The uberisation of spare engines

The taxi hailing start-up Uber has seen phenomenal growth with some reports saying that the company is reaching $2bn revenue. What is Uber doing to attract so many new customers?

Uber provides an automated digital platform to customers and drivers, enabling them to book rides whilst removing transaction friction by storing customer information.  Uber has now partnered with some airlines so that customers can order a pick-up from within that Airline’s app and at the same time the Uber driver has access to the flight details.  This results in the customer receiving a seamless airport connection.

The aviation asset management world could benefit from taking inspiration from Uber. In an industry where margins are low for the underlying risk, digitisation and automation are vital to reduce costs. Today, data exchange between parties in the industry is limited.  A mid-life aircraft will produce several boxes of physical data and, although there are IT solutions that can store or analyse this data, people are still needed to operate such systems. Ideally, systems should have ability to exchange data directly with other systems and perform basic analytical tasks using artificial intelligence. Humans can then add value by assessing key outputs.

However, there is also a need to adapt working practices to the digital world. Industry representative bodies can help advance digitisation and automation by agreeing specific standards. The leasing and trading community can then apply these in transactions when assets are sold and purchased.

The quantity of data generated by the aviation assets themselves will increase significantly over the coming years, providing further opportunity for efficiencies through digital automation. The new generation of aircraft such as the A350 have a greater number of embedded sensors to monitor the aircraft components. This will provide even more real-time data resulting in efficient engine removal. If we add greater system-to-system connectivity - think Uber working with airlines on airport connections – then airlines will be able to “pick-up” spare engines seamlessly and manage their fleet with fewer spare engines.

Rolls-Royce & Partners Finance has recently developed a customer portal as part of its digitisation strategy.  This portal will give customer’s access to information on the engines that they have leased from us, as well as being given the ability to view other engines that are available for lease and make requests to take such engines.  This opening up of our systems is a natural extension of our way of working. We will continue to work closely in partnership with our customers, in person, and increasingly, digitally.

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Are Zip-aero-engines the future?

Today, 85% of people in the USA travel to work by car, but ownership of cars peaked in 2001 and has been declining ever since. In the past decade, US cities have seen the rise of an alternative way of accessing cars: car-sharing services. Zipcar, one of the pioneers in car sharing, has successfully monetized the trend away from ownership.

There is a similar trend away from ownership of aircraft spare engines. Airlines are increasingly reluctant to tie up large sums of capital in what is a low utilization asset. Also modern engines, thanks to new monitoring and diagnostic technologies, quickly mature to follow a predictable maintenance pattern. In this context, the engine leasing industry is ripe for innovation. Is the future Zip-aero-engines?

Ideally, airlines only want spare engines on a just-in-time basis to cover engine maintenance events. However, the providers of spare engines need to have predictable and high asset utilization in order to earn a return from their investment. The optimal solution generally adopted is for airlines to secure a base load of engines on a long term dedicated basis, either owned or on long-term lease, and then to source incremental needs through short term leases.

If airlines and service providers worked closer together by sharing data on coverage requirements and were able to more efficiently match available capacity to the underlying need, then costs could be reduced. Also, other industry transition costs related to the preparation and transmission of manual technical documents need to be addressed through greater digitisation. Finally, for a new Zip-aero-engine business model to work, airlines will need to complete lease returns so that the next user is not affected. Zipcar has created a community feel among its users, to the extent that users go to great efforts to ensure other users are not inconvenienced.

It is likely that we will first see Zip-aero-engine innovation on narrow-body engine types, such as the V2500-A5 and CFM56, due to the large number of potential users, the lower cost of assets and ease of transportation between users.

It will be the spare engine providers that can work in close partnership with customers that will be in the best position to introduce innovations to the market as they can better understand needs and work closely with customers to refine new services. The zip-aero-engine business is not here yet but customers will benefit from this model in the future.

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Capital markets, cost and choices in 2014

The airline industry is a capital intensive industry. Aircraft and engines are multi-million dollar investments but without them an airline literally won't take-off.

It now seems a long time ago since the financial crisis of 2008, when capital was hard to find, because in 2014, many airlines will see an increasing number of options available to them. For example, US capital market debt finance is now being successfully tapped by non-US based airlines through Enhanced Equipment Trust Certificates (EETCs) as well as through private placements.

However, not all airlines will be able to follow this recent trend of tapping capital markets directly, as having sufficient financial strength and a brand presence with investors – mainly based in the USA – will not be easy to obtain for many. The good news for these airlines is that they may be able to take advantage of these new sources of funding indirectly, through leasing companies. Some lessors have recently managed to raise new funds in the US capital markets. RRPF is one of them and recently secured new funding through a US private placement after successfully obtaining an S&P investment grade rating of A-, one of the highest ratings issued for an engine leasing company.

Operating lease finance has for many years been an important source of capital for airlines. Leasing aircraft, engines and other assets is not only a flexible source of capital but also has the additional benefit of mitigating residual value exposure. Owning and trading spare engines is a non-core activity for airlines, while it is a core competence for engine leasing companies. Leasing is a simple and attractive solution for many as it provides an important source of finance, operational flexibility and eliminates asset value risk.

In the next 20 years, approximately 32,000 aircraft of various different types will be delivered. The associated spare engine demand will be approximately 5,200 engines with a catalogue price of $65 billion (2013 price levels).

In 2014, many airlines will have more choice as to how they finance their spare engines. Debt finance may increasingly be available; however airlines should consider the residual value risks inherent of such options against the potential additional benefits of operating lease structures. RRPF believes that at least 50% of future spare engines will be delivered via operating lease. This is because established and well-financed spare engine leasing companies should be able to pass on some of the pricing benefits of greater availability of capital combined with the additional comfort of residual value risk protection.

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RRPF offered an innovative and flexible financing solution to support our spare engine requirements. This helped reduce the transition costs of the A330 fleet and we are pleased with the results of this unique partnership.

Matthew Baumgarth,
Fleet Acquisition at Hawaiian Airlines