Customized Competitive Air Finance Journal 19 September 2006, London Flexible Key issues in Engine Leasing: The Lessor s perspective Bruno Castola,Vice Vice-President Sales and Marketing,, SES
Shannon Engine Support: Who Are we? A spare engine leasing company CFM56 only: > 180 engines About 100 customers worldwide A wholly-owned subsidiary of CFM International We offer customized solutions - From Ad Hoc leasing per day to operating lease - The only company offering a guaranteed availability Pool locations on 3 continents Fast & easy re-delivery with a dedicated 24-hour technical support The Spare Engine Solution
A brief introduction: The spare engine dilemna: Before: the legacy airlines used to purchase spare engine as recommended by the manufacturers Success in Aviation led to small fleet Airlines operating with no or few spare engines created a need for spare engine Lessor Engine & Aircraft reliability + expansion of airline business (deregulation ) multiplication of airline fleet fragmentation competition cost control reduction of investment A growing need for spare engine leasing
From an airline s perspective Spare engine investment Dilemma Acquisition costs Underused assets Overhead costs AOG Unscheduled removals A Constant Balancing Act
Key issues about spare engine leasing Why is engine leasing attractive? What are the attractive engines? What is specific about engines leasing? The advantages of engine leasing
Why is engine leasing attractive? Demand for aircraft is very strong Increasing number of operators Fragmentation of fleet from legacy carriers Air travel booming in emerging countries Record orders for both Boeing and Airbus narrowbody aircraft Traffic growing steadily 6% in 2005/2006 to remain strong at 4.5% over the coming years
World demand for spare engines is strong Significant Engine Shop Visits (maintenance) growth Increasing need for spare engines Airlines drive for cash make leasing attractive Resulting from Airline competition Don t want to tie the cash in the assets Airlines considering less engine investment as the result of an increasing reliability - Why investing in an under-used asset? A favourable context for spare engine leasing
What are the attractive engines? Key issues: Life cycle of the Aircraft / Engine (production engine or retirement engine?) Operator base (number of operators, large engine production, presence worldwide) Maintainability (easy line and shop maintenance, MRO network worldwide) Interchangeability / intermix of engines (to use on a large Aircraft application range) High reliability (airlines are looking for trouble free engines) Easy marketing / re-marketing
Aircraft Life Cycle modelling 120 100 All Aircraft models appear to follow a similar cycle of 3 phases 1. Production phase: % 80 60 40 B737 NG (-7) A320 (-5B) B737 Cl. (-3) B737 OG (JT8D) B727 (JT8D) DC9 (JT8D) MD-80 (JT8D) typically first 15 years 20 2. End of production / Maturity phase: about 10 years 0 120 1 3 5 7 9 11 13 15 17 19 21 23 25 27 years since introduction 29 31 33 35 37 39 41 3. Phase out or cargo conversion: after 25 to 30 years (at about 3to 5% of total fleet/year) Contributors to phase out: Age of Aircraft % of fleet in service 100 80 60 40 20 Market price of New Generation Vs old Aircraft Economic downturn 0 1 4 7 10 13 16 19 22 25 28 31 years since introduction 34 37 40
SES Asset Base Vs Operator Fleet base (as of 31 may 2006) CFM56-3 Application: Boeing 737 Classic 1969 A/C delivered Total SES Asset: 88 Engines CFM56-5A Application: Airbus A320 family 529 A/C delivered Total SES Asset: 16 Engines CFM56-5B Application: Airbus A320 family 1045 A/C delivered Total Asset: 29 Engines CFM56-5C Application: Airbus A340 236 A/C delivered Total SES Asset: 16 Engines CFM56-7B Application: Boeing 737NG 1941 A/C delivered Total SESAsset: 34 Engines We are investing in current / high production engines
CFM56-5B family A318 / A320 / A321 CFM56-5B1 CFM56-5B2 CFM56-5B3 CFM56-5B4 CFM56-5B5 CFM56-5B6 CFM56-5B7 CFM56-5B8 CFM56-5B9 Thrust ranging from 21,600lbs to 30,000lbs CFM56-7B family B737-600/-700/-800/-900 CFM56-7B18 CFM56-7B20 CFM56-7B22 CFM56-7B24 CFM56-7B26 CFM56-7B27 Thrust ranging from 19,500lbs to 27,300lbs Same hardware engines that can be used at the requested thrust upon request
What is specific about engine leasing? Purchase Price Value Depreciation & Residual Value Maintenance Costs Financing Costs Other Costs
Purchase Price New Engine Prices are driven by OEM Catalogue Price No significant deviations Used Engine Prices Significant deviations can be observed (+ or -10 to 15%) Especially in turbulent times (high growth or high contraction in the cycle) Strong supply and demand impact Paying the Right Price is Key
Value Depreciation and Residual Value Engines and Aircraft values behave similarly in the early phase Then Engines outperform Aircraft value retentions At the end (after 15 20 years in some cases) the Aircraft is worth the price of the engines Aircraft last over 30 years Engineslast much longer : over 40 yrs Virtually all the parts would have been replaced after 3 shop visits. What is the Residual Value? Too long a time to test who has the right answer Main stream lessors will not keep the engine that long Residual Value Assessment is the biggest Risk
Maintenance Costs (Shop visits, SB, Ads ) Honeymoon period First 4 to 5 years up to 7 / 8 years depending on utilization Airworthiness Directives (AD) risk First Shop visits Heavy maintenance in specialized repair centres OEM Warranties would limit any huge exposure Mature Engine Long run maintenance costs are rather well assessed But require engine expertise Long Term Maintenance Costs are well understood
Financing Costs Interest Rate The lower the better! But does the airline have enough equity and enough security Loan terms Duration Balloon Lessors would have better rates than Airlines
Other Costs Storage and Management Hangar, Security system Engine paperwork, traceability Transportation Insurance Value can leak out with bad or lack of management
The advantages of engine leasing Provides operational solutions to Airlines Asset management type service Requires engine expertise Provides financial services From standard to highly structured type services Based of Lessee/airlines credit rating Asset Manager or Financier type of service?
Increased offerings by lessors Operational Solutions Rentals Short-term (30-90 day) rentals Medium / long term leases Guaranteed Availability Spare engine available within 24h Advance Reservations Reserve future spare engine rental Engine Exchange Trade used engine for ready-toinstall engine Financial Solutions Highly Structured Financial Products Standard Low Tax-Based Financing Sale-Leaseback Lease In / Lease Outs Investments in Asset Securitization Finance Lease Long-term Operating Lease Medium-Term Operating Lease and Loans Lessee s Credit Rating High Maximising Customer Benefit with Tailored Solutions
Advantages of Leasing Companies Asset Manager Financier Asset Management Technical and specific market Knowkledge Core business Remarketing Specialist Access to a Broader market increases utilisation helping reduce rental Financing Advantage Purchase Price Value Depreciation & Residual Value Financing Costs Maintenance Costs Strong connection to a finance institution Better understanding of risk and rewards Other management costs
Conclusion A growing demand for engine leasing as a Value Added Service Engines are very attractive assets, providing they are properly managed and maintained - quality of maintenance is essential to keep the value! Good engines = liquid engines Operational support and asset financing are two different jobs Engine technical expertise + accurate asset management on the right engines = key success factor.
Contact Information Shannon office Aviation House Shannon Industrial Estate Shannon County Clare Ireland +353 61 36 0056 phone +353 61 36 0614 fax Sales Enquiries: marketing@ses.ie Technical Enquiries: technical@ses.ie General Enquiries: info@ses.ie SES: The Spare Engine Solution