High Demand and Supply Chain Challenges in Engine Leasing Market

High Demand and Supply Chain Challenges in Engine Leasing Market

The engine leasing market is in some turmoil at the moment, caused by the high demand for air travel, supply chain issues, staff shortages and Pratt & Whitney’s GTF problems.

Starting with GTF, an initial announcement in July by Pratt & Whitney was that a new GTF inspection program would start in September on PW1100G-JM engines on Airbus A320neo Family aircraft. This followed the finding of a rare condition in powder metal used to manufacture certain engine parts and would require accelerated removals and inspections within the next nine to twelve months, including approximately 200 accelerated removals by mid-September of this year.

On September 11, the OEM made another announcement. The inspection program would now result in 600 to 700 additional shop visits for PW1100G-JM engines in the coming years and an average of 350 aircraft being grounded in the period 2024 to 2026. A majority of the extra engine removals will occur in 2023 and early 2024.

The company is adding maintenance capacity, increasing part output and taking other action to mitigate the impact. Somewhat ominously, it is analyzing powder metal components on other engine models within its portfolio, although it expects to see far less impact.

As a result, demand has skyrocketed in the last few months for mid-life and older aircraft. There was already reasonable demand but, now, even Airbus A319s that would have been assumed to be heading for part out at end of lease, are being put back into service.

In addition, ACMI operators, who provide additional seasonal lift to larger carriers, especially in Europe, tend to be more agile and move faster than their customers. In the last couple of years, they have experienced rapid and healthy growth, as they anticipated post-pandemic growth. They tend to look at mid-life aircraft that are 15 years old or younger, but are now starting to look at 20-year-old models again. That is a driver for the engine market.

Some engine leasing companies are able to take advantage of price rises as part of the juggling act with the portfolio but are running out of inventory and struggling to replenish their portfolios. That means they are now looking for older engines with less remaining life. There are still plenty of potential acquisition candidates but they are now more expensive and some have better pedigrees than others, requiring a lot of due diligence. However, many engine shops are putting together similarly timed modules to make a complete engine. Overall, there is a growing interest in continued time engines, as previous generation aircraft enter the mature phase of their life cycle.

Up until six months ago, many operators using IAE V2500 engines would insist on SelectOne or SelectTwo models, due to the fuel economy savings. Now, the older engines are back in demand as the availability of Select engines has diminished and the demand has increased. This means airlines have to lower their expectations as it relates to what may be available to meet their capacity requirements, whether it is how old the engine is, whether it is Select or pre-Select, or even the aircraft type, an A319 against an A320. Of course, if SelectTwo is scarce, the price rises, which pulls SelectOne and pre-Select values upwards with it.

There are end-of-lease returns occurring where the expectation six to twelve months ago would have been to send the aircraft for part out; these aircraft are now staying in service with the existing operator, or in certain instances moving on to a new operator for an additional lease term. While there are aircraft that have been parked for a considerable time, there are no signs at present that these are being reactivated, although it is possible if GTF problems persist or are delayed, with 737NGs and A320s being the most likely candidates. These are likely to have been parked because a heavy check was imminent and the level of lease rates at around $150,000/month did not make the significant investment worthwhile. If lease rates remain at $200,000/month plus, the cost might be justified.

With production rates yet to reach pre-pandemic levels, supply chain issues and rising engine parts costs, there are global capacity constraints on narrowbody lift. Throw in problems with new-generation powerplants and it creates favorable conditions for long-term values on used aircraft and engines. At least the pilot shortage seems to have abated.

Oliver James AerFin
Oliver James AerFin

Of course, it is still unclear whether this is a near-term issue or will it persist? Fixing the supply chain and reaching previous aircraft production rates will be the greatest help.

The MRO and parts businesses have had a couple of strong years and this is predicted to continue for a couple more because there is so much work around. Many lease contracts are tied to return when a heavy check is due. If the leases are being extended, that heavy check must be carried out.

As for sourcing new engines, leasing companies tend to acquire an aircraft that might provide one serviceable engine for the lease pool and another for part out along with the airframe. Any minor repair work that might be necessary could be contracted out for repair, reducing costs.

