CIVIL | LEASING
Aircraft spare engine leasing is separate from aircraft leasing because engines require more intensive technical management
In general, the airline industry is capital intensive and the aircraft used by it are high cost and long life assets. Moreover, how these aircraft come to be flying with a particular airline is not always the result of a simple purchase form the aircraft Original Equipment Manufacturer (OEM). The most common modus operandi is a sale and leaseback wherein a tripartite agreement between the airline that originally booked an aircraft with the OEM lets a leasing company buy it from the OEM and then the airline leases it from the leasing company. Payments to OEMs include options (amounts paid in advance to book an aircraft purchase), purchase rights, deposits and progress payments. While aircraft leases have been in vogue ever since airlines started sprouting up, engine leasing market started emerging only around three decades ago. At first glance, leasing of an engine differentiated from purchase or lease of an aircraft of which it is a part, appears befuddling, but there are financial reasons for this to happen which have evolved from experience over decades of commercial operations.
It is customary for a car or a load carrying vehicle to be designed to carry a single (the same) engine for its entire life; in contrast, an aircraft engine is a replaceable part of the aircraft which gets replaced several times during an airframe’s useful life, depending on aircraft type, utilisation rate, company policies, regulatory mandates and occasionally due to accidents/incidents. As aircraft down time is expensive in terms of lost revenue, airlines generally maintain a number of spare engines to ensure aircraft are not grounded when engines are removed for normal maintenance or as a result of failure. Prior to development of the aircraft spare engine leasing business, airlines had to manage engine removals via spare engine ownership or expensive emergency engine leasing. Aero engine leasing is not as old as aircraft leasing and not long ago operators owned their engines including the spare ones they needed. However, as engines became more powerful and more technically advanced, their costs also skyrocketed; in addition to initial costs, their maintenance costs also increased considerably. Engine leasing became attractive for the same reasons as aircraft leasing in a capital intensive, cost conscious resource milieu. When an aircraft is acquired by an operator, it would normally establish an engine life cycle management plan so as to maximise on wing time and reduce workshop time to the minimum. This plan aims at finding a middle ground between airworthiness perspectives and cost saving considerations over engine life cycle.
It is pertinent to point out that International Civil Aviation Organisation has not provisioned for a formal definition of the term ‘lease’ in relation to aircraft
Aircraft spare engine leasing is separate from aircraft leasing because engines require more intensive technical management. Since engine overhauls are one of the largest airline operating cost segments, each overhaul must be closely managed. Engine lessors work with airline customers to optimise the cost and ready availability of spare engines at short notice. Pratt & Whitney (P&W), a leading engine OEM has its engines mounted on more than 130 different aircraft types including regional airliners, business jets, general aviation aircraft and helicopters. To support this vast market and related Maintenance Repair & Overhaul (MRO) activities, P&W claims that it offers the largest engine rental and exchange pool of any engine OEM in the form of more than 850 engines worldwide to support its MRO activities. The other leading engine OEM is CFM International, a 50/50 joint company formed in 1974 by Snecma (Safran) in France and GE in the US. Shannon Engine Support Limited (SES), a whollyowned subsidiary of CFM International, specialises in providing spare engine lease solutions to CFM56 and LEAP operators around the globe. Headquartered in Shannon, Ireland, with marketing offices in Beijing and Budapest, SES has a portfolio of over 200 CFM56 and LEAP spare engines, including CFM56-5B, CFM56-7B, LEAP-1A and LEAP-1B engines. SES’ 13 strategic pool locations give SES both the capacity and the reach to support airlines operating CFM engines worldwide. The Rolls-Royce & Partners Finance companies (collectively, the “RRPF Affiliates”) are a collection of 50 per cent owned domestic and foreign joint ventures with Rolls-Royce, another leading manufacturer of commercial aircraft jet engines. The RRPF affiliates are primarily engaged in two business activities: lease financing of aircraft spare engines to a diverse group of commercial aircraft operators worldwide and sale-leaseback financing of aircraft spare engines to Rolls-Royce for use in their engine maintenance programmes. GE Engine Leasing Holdings Incorporated is another big name in engine leasing business. Besides these, there are dozens of companies like Engine Lease Finance and Willis Lease which have spare engines to lease out for lease rentals include long term lease on the one end and short term ones, even on a daily basis, on the other. Perhaps the most dynamic part of the engine leasing market is the short term leasing segment in the newer narrow body engine types.
