Jet Engine Leasing - Impacts in a COVID Environment - AN ISTAT PRESENTATION - August 2021
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Jet Engine Leasing – Impacts in a COVID
Environment
AN ISTAT PRESENTATION
Graeme Crickett
Chief Technical Officer
August 2021
1
Rider:
The views, discussion points and opinions are expressly those of the author of
this presentation and may vary in essence or entirety from SMBC Aero Engine
Lease at the time of publication
2
Introducing SMBC Aero Engine Lease:
• Start up October 2014 based in Amsterdam, the Netherlands as a JV
between Sumitomo Corporation (90%) and MTU (Germany) (10%)
• Concentrating on long term leases of Jet Engines
• Portfolio of around 75 engines (~USD$720m)
• Mix of widebody and narrowbody
• Trading and profitable from day 1
• Ownership sold to SMFL (Sumitomo Mitsui Finance Lease) 2019
• Approved for future significant growth
3
Jet Engine Leasing (in general)
Engines as Assets as a comparison to Aircraft Leasing
• More detail sensitive – sophisticated asset
• Harder to hide value influences (read losses)
• Very portable (usually)
• Subject to annual OEM production escalations of sales pricing
• Generally smaller competition profile
• Multiple installation platforms
• Long life projections (30+ years)
• Value can be reset from shop visit refurbishments
• Can be subject to mechanical upgrades
• Technical asset management sensitivities
4
Aircraft vs Jet Engine Leasing
Engines as Assets as a comparison to Aircraft Leasing
• Engine leasing opportunities tend to have a much more truncated
timelines for response
• Engine Leasing all about knowledge of the asset and how various issues
impact the functional and operational ability of the Engine on a day to
day basis
• Require tracking of specific technical details at a granular level such as
HPT Blade P/Ns per engine
• Highly specialised technical staff
• Less tolerant of asset value movements or losses
• Usually more stable asset values if deals are set correctly
5
Aircraft vs Jet Engine Leasing
Engines as Assets as a comparison to Aircraft Leasing
Aircraft Production Value
$m
Engine Production Value
Time (years)
6
Aviation Market - COVID sensitive
So what has COVID done?
• No evidence of any fire sales nor massive airline bankruptcies
• No evidence of massive fleet early returns
• No evidence of Leasing companies going broke
• Evidence of a LOT of airlines in distress
• Evidence of a lot of parked up capacity, delaying shop visits etc
• Evidence that the virus is significantly deadly and long lived
• Evidence that global and Governmental responses exceptionally poor
• Price of Oil is around the same pre COVID
• Cost of finance is a little less but susceptible to USD$ Fed movements
• Significantly increased the burden of risk to the Aviation asset owners
7
Aviation Market - COVID sensitive
Comparison of 2021 to 2019:
• Oil Pricing: 2019 $64.30 / Crude Oil Price
2020 $41.96 / Crude Oil Price
2021 $63.16 / Crude oil Price
• US Treasury 10 year swap rates
Aug 2019 1.65% (biggest fall since 2008)
Aug 2020 0.568%
Aug 2021 1.301%
• Pre COVID 2019 around 35% of all Airlines were loss making, around
25% making a profit, the remainder struggling to break even
8
Aviation Market - COVID today and tomorrow
Recovery:
• Evidence that recoveries are sporadic and localised to regions or
continents (mini recoveries)
• Emerging evidence of Country alignment on travel policies
• Convincing evidence that a vaccination program will be the only way
to resume as close to normal travel as can be expected
• Emerging evidence that some regions (SE Asia, Africa, Asia sub-
continent) are many months away from a planned and executed
vaccination program and therefore aviation stability
• History will not cover many Governments and their Leaders in praise
• A vaccination passport (or equivalent that is globally acceptable) will
be required for most travel
• Travel to any areas that do not have vaccination programs will be
significantly impacted
• Business class travel will return esp with respected airlines with
controls
9
Aviation Market - COVID sensitive
COVID Olympics? FYI – the Market is not a game
Despite no actual evidence of any fire sales or mass aviation assets being
flooded back into the market from distress airlines, the market was
being short talked down by a number of people.
