Leasing on the rise

In the time- and cost-sensitive aviation industry, airlines are increasingly using the opportunity to lease aircraft and engines.

05.2015 | Text: Nicole Geffert

Text:
Nicole Geffert has been working as a freelance journalist covering topics such as research and science, money and taxes, and education and careers since 1999.

Around 7.3 billion passengers will board an aircraft in 2034—more than twice as many as today. This means a huge demand for new aircraft and engines, a view shared by the forecasts of the two major aircraft manufacturers. According to Boeing, the total value of worldwide aircraft deliveries in 2015 is already around 124 billion US dollars, double the value of just a few years ago in 2010. And this trend is set to continue: by 2033, according to Airbus, about 31,000 new aircraft with a total value of 4.6 trillion US dollars will be needed.

Airlines concentrate on their core business

To keep pace with this demand, airline companies would have to invest on average around 250 billion US dollars every year in new aircraft. However, IATA estimated their recent profits at “only” 20 billion US dollars. Leasing companies with strong financial muscle are increasingly stepping in to close this gap. Since 1990, the proportion of leased aircraft has gone up by 26 percentage points to 40.7 percent. Boeing expects that in a mere five years from now, over half the aircraft worldwide will no longer be­long to operators but to leasing companies. Other experts are more cautious in their estimates, but all aviation market observers agree on one thing: leasing instead of buying will be the name of the game in the future.

As in other industries, the companies benefit from the higher flexibility and lower capital costs of leased objects. Low-cost start-ups in particular can build up a fleet quickly through leasing, but even the big established players are turning more fre­quent­ly to this alternative form of financing. Dr. Marc Le Dilosquer, Senior Market Analyst at MTU Aero Engines, explains why: “Airlines tend to see their core business more as transporting people and goods than acting as investors and managing assets.” In addition, says Le Dilosquer, investing in their own aircraft holds a financial risk for airlines—one that other companies are better placed to evaluate and bear.

Aircraft as an investment opportunity

In light of the continuing liquidity glut, these companies are seeking lucrative and se­cure investment opportunities more than ever. Seen as attractive investments, aircraft are also drawing more and more investors and new leasing providers from the Middle and Far East. However, the largest lessor in the world is GE Capital Aviation Services (GECAS), which belongs to the US conglomerate General Electric. The industry pioneer has been operating on the market for over 40 years and currently has about 1,650 air­craft leased out to other companies—even the world’s largest airlines come nowhere near a fleet of that size. The second largest lessor is AerCap, which is based in Amsterdam and has around 1,300 aircraft.

These leasing companies supply aircraft to airlines for a contractually agreed period of time. In the case of narrowbodies such as the A320 and B737, the term is usually three to seven years. The leasing costs are made up of a monthly rate, which is gen­er­ally one percent of the price of buying the aircraft new, as well as maintenance and contingency reserves, which are refunded at the end of the contract term.

LEASED AIRCRAFT AS A PROPORTION OF THE WORLDWIDE FLEET

Already, more than one in every 3 aircraft is leased today.

1970

1980

1990

2000

2014

2020 (Forecast)

In 1970, not even 1 percent of aircraft were leased. Ten years later, this figure was 1.7 percent. By 1990, the number had multiplied by almost ten, and the market has grown strongly since then. Firstly, many airlines are scarcely able to finance the requisite aircraft purchases to cover increasing passenger numbers based on current profit margins. Secondly, investors are increasingly discovering aircraft as an attractive investment opportunity.


Source: Ascend and Boeing

Engine leasing growing

Aircraft leasing companies benefit from continuous payment flows and the ownership of assets that retain their value for a long time. These two factors also characterize the engine business. It is no wonder, then, that a growing number of engines is leased, as well engine lessors include original equipment manufacturers (OEMs) and in­de­pend­ent providers. MTU Aero Engines, too, is active in this promising market. In 2013, it founded two joint ventures together with Sumitomo, one of the largest trading com­panies in Japan, so as to be able to better meet airlines’ growing demand for financing solutions: MTU Maintenance Lease Services (MLS) and Sumisho Aero Engine Lease (see Inside MTU).

Thanks to leasing, airlines no longer have to invest in their own replacement engines, preserving their capital base. However, they want more. “We’ve received a clear mes­sage from our customers: They want a comprehensive service that allows them to ef­fi­cient­ly manage their engines,” says Martin Friis-Petersen, Managing Director, MTU Main­ten­ance Lease Services. “Consequently, we have added asset and materials man­age­ment to our portfolio in order to take the value that lies in an engine and optimize it for our customers’ benefit.”

This facilitates optimum engine management and cost-effective support that en­com­passes everything from delivery and maintenance through to the recycling of the en­gine’s parts at the end of its service life. “Aside from the OEMs, there are only a few competitors worldwide that can offer the entire service chain like we do,” says Friis-Petersen.

Inside MTU New leasing power

In 2013, MTU Aero Engines and the Japanese trading company Sumitomo founded two joint ventures for engine leasing: MTU Maintenance Lease Services (MLS), with an MTU stake of 80 percent, and Sumisho Aero Engine Lease, with an MTU stake of 10 percent. Both companies are headquartered in Amsterdam.

MLS offers integrated solutions for different customer needs, such as short-term leasing and standby arrangements. On top of this, it provides a range of additional services for all MTU Maintenance engine programs, including engine replacement, logistical services and maintenance and repair. For older engines, leasing can be a cost-effective al­ter­na­tive to repairs. This is where MTUPlus Mature Engine Solutions come in.

Asset management and materials management round off the services offered. The port­folio ranges from evaluating engines and analyzing their residual value, to purchasing or sub-leasing the entire engine, to comprehensive parts management. This includes taking the engine apart, repairing parts that can still be used, and warehousing and reusing spare parts.

Sumisho Aero Engine Lease specializes in long-term leasing, which involves customers using engines for a longer period defined in advance. Their portfolio also includes sale-­and-leaseback solutions.

MTU Maintenance Lease Services

The company’s engine portfolio includes:
V2500-A5/-D5, PW2000, CF6-50/-80C2, GE90-115B, CFM56-3/-5B/-7 und CF34.

Sumisho Aero Engine Lease

The company’s engine portfolio includes:
CFM56-5B/-7, V2500-A5, Leap-1A/-1B, PW1100G-JM, CF6-80C2, GE90-115B, GEnx und CF34-10E.

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