In this battle together

One of the world’s leading aircraft engine lessors believes the airline industry is returning to normal, but not as quickly as many hope. Austin C. Willis told associate editor and chief correspondent, Tom Ballantyne, the percentage of leased aircraft and engines in the global airline fleet, now at 47%, should continue to increase.

June 1st 2022

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When asked the lessons the industry is learning from the pandemic, CEO of major aircraft engine lessor, Willis Lease Finance Corporation, Austin C. Willis, does not hesitate in his reply. Read More » “It goes back to the same question we had following the 2008 (Global Financial Crisis) crisis. It’s a Black Swan question,” he said.

The engine lessor’s response is specifically relevant to the aviation industry’s pandemic experience. A Black Swan event is a catastrophe that may or may not happen. If it does, the precise pathway and the timing of its occurrence are near impossible to predict. Like a global pandemic.

“We have to consider how we price our leases,” Willis told Orient Aviation. “Often times, we commercial aviation lessors price in lease and financing rates indicative of the risks they know, not necessarily the risks they don’t know.

“Perhaps we could take a more conservative approach on that? Perhaps not. Ultimately, it goes back to a partnership approach with a lot of our customers and then trying to work through major economic downturns and issues with them rather than working against one another.”

In fact Willis, who served as a Green Beret in the U.S. Army’s 20th Special Forces Group, makes the point that working with airline customers, not against them, was a key part of finding a way through the pandemic. “We became de facto partners. We discussed it early on. Historically, when it comes to collections, we are pretty forward leaning. When somebody owes us money, we do what we can to make sure they pay us,” he said.

“This was different. This was not airlines, generally speaking, taking advantage of the situation. They genuinely were in dire straits so to go in there aggressively when they are on their backs would have been the wrong approach. We worked with them. We did not get taken advantage of in the crisis.

“I will add there were certain airlines that did take advantage of the situation and used it as an excuse to exploit circumstances and renegotiate contracts. But they were very, very few and far between.”

Willis Lease Finance Corporation, headquartered in Florida, was founded by Willis’s father, Charles F. Willis, more than four decades ago. It specializes in leasing spare commercial aircraft engines and other aircraft-related equipment to commercial airlines, aircraft engine manufacturers and maintenance, repair and overhaul facilities worldwide. Willis was appointed CEO on April 1 this year after a long and diverse aviation career, most recently as the lessor’s senior vice president corporate development and since 2008, a member of the lessor’s board of directors. A graduate of the London School of Economics and Political Science, in 2004 he founded and led J.T. Power LLC, a privately held aviation parts and leasing company.

“Judging where the industry is in terms of recovery is a tricky question,” he said. “I wrote a letter to our shareholders recently and what we came away with from 2021 was continued instability. Every time we thought things were starting to normalize and improve, something new would hit the industry like the Delta variant, then the Omicron variant and now political instability in Europe with Russia’s invasion of Ukraine.”

Russia’s invasion of Ukraine is having an impact on the lessor sector. “We have and manage a limited number of assets in Russia,” Willis said.

Long-term positive growth in Asia-Pacific Like most global companies, Willis Lease Finance Corporation sees the Asia-Pacific as an increasingly important part of the business. “Historically, the lion’s share of our revenue was generated from Europe and the Americas, but that has been changing and continues to change. We see long-term positive growth trends in the Asia-Pacific. It’s going to be interesting to see what happens post-pandemic when China finally comes out of the lockdown. We are cautiously optimistic that things will return as strongly there again and be a long-term region for growth.” Willis Lease Finance Corporation CEO, Austin C. Willis

“We have been working diligently to recover them and actually had some asset recovery during the military incursion. We continue to pursue different angles both internally within Russia among the Russian airlines as well as pursuing our claims with the insurance companies.”

In May, Willis Lease reported first quarter revenue of US$68.8 million. For the three months to March 31, aggregate lease rent and maintenance reserve revenues were $53 million and spare parts and equipment sales were $6.6 million. The company reported increased total revenues in the first quarter compared with a year ago primarily from higher lease rent revenue and short-term maintenance revenue.

Quarterly performance was negatively impacted by the Russian-Ukraine war and related sanctions. In the first quarter of this year, the lessor recorded a $20.4 million impairment on two engines in Russia expected to be unrecoverable and wrote down $0.9 million of receivables associated with Russian leases. Through its joint venture, Willis Mitsui & Company Engine Support Limited (WMES), the lessor recorded an additional net impairment of $2.4 million, presented through losses, from joint ventures.

