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If I could tell an airline executive how it could add millions of dollars to its bottom line fairly easily, do you think it would listen?

Pay more attention to lease return conditions—and start about two years in advance. Some airlines already do this, but the International Bureau of Aviation (IBA) surveyed the industry and found that airlines spend $1.65m, on average, on extra costs related to each narrowbody redelivery to lessors. Overspend on widebodies can be twice that. 

This news shouldn’t shock you: groups such as the Aviation Working Group--whose members include lessors, financiers and manufacturers--have been working for several years on trying to develop harmonized regulations and procedures to efficiently transfer, certify, import and re-register aircraft in different jurisdictions.

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AAR looks to adapt in a changing engine teardown market

At this year’s MRO Network: Engine Leasing, Trading and Finance conference, James Pozzi spoke to AAR’s director of commercial sales Christophe Giraud about the current state of the engine teardown market and how the aftermarket specialist is adapting to increased competition.

Posted in Interviews and tagged AAR, engine, leasing, Finance, tear-down

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At MRO Network’s Engine Leasing Trading and Finance event in London this week, topics ranging from the growing OEM aftermarket influence to the current state of the part-out market were discussed in a series of panels comprised of industry specialists.

One of the discussions that was of particular interest to me was a talk about the current state of the engine leasing market, involving figures from the world of aviation leasing and finance.

The consensus suggested that the industry finds itself in a healthy state at present, owing much to what panel chair Jon Sharp, president and CEO of Engine Lease Finance, pinpointed as airlines becoming smarter post-2008 financial crisis and better at managing their fleet by using the leasing market to their advantage.

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Aircraft lease redelivery optimisation

In an exclusive blog for MRO Network, Chris Spafford and Neil McConachie of consultancy Oliver Wyman discuss how airlines can best optimise redelivered aircraft on lease.

In an exclusive blog for MRO Network, Chris Spafford and Neil McConachie of consultancy Oliver Wyman discuss how airlines can best optimise redelivered aircraft on lease.

As a result of the delivery surge in the early 1990s, airlines are expected to retire 8,220 aircraft over the next decade, according to data from CAVOK, up 50 percent from the last 10 years.

Many of these aircraft are leased and carriers must prepare for redelivery to the lessor, which can be a costly process if not planned properly. For a number of airlines, that means tens of millions of dollars in last-minute maintenance costs, late redelivery penalties, and out-of-service downtime. But with sufficient planning and the use of dedicated optimization tools, airlines can significantly reduce or avoid these costs.

A best-in-class lease return process starts at aircraft delivery and continues through the return of the aircraft to the lessor, with final preparations underway three to six months prior to the redelivery date. This process contains a number of critical tasks, from managing technical records to ensuring the aircraft’s condition meets the lease return requirements, including component age and the remaining maintenance life on engines and other hard-time components.

Yet, while airlines employ some of the most advanced operational research tools in the world, they are often insufficiently prepared to return a leased aircraft, and end up spending millions of dollars in unexpected maintenance and late redelivery fees. On older fleets, the cost to overhaul the engines to meet return conditions alone can easily equal or exceed the total value of the aircraft.

The approach traditionally used by many airlines is to manually adapt the maintenance plan to minimize the total expected lease-return-related maintenance in the final six to 12 months of the lease. This usually consists of replacing engines or other time-controlled parts that do not meet the contractually stipulated lease-return conditions.

The airline then places spare or short-term leased assets on the aircraft to bridge the timing gap to redelivery, replacing the original asset on the aircraft at lease return.

But this approach is flawed. Most importantly, the airline limits its flexibility as the combined timing and availability of parts is unlikely to materialize in an optimal manner. The airline risks a tight market for suitable surplus or used parts and, in times of low supply, market-clearing prices can be prohibitively expensive.

Airlines need to think about this problem differently. To optimize the entire fleet, airlines need to examine lease returns over a longer time horizon, typically three to five years prior to aircraft retirement. And to do this well, airlines must rely on sophisticated mathematical modeling tools.

There is a significant amount of planning required to minimize the remaining life penalties frequently stipulated in lease agreements on engines, airframes and other hard-time components. For example, instead of using a short-term engine lease just prior to aircraft redelivery, an airline could use an optimization model to sequence its entire fleet of engines and other components for a multi-year period. This type of analysis needs to consider many variables, including maintenance costs, lease return conditions, forecasted used asset availability and predicted market pricing, with the goal of solving the minimal total cost function.

This optimal solution would include more cost-effective swapping of the airline’s existing assets and would use short-term engine and asset leases when the assets are available or at lower prices, which may be many years before the scheduled redelivery of the aircraft. Similar logic can also be applied to landing gear, auxiliary power units, thrust reversers and other high-value components, as well as the more efficient packaging of airframe maintenance tasks.

In our experience, such planning can help the airline save on average $1m to $2m per aircraft redelivery in maintenance costs alone. But this type of analysis is extremely complex and must combine several algorithms to evaluate hundreds of thousands of possible sequences. This clearly does not lend itself to the typical manual or spreadsheet-based modeling techniques that are often employed.

By thinking about this more holistically over a longer time period, the airline opens a number of possible new paths.

These include more efficient engine swapping, life limited part (LLP) programs that match the remaining life of the leased assets, and more proactive and predictable surplus parts management, including forward purchasing of assets or surplus parts. This is particularly relevant when market supply is uncertain or not expected to be very robust. And, if the fleet has sufficient scale, carriers can consider other strategic options including surplus part partnerships.

Unlike using a manual process, which often comes too late to have any practical benefit, the model provides an efficient mechanism to reduce aircraft down time, fine-tune lease redelivery dates, identify the highest value items for possible renegotiation with the lessor, and provide tangible justification to lower the lease redelivery provision on the balance sheet. In this way, airlines can extract additional value beyond the direct maintenance benefits.

Chris Spafford is a partner in global consulting company Oliver Wyman’s aviation practice, and Neil McConachie is an engagement manager. Both are based in Dallas.

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