spare engine services can in theory increase overall asset utilisation across the market and reduce costs for airlines.

However, such services are only easily provided for engine types that are easy to move between airlines as well as being part of large populations and having lower unit costs, such as narrow-body types. Wide-body engines are logistically harder to move between airlines at speed and also carry larger unit costs, meaning that it is not possible for most investors to balance the asset ownership costs against the likely periods of down-time, uncertainty of spot market short term lease rates and low access fee revenues.

In any event, in order to compete successfully in this market, lessors will increasingly need to adapt their services and find ways to add further value to their customer’s business.

Trend #3: Low fuel price could reduce the number of green time spare engines entering the market

So far, we have looked at the demand for new spare engines in 2017, but what about the supply side of the market for the older generation of used spare engines? Although each engine type is very different and should be considered a market in its own right with its own supply and demand dynamics, there is one important macro trend that will affect all used engines in 2017: The fuel price.

...there is one important macro trend that will affect all used engines in 2017: The fuel price.

Some airlines operating older narrow-body aircraft now expect to be able to secure “green time” engines nearly all the time. In this context, the phrase “green time” engines refers to older engines with limited life remaining that have been taken from aircraft that have been retired and parted out and offered into the market by a used parts company who are also selling the related airframe components. These engines are very often on the lessor’s books for very low values and it is possible for these lessors to offer the engines into the spot market at attractive short term rental and utilisation rates.

However, the current low cost of aviation fuel is helping airlines to create increased demand through lower fares. Assuming the oil price stays in the current range of $50-$60 a barrel, airlines may decide to keep some of their older aircraft in-service for longer. There is some anecdotal evidence of this happening already in the market and if this trend continues we could see a reduction in the number of aircraft retiring for part out and in turn the number of the “green time” engines entering the market in 2017.

2017 will be a good year for airlines needing finance for spare engines

Airlines are currently enjoying favourable tail winds in the form of low fuel prices and low financing costs. In terms of spare engines for 2017, airlines will have good options as to how they finance these vital assets; however they may need to adjust their expectations on the availability of “green time” engines to support their existing fleet. The spare engine leasing market will mature further in 2017 with new asset types and competition likely to drive lots of innovation and change.

The original and extended version of this article was first published in Aviation Week’s Engine Year Book 2017 and a summary can be read online here