“Busy times” for engine lessors as airlines right size fleets

October 1st 2021

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There are busy times ahead for aircraft engine lessors, sector insiders predict. Read More » “Lessors are becoming increasingly involved in asset maintenance, either by providing full maintenance support or by leasing assets until unserviceability,” Chief Representative Singapore Office, MTU Maintenance Lease Services, Luc Morvan, told Orient Aviation.

'Passenger traffic in many regions within Asia-Pacific is still well below pre-COVID levels as lockdowns and travel restrictions remain. Even in markets where there are no caps on utilization or capacity, passenger quarantine requirements continue to impose a damper on travel demand, especially in regions that rely heavily on international traffic. As a result, it would be no surprise if there are several airlines continuing to struggle financially, with debt still growing, especially those in jurisdictions that have received little to no government support'

Craig W. Welsh Willis Lease Finance Corporation senior vice president and chief commercial officer Americas & Asia

“Already, we are seeing stronger demand for engine MRO support from the lessors. In addition, there will be a wave of maintenance events required to manage the return to service of the currently parked fleet. Technical teams will have a lot of work to do on this front, which we are already seeing reflected at MTU Maintenance with increased demand for our on-site and technical asset management services.”

Willis Lease Finance Corporation senior vice president and chief commercial officer Americas & Asia, Craig W. Welsh, told Orient Aviation recovery in the region’s lessor industry will vary with some countries emerging sooner than others.

“On the whole, we anticipate the Asia-Pacific to recover in the 2023 to 2024 time frame. From a lessor perspective, however, the industry could recover sooner as airlines will likely rely heavily on the lessor community to provide capacity for growth and also to defer maintenance costs as cash conservation will remain a priority for the foreseeable future,” he said.

“As an example, many airlines use leased engines to replace engines requiring expensive refurbishments, allowing them to continue operating the aircraft while delaying the large cash outlay for the unserviceable engine’s shop visit.”

Welsh said a major question at hand was which airlines or regions may still be vulnerable to another wave of the pandemic.

“In other words, when considering new placements, lessors need to recognize that while things may be headed in the right direction today, it is possible tomorrow could quickly return to lockdowns and capacity limits by jurisdictions in reaction to outbreaks, once again hurting the airline’s cash operating position and ultimately their ability to pay.”

Overall, Willis expects the narrow-body market to recover the fastest, in particular the models with newer technology engines, Welsh said. “With better fuel burn and greater range than their predecessors, they are the more cost effective and versatile aircraft to operate. They can cover domestic and regional international routes as the latter recovers over time.

“We have already seen this to some extent in North and Latin America.”

MTU’s Morvan said: “airlines have been able to rotate and optimize their engines in the fleet through parked aircraft, so short-term lease demand is minimal.”

“Trading activities have definitely increased in 2021 compared with 2020. Asset owners are actively looking to purchase assets they want to keep in their portfolios and sell those they may want to exit,” he said.

“For engines, trading mainly has been used to generate cost-effective green time or postpone heavy maintenance events. We clearly feel the market is preparing for recovery.

From a trading perspective, full recovery to pre-pandemic levels in the Asia-Pacific probably won’t come until 2024, predicted London-based Aircraft Finance Lease (AFL) CEO, Deepak Sharma, who said there has been a slight improvement in 2021 compared with 2020. China and India will recover fastest in the area of lessor activity.

“Price wise, it is unlikely lease rates will return to pre-pandemic levels soon, Morvan said. “But current commercial concessions are not sustainable for lessors in the long-term. Fleets will need to be operated longer for lessors to receive their return on investment,

“This will affect their opportunities to provide solutions to airlines for fleet refresh. In turn, lessors are looking to preserve book value, especially on the high-cost items, such as engines.”

Another trend is airlines “right-sizing” their fleets. “Excess capacity will take an extended time to be reabsorbed by the market. Growth will be intra-regional and more narrowbody-focused to start,” said Morvan.

“Some lessors have been quite aggressive about acquisitions during the Covid-19 crisis, capitalizing on distressed asset values.

“We expect a quicker disposition of older aircraft types s we emerge from the pandemic and lessors look to sell excess fleet. This will increase trading volume, in our area in particular, for green-time engine assets and material.”

If the region manages to reach pre-COVID levels of travel in 2023, MTU agrees expansion is ahead from 2024, probably led by LCCs. Asia-Pacific markets with the highest portion of domestic travel will recover first – such as Australia, China, India, Indonesia, Japan, Korea and Vietnam, is the view of most leaders in the sector.

The downside, as pandemic jitters continue, is that more airlines could go out of business.