The airlines have to afford the maintenance costs but engine leasing companies are often more about private investment. As the overall costs become more and more expensive due to increased OEM list prices on material and a shortage of used serviceable material being available at reasonable prices, they are being forced to rely on acquiring engines with useful remaining life. The market will eventually have to accept higher lease rates reflecting higher overhaul costs and the increasing costs of continued time engines.

Also reflective of this private investment attitude, it has always been difficult for a mid-life lessor to carry out an overhaul and have a zero-time engine with a large book value. The speciality has been half-life engines and, in some ways, there has been no change. However, the price point of that engine has gone up, presenting a challenge, although lease rates have gone up a bit to help offset the increase.

The companies tend to have a wide customer base, especially with ACMI and cargo airlines, as they also prefer mid-life engines. Major airlines tend to rely more on their own overhaul capabilities, although there are occasional ad hoc requirements. There has also been increased interest of late, with several majors checking the market for the availability of mid-life engines, which can be seen as a response to the various problem situations at the moment.

A typical lease term is between 12 and 36 months — shorter terms of three to six months can lead to greater exposure to finding technical problems during installation/removal. Major airlines tend to prefer shorter leases when they use an outside source as this is usually in response to an emergency but they are likely to accept the typical term in the current situation.

The biggest problem for the leasing companies now is inventory, levels having dropped due to demand. As a result, they will have to be a bit more creative in replenishing stock. Higher purchase prices will be inevitable.

Despite GTF, it is the delays to deliveries of new aircraft that are causing the crisis in the mid-life engine leasing market. One engine leasing company is AerFin, where Oliver James, VP Trading, says the ongoing GTF issue will likely have a considerable impact across the supply chain. Lease rates for V2500 engines have started to rise in the last few weeks in line with demand. Going into next year this will lead to healthy competition for quality V2500 engines to support operators affected by the GTF.

He says AerFin is active in the V2500 market, including green time leasing for that engine and the CFM56. However, he predicts that next year will probably see a shortage of quality feedstock to meet the demand. That may also have an impact on the CFM56-5B market as airlines may look to onboard additional A320ceo aircraft with the alternate 5B engine variant.

He confirms that lessors have witnessed unprecedented levels of lease extensions on older generation aircraft that would otherwise have been parted out. That, again, causes supply shortages of aftermarket components as fewer aircraft are being parted out. Of course, many aircraft were parked during the pandemic and, of those still on the ground, he says the number of them dismantled has been lower than expected. he notes that the decision to reactivate those aircraft is on a case-by-case basis and highly dependent on the maintenance spend required to make them airworthy again.

Another trend during the pandemic was that airlines rotated engines from parked aircraft within their fleets to avoid engine shop visits and preserve cash.

Several freighter conversions have been completed but cannot be delivered because of engine shortages. Freighter aircraft typically operate at lower utilization rates and can therefore use engines with fewer cycles remaining. However, this has become a sweet spot for passenger operators seeking temporary short-term engine leasing solutions to overcome the GTF challenges and delays with new aircraft deliveries.

Whilst AerFin has a strong aftermarket focus on the narrowbody fleets such as the Airbus A320 Family and Boeing 737NG series, they also specialize in the Embraer E-Jet Family and the associated GE CF34-8E engine. The regional market has also been affected by the GTF but only where operators have been looking to transition from E175-E1 to the newer generation E175-E2 or A220. This has been particularly evident in Europe. In this scenario, those operators may be forced to retain the E175-E1 for several more years. This has presented AerFin with a unique opportunity to continue supporting customers with various flexible solutions to help navigate this challenging period.

The company has an EASA Part-145 MRO facility in the U.K., which is being used to directly support airlines, lessors and asset owners, seeking engine MRO Lite solutions, whether that is lease transitions, top case repairs, module swaps or QEC/LRU changes whilst also working closely with the major engine MRO shops in supporting overflow work to alleviate engine turn time pressures.

AerFin remains well positioned in the market, having successfully sourced a significant volume of quality aircraft and engines which will allow the business to further enhance its service offerings which will act as a springboard to supporting its next phase of growth.