Maintenance tips for engine lessors
Engine leasing has changed dramatically in the past five years as rent extensions for older equipment have given way to short-term deals that burn off the remaining service life of a turbofan before teardown. In some respects this has reduced lessors’ maintenance concerns, but accurate knowledge about an asset’s service history can still be the difference between a wise investment and a burden on the balance sheet. Alex Derber reports.
The engine leasing market is now about 25 years old and approaching full maturity. Like aircraft, engines are established as alternative assets, while a growing pool of lessors offer sale-and-leasebacks, short-term contracts and green-time operations, which seek to monetise the remaining service life on older equipment.
Unlike aircraft, however, there is a fundamental difference in how spare engines — which account for the powerplant leasing market — are utilised. Engines have a life and maintenance cycle independent from the airframe. As a consequence, airlines require a stock of spare engines to replace installed engines during both planned and unplanned engine removals.
These two types of removal, each of which has its own level of unpredictability, make managing spare engines and optimising their utilisation a greater challenge from both the asset management standpoint of the lessor, and the operational perspective of an airline trying to avoid cancellations.
In addition, the priorities of operators and owners do not always align, mainly because the former are responsible for the condition of the asset while the latter assumes residual value risk. Airlines renting an engine want to spend the minimum possible to ensure it meets reliability expectations and fulfils lease-return conditions. The lessor, in contrast, is most concerned about the long-term value and marketability of the asset.
Thus the best advice for any lessor regarding maintenance — other than to avoid paying for it himself — is to engage in full, frank and detailed negotiations with the operator prior to drawing up a contract. There are many opportunities to optimise a service programme, including: proper parts management when deciding about repair versus replacement; the retention of parts for repairs in development; and the selling on of surplus parts.
For newer engines, especially those approaching their first shop visit, other issues to consider are: OEM warranty support management; detailed oversight of time-and-material contracts to ensure minimum performance margins are respected; and efficient reserve claim handling.
Asset management of engines is more complex than that of aircraft, due to less predictable maintenance cycles plus shorter and more frequent lease terms. Moreover, each engine model has its own quirks, and even within a specific line there are myriad updates and technical tweaks that can drastically differentiate one engine from another. Use of PMA parts can also hit resale value, even more so now since the introduction of programmes like CFM’s TRUEngine.
For the lessor about to purchase an engine, its maintenance history and physical status need to be assessed alongside its age and operating history. Thorough visual, borescope and endoscopic checks are needed to ensure there are no defects limiting airworthiness, alongside ‘backto- birth’ checks on all life-limited parts (LLPs).
Just as important is the lease contract once the asset has been purchased. The critical clauses will define the maintenance reserve, which is an amount the lessee — usually an airline — puts aside to cover a performance restoration in the event of default or return of the engine. Usually this reserve will increase with engine usage and
negotiations usually focus on the definition of the minimum maintenance event for which the fund can be used, the maintenance interval and, therefore, the amount to be paid per flight hour.
However, on-wing times for modern engines are steadily rising, and it is difficult to precisely gauge the time between performance restoration shop visits. One influencing factor is thrust setting, as the higher the setting, the quicker the deterioration. Average sector length is also important as most wear occurs on take-off. Airlines often only use a proportion of maximum thrust on take-off, and this ‘de-rate’ also contributes to an engine’s condition.
Lessor and lessee will also define redelivery status by agreeing on a minimum technical condition of the asset, the idea being to maximise the use of the maintenance reserves and minimise lessee costs.
Once the lease is in place, lessors should keep abreast of the condition of their assets through site visits to their customers to check that engines are being stored and operated in good fashion. These checks might be especially
necessary during shop visits, when the priorities of lessor and lessee diverge most sharply. Engine remarketing can also be affected by technical and regulatory updates from manufacturers and airworthiness authorities, so the diligent lessor should stay apprised of these too.
Growing demand for alternative forms of asset finance has drawn new players to the sector to compete with established independent engine lessors such as Ireland-based Engine Lease Finance Corporation (ELFC) and US-based Willis Lease Finance Corporation and, to a lesser extent, the OEM-affiliated lessors like UK-based Rolls-Royce & Partners Finance and US-based GE Engine Leasing, which dominate the widebody engine rental sector.
And while the most dynamic and competitive segment is undoubtedly in narrowbody engines, there have been some interesting recent developments in large engine leasing, which has long been almost the exclusive preserve of GE and Rolls-Royce.