Regrettably, India produces no commercial aircraft and its entire airline industry is reliant on import of foreign-built aircraft under lease or ownership. The Indian scene is dominated by lease in contrast to ownership. Aviation finance and leasing are not covered under any specific legislated Act in India, but are governed by Indian contract laws, Indian company laws and Indian foreign exchange regulations. Also, the (Indian) Aircraft Act, 1934, read with the (Indian) Aircraft Rules, 1937 and the Civil Aviation Requirements (CARs) promulgated by the Directorate General of Civil Aviation (DGCA) from time to time, governs important aspects of aircraft leasing in India. In this context, it is pertinent to point out that International Civil Aviation Organisation (ICAO) has not provisioned for a formal definition of the term ‘lease’ in relation to aircraft. This is basically because national laws governing lease contracts vary and the negotiating process results in individual variations in the terms and conditions of aircraft leases since these are usually tailor-made to specific situations. However, ICAO’s Manual on the Regulation of International Air transport (Doc 9626), describes ‘aircraft leasing’ as the rental rather than purchase of aircraft by an aircraft operator from another operator or a nonair operator entity. In essence, an aircraft lease is a contractual arrangement in which an aircraft operator (the lessee) rents an aircraft from either another operator or a financial institution (the lessor). India has ratified the 1997 Article 83 bis of the Convention on International Civil Aviation 1944 which was the first substantial amendment of the Convention and came about in response to industry growth and leasing trends. Under Article 83 bis, a bilateral agreement can be signed between the aviation authorities of two contracting states and that agreement transfers and delegates the responsibility for the regulation and safety oversight of an aircraft in accordance with the requirements of the state of registration from that state to the air transport authorities in the airline’s home state. DGCA meticulously maintains a register of aircraft with details of aircraft type, year of manufacture, full name and address of the owner or lessor and of the operator or lessee. The notable point is that there is no engine-specific register in India to record separate registration title of an engine on an aircraft, whether maintained by DGCA or any other registry. The certificate of registration for the aircraft does not include details of the engine(s) mounted on it.
Aircraft engine leasing is a highly effective and economical alternative even for large operators who own the majority of their engines as they too need leased engines in times of high unscheduled engine removals (UERs), Life Limited Parts (LLP) shop visits etc. The flexibility to plan removals, UERs, warranty issues etc, relies upon the use of leased assets. In reality, the cost of ownership versus leasing can make a huge financial impact on the operators. Although engines are increasingly reliable, they are complex and when they are removed from aircraft for maintenance, repairs can take a long time to complete. Also, some events such as bird strike cannot be predicted. Spare engines are a small segment, around two percent, of the total aviation finance market.
Digital technologies and Artificial Intelligence are helping airlines reduce spare engine requirements by accurately predicting engine removals, but spare engines are vital as all engine removals cannot be predicted. Although no figure can be put on the number of spare engines required by an airline, the generally accepted ratio is one for every ten in use. However, local conditions, airline financial health considerations and operational models may dictate variations from this thumb rule. There is tough competition amongst the engine leasing market players to provide more and more attractive and innovative options to lessees. Cost focused airlines are increasingly able to reduce the required number of dedicated spare engines and where possible, rely on the spot market, pooling or engine availability services. These nondedicated spare engine services can in theory, increase overall asset utilisation across the market and reduce costs for airlines. Another healthy trend is availability of “green time” engines; the term refers to older engines with limited life remaining that have been taken from aircraft that have been retired. These are offered into the market by a used parts company and very often they are held 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. In general, the trends for the engine leasing market appear to favour the airlines.