“The recent events in Ukraine are tragic and they have impacted us commercially through asset seizures in Russia,” Willis said. “However, proactive measures were taken early on to reduce exposure and recover assets, helping to mitigate potentially greater impairments.”

Despite such blows to the bottom lines of many aviation lessors, Willis is confident the percentage of aircraft and engines leased by airlines should continue to grow beyond the sector’s current up to 50% market share.

“It will, for a few reasons. On the aircraft side, airlines have become accustomed to leasing airplanes for a fixed period of time to benefit from a particular maintenance window. From an engine perspective, there are two principle reasons: fleet planning and the overall expense of engines,” he said.

“If you look at the list price of a CFM56 or a V2500 [engine] not that long ago, it was in the $7 million to $9 million range. You look at the list price of a new LEAP or a new GTF high-thrust [engine] today and they are knocking on the door of what an aircraft cost only a few years ago. The engines have become so much more expensive so it is harder now for airlines to own them outright.

“Combine that with the trend we have been seeing for a few years of airlines trying to move away from a lot of the maintenance function internally and instead outsourcing it. The combination of that outsourcing and the finance side from a leasing perspective has lent credence to the leasing market in general.

“We have our Constant Thrust program where we do sale and lease backs on airplanes and when an engine becomes unserviceable, we replace it with another engine. Programs like that where we combine the maintenance aspect and the financing aspect could have a long runway.”

From a personal perspective, Willis shared that the pandemic has meant he went from travelling 50% of the time to spending a lot more time with his family. “The flip side to that coin is the stress of trying to manage a company where many of your customers have gone to zero revenue at the same time. It was incredibly difficult. You saw various ways different people managed through the crisis. From a lessor perspective, there were some that played hard ball, so to speak,” he said.

“Ultimately, they did not really gain from it in many respects and they alienated their customer base. We found it was very much a case that we were heightened partners to the airlines. We preferred not to take back these assets, but airlines were generally not in a position to pay what they owed.

“So, we worked in a pretty collaborative format to find deferral and rental agreement restructurings that protected our shareholders but also enabled the airlines a degree of flexibility with liquidity and payments.

“For the most part, most of those contracts have run their course and our engines are back on more traditional lease structures. But we definitely made a real effort to work with the airlines.

“Looking at the bigger picture, from our perspective our approach validated our business model in the sense we are different from a lot of the other lessors because we were and are much, much more hands on.

“Unlike a lot of aircraft lessors and even some of the other engine lessors, we do a lot more short-term leasing.

“It means we are interacting with the airlines all the time. That interaction really enables us to find collaborative solutions with the airlines.”

While the pandemic has certainly increased online communications and digitalization with suppliers and customers, that had been the trend before the pandemic, Willis said. An example is video borescope reviews.

“They can be sent electronically now. Where historically you would have to do engine test cell runs after a lease we are now doing on-wing MPA (Maximum Performance Assurance) runs and acquiring performance data,” he said.

“The pandemic has probably accelerated them, but a lot of those technical functions already had become remote and these trends will continue.

“Digitalization has been scaled up during the pandemic more as a way to replicate the face-to-face interaction we had historically. I think Microsoft Teams and other collaboration apps were a big part of that.

“We were fortunate we actually implemented a new ERP (Enterprise Resource Planning) and CRM (Customer Relationship Management) system some months before the outbreak of the pandemic. The data we gathered made us far more reactive, agile and better equipped to deal with issues as they came up.”

What makes Willis Lease unique, its CEO said, are the customized solutions it offers clients. “There are a number of parties that can do just money over money leasing and lending. We offer ways to essentially enable customers to better budget and reduce costs and expenses as they come out of the pandemic,” Willis said.

“Through our Constant Thrust program and similar products, we essentially offer power-by-the-hour on engines, where we do a sale lease-back on an aircraft and the airline just pays maintenance reserves and we recycle engines on and off wing. These offerings should be a real value to customers as they come out of the pandemic and (a) are trying to budget effectively for engine costs and (b) are unsure about the longevity of the particular fleet and when they are going to replace it with something newer. That provides them with a lot of flexibility.”