The Lessor s Perspective

Transcription

1 Financing & Investing in Engines New York October 2011 The Lessor s Perspective 1

2 Engine Lease Finance Corporation Agenda Lessor Market Some Perspective Timing the cycle: World Demand for Spare Engines OEM Support Programs 320neo Impact on residual values of V2500 and CFM56-5B engines Questions 2

3 What crisis Macro-modelling does not work so well for engines Each engine type has its distinct life cycle Economic fluctuations (supply and demand) are different from the generic cycle e.g. they may be driven by technical issues A balanced portfolio of older and newer engines is essential for lessor robustness New growth is at a negative yield in early years of lease Older depreciated engines offer better returns but with bigger residual risk ELF was a net seller in 2006 & 7, a major buyer in 2008 onwards. The cycles are good for us ??? Eurozone crisis, US debt, China slowing down... 3

4 Market Overview 2012 and onwards Engine Operating Leasing Market Size Analysis method How many aircraft? What numbers leased? How many spare engines leased? How many spare engines? What dollar value? Potential market for engine lessors 4

5 Market Overview - future demand Commercial Aircraft Jet Engine - Market Size Base data from Boeing current market outlook Aircraft Size Aircraft Deliveries Installed Engines Spare Engines (10%+) Leased Spare Engines (40 50%) Large 720 2