Changes In The Engine Leasing Market

The past year saw massive fleet groundings in the wake of the COVID-19 crisis. While many MRO providers found work in aircraft restoration services and areas such as freighter maintenance, workloads were sharply reduced. One major casualty was a drop in scheduled engine maintenance, with carriers looking to postpone or cancel expensive overhaul work.



Four key observations emerged from Aviation Week’s Engine Leasing Trading and Finance virtual event in May.

U.S.-based low-cost carrier Sun Country Airlines renegotiated existing agreements with lessors. The Minneapolis-headquartered airline operates an all-Boeing 737 passenger fleet consisting of 31 aircraft, along with 12 cargo aircraft operated in conjunction with Amazon Air since May 2020. “The scheduled service business was hit the hardest, and in April 2020 we were down 90% in terms of passenger bookings versus April 2019,” says Dave Davis, the carrier’s president and chief financial officer.



Davis says that despite the reduced passenger numbers, the carrier saw growth in its cargo business, so the airline did not shrink overall. But to reduce costs, Sun Country looked to renegotiate existing leases. “We didn’t want to extend any leases and instead deferred payments into late 2020 and early 2021,” he says.



The airline has no orderbook and instead focuses on acquiring mid-life 737-800 aircraft, Davis says. “There’s a lot of these aircraft on the market right now, and we are actively pursuing those. We are bidding on a lot of aircraft.” He adds that it is also very active in terms of acquiring used engines and parts as well as burning green-time engines, with the airline looking for more CFM56-7B engines to either use in its fleet or for parts.

Although the engine sector of the leasing market is expected to recover at a slower rate than airframe leasing, an uptick in short-term engine leases is expected over the next 12-18 months, as airlines look to offset expensive shop visits.



“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,” says Tadhg Dillon, senior vice president and head of sales and marketing at Shannon Engine Support.



“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,” Dillon says. “From the airline’s perspective for their own engines, do they go and spend $5 million on an engine or lease an engine short-term to preserve cash for 12-18 months until the crisis is over? Many airlines are heading down the short-term leasing route.”

OEMs have taken a major hit during the past year owing to cuts in production as well as disruptions to their after-market businesses. This was most evident in the engine segment, which was hit by a wave of deferred or canceled shop visits. However, the downturn afforded some manufacturers an opportunity to look at issues of reliability and cost of ownership, often cited as challenging by operators.



Among these is Rolls-Royce, which, following an MRO load reduction of around 11%, looked to move forward with wellness programs for some of its Trent engine programs. These include the Trent 1000 engine, which Rolls-Royce set about modifying after undergoing technical issues related to its fan blades back in 2019. “During the pandemic we came back up to speed with no disruption in terms of AOG to our customers, and we made good progress in incorporating the modifications to that program,” says Romain Chambard, vice president of marketing at the British engine-maker.



About the cost of ownership, Chambard says Rolls looked to make additions to its existing services portfolio to address specific needs around flexibility. These include a SelectCare Repair offering that provides a check on repair coverage for operators that they can opt for on a standalone basis. This, he says, is the company’s way of “trying to adapt to the market” and “see what the airline or lessor wants to do.”

In the past year, the aviation industry has seen massive fleet groundings, airlines restructuring financially, rental deferrals, early asset returns, an inactive secondary market and hits to OEMs’ orderbooks. As the industry looks toward a long-term recovery, restoring the confidence of investors hard hit by the crisis will be essential.



But for any recovery to take place, it is the resumption of air traffic that is pivotal. COVID-19 has been a unique crisis with few precedents, says Simon Finn, director of aviation for EMEA at MUFG Bank. He sees passenger confidence as being like investor confidence. “It’s been notable that where restrictions are lifted, rather like investors, passengers aren’t too deterred by COVID-19 or the challenges that are facing the vaccination process,” he says.



Ultimately, Finn says companies operating in a certain way will be the ones who will attract investors. “It is those who are nimble, quick and with fast operational management and the best business models that are probably going to prove the most attractive to the investment community,” he says.