It may be that over time the doom forecast comes true but at the time,
it was not helpful nor reflective of the actual market conditions.
• They were largely not Jet Engine Lessors, nor were they Jet Engine
Investors.
• They were not even recognised Jet Engine Specialists but because
they knew what an aeroplane looked like, they thought their opinion
was just what the market needed.
• There were a few Engine Lease specialists who advised of the need to
actually know what people were talking about – the need to be a
SPECIALIST, not a generalist.
• At the same time as the talking heads voicing their opinions, a few
Engine Leasing companies were talking up the market – perhaps in
10
seeking more finance?Aviation Market - COVID today and tomorrow
Further Recovery:
• It’s a lot of common sense
• Widebody market will struggle (A380, B777 series, A330 series, A350
series) for some time but probably never fully recover for some years
• When over 50% of an aircraft type is with one airline (Emirates)?
• Narrowbody is heading to a localised recovery but capacity and
demand can rapidly respond as required.
• CEO engine models will not be mass culled as new OEM aircraft are
not at pre COVID production levels and wont be for a long time
• Exception to the above would be the B737 Max which has a big
number still parked up
• OEM aircraft manufacturers while announcing increasing production
rates, this will be some time away due supply component ramp uo
issues
11Engine Leasing Strata
Breakdown of the prime Jet Engine Leasing scenario opportunities:
• Widebody (Pre COVID)
• Sale & Lease Back (SLB) – mostly long terms (10+ years)
• Current production variants
• Some short term or medium term shop visit (SV) support leases
• Reasonable returns (profits)
• Maintenance Reserves commonly paid at lease end
• Widebody Current Situation: mostly power by the hour (PBH)
• Essentially market is either dead or on life support
• Rent down 30-40% if airline restructures
• Maintenance Reserves may not cover reasonable shop visit event
• Not evenly remotely sustainable 12Aviation Market - COVID sensitive
New Engine Pricing (thrust sensitive)
GE90-115B: Around USD$40m COVID impacted
GEnx: Around USD$31m (High Thrust) COVID impacted
LEAP-1A: Around USD$18m No COVID impact
LEAP-1B: Around USD$16m No COVID impact
GTF: Around USD$16m No COVID impact
CF34-10E Around USD$10m End of Production
QEC/EBU kits can add $2-$3m+ to the costs.
Largely, the SLB market of NEO variants hasn’t changed the sale pricing
There is virtually no discount in new SLB NEO engines being offered except in
exceptional circumstances
13Jet Engine Values (COVID sensitive)
Engines as Assets
So what about used Engine values?
• Very sensitive to condition, thrust, modification level and operational life
remaining
• Demand: CFM56-5B soft at the moment
CFM56-7B demand increasing, few good ones
V2500-A5 sensitive to AD impacts – demand up
GE90-115B demand not there, too many spares
GEnx demand not there
CF34-10E short term demand increasing
Last 12 months lease demand mostly based on PBH rates paid on installation
only. Some airlines look to take a long term lease on a PBH contract but
market is moving away from this now.
14Jet Engine Values (COVID sensitive) cont…
Engines as Assets
So what about used Engine values?
• CFM56-5B used serviceable, NQEC, down ~ 15%
• CFM56-7B used serviceable, NQEC, down about 10%
• V2500-A5 used serviceable – exchange demand, down ~ 10-15%
GE90-115B no market except teardown
GEnx No market
CF34-10E under $6m range or less
Exchange engines are increasing option but higher thrust variants. A number
of quite poor engines around impacting options. Very few sales in the market.
15Jet Engine Leasing SLB market today
• Most new SLB NEO leases: Have OEM or MRO fleet agreements
• No cash maintenance reserves during the Lease
• SV event is pay at time of event
• No Letter of Credit issued
• Increases risk exposure of Lessor or Investor during Lease term
• Typically Airline and OEM are risking someone else’s money
• Even poor credit Airlines BEFORE COVID are getting better rates today
• A lot more players in the Engine Leasing market due less returns in other
parts of the Industry
• A lot of non genuine Engine Leasing specialists now bidding
16Jet Engine Leasing Green Time Market today
• Mainly short term periods – 4 to 18 months, possibly 36 months
• Covering either SV events or end of lease juggling
• Airlines looking for the best condition engines, full QECs for ultra low rates
• Some require a PBH scenario (no install = no payment)
• A lot of quite poor build life engines and low thrust models in the market
• Some airlines looking to lock in these conditions for up to 5 or more years
• Poor credit Airlines asking for significant terms
• A lot more Aircraft Leasing players in the Engine market due spares
• Parts market is flat, so not a lot of options
• Freighter market is healthy but still relatively small
17Jet Engine Values
Impacts of a Poor Lease Agreement
Often overlooked, the value of an Engine on lease is in the detail of what the
compensation will be at the end of the lease.
A recent development in the SLB market is for poor return conditions which
saves the airline lots of money.
But when you have paid full list price at the front of the lease, then someone
is losing value and money if there is not full compensation at the back end.
Typically, this type of situation is where the Engine is placed into a
Securitisation or pension fund as quickly as the lease manager can do and
pass the value risk to someone else
18Jet Engine Values
Engines as Assets
Spare Engines don’t come fully inclusive of all the parts required that they
can be installed quickly.
They need such things as QECs (Quick Engine Change kits or EBUs (Engine
Build Up kits).
These things cost quite a lot of money (up to 20-30% of the initial Engine
purchase price)
On new technology Engines such as the LEAP, GTF or GEnx Engines, no used
kits are available and lead times for new kits can be 6 months, so co-
ordinating new Engine deliveries needs a bit of planning.
All Engines need shipping stands (most go for Engine OEM approved stands)
which can be a little expensive. The smaller Engine stands are roughly
USD$32k to USD$65k and the big Fan Engines (GE90 & RR T800) can get to
USD$500k pretty quickly.
19Jet Engine Values
GE90-115B Engine – produces approximately 115,000 Lbs of Thrust. Fitted to
the Boeing 777-300 ER. USD$40m each when new, now the market is in
distress and too many spares are available
20Jet Engine Values
GEnx Roll Over Shipping Stand – cost approximately USD$350,000
Specially rolls the engine 90° to lower the height of the Fan Cowl for air
freight access. Fitted to the Boeing 787. Produces up to 78,000 Lbs thrust.
Costing over USD$30m each when new, no demand for spare engines today
21Jet Engine Values
CFM56-7B Engine. A new Engine costs approx USD$10m and the Stand is
around USD$32k. Fitted to the Boeing 737NG. Produces up to 27,000 Lbs
thrust. Firm demand in the market but for the higher thrust variants. Rental
rates around USD$45-$50k / month plus reserves
22Jet Engine Values
CFM56-5B Engine. A new Engine costs approx USD$11m and the Stand is
around USD$35k. Fitted to the Airbus A320 series. Produces up to 32,000 Lbs
thrust. Soft demand in the market, only for the higher thrust variants. Rental
rates around USD$35-$40k / month plus reserves
23Jet Engine Values
V2500-A5 Engine and Shipping Stand. A new Engine costs approx USD$10m
and the Stand is around USD$35k. Fitted to the Airbus A320 series. Produces
up to 32,000 Lbs thrust. Increasing demand in the market due AD impacts
and exchange engine basis, interest for the higher thrust variants. Rental
rates around USD$45-$55k / month plus reserves
24Jet Engines
LEAP-1A new Engine assembly line, costs approx USD$18m. Missing the LPT
Module at the rear of the Engine. Fitted to the Airbus A320 NEO series.
Produces up to 33,000 Lbs thrust. Shipping stand costs USD$55k
25Jet Engines
LEAP-1B new Engine on the assembly line, costs approx USD$16m. Fitted to
the Boeing B737-Max series. Produces up to 28,000 Lbs thrust. Shipping stand
costs USD$55k
26Jet Engines
What can go wrong
27Jet Engines
What can go wrong
28Jet Engine Leasing – COVID developments
Thank you for your time
Questions?
Graeme Crickett
Chief Technical Officer
August 2021
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