Are head winds coming?
The world has been experiencing the longest running period of economic growth since 2009 and all major economies, such the US, China and India, have expanded strongly. This has created a sustained demand for air travel and led to robust demand for both new and used aircraft.
Correction could be due
Based on previous cycles a correction is due at some point. Currently, there are varying degrees of head winds depending on the country and region; increasing taxation on aviation fuel, strengthening US interest rates and its effect on emerging market currencies – weakening currencies against US Dollar and capital outflow and contracting disposal income.
Competition remains high in many markets and so some airlines may not be able to pass on all input cost increases through their base fares to cost conscious consumers. This is extremely acute in countries like India and Indonesia where price elasticity is very high. Some airlines are cleverly increasing their ancillary charges such as check-in bags to help cover higher input costs while at the same time making capacity adjustments.
Current state of spare engine leasing market
Teething problems linked to new generation engines, limited MRO capacity, high fleet utilisation and limited aircraft retirements, have all conspired to keep the spot market very tight for spare engines. If there is lower demand for used aircraft because of rising operating costs then aircraft lessors may look to retire mature aircraft in the hope of generating better economics via part out of airframe and engines.
Although there is limited supply of engines today, increased supply of engines from aircraft tear downs, improved shop turn times in the medium term and elimination of teething problems on new generation engines could dramatically change the market – creating a supply-demand imbalance. However, unlike the previous downturn, established spare engine lessors have developed multiple risk mitigation solutions such as vertically integrating serviceable used parts businesses.
The value of used parts
In the event of over-capacity in the market, lessors will be able to use part out businesses to reduce capacity. This will increase the supply of serviceable used material and reduce the cost of engine refurbishment. We recently overhauled two Trent 700s and by using a large quantity of serviceable used material achieved much cheaper maintenance costs. We are now working with MRO shops to provide used material to reduce refurbishments costs for other engine owners.
Partnership is our business
As the largest V2500 and Trent 700 spare engine lessor, we can offer the full breadth of solutions from sale & leaseback financing of new or used engines, spot market leasing, green time leasing, serviceable used material as well as the leasing of ground support equipment. We can effectively offer a one-stop solution to mid-life fleet operators and aircraft owners. We are also increasingly investing in our digital systems to enable smarter service delivery to our customers.
The potential for growth in the spare engine leasing market is significant, even in a downturn. In the next twenty years, approximately 34,000 aircraft of various types will be delivered. The associated spare engine market will be approximately 5,200 engines with a catalogue price of $65 billion (2018 price levels). We believe that at least 50% of these future spare engines will be delivered via operating lease. The lessors that can find ways to add value to their customer’s business will not only be able to generate a reasonable return for their investors but will also grow and thrive in any coming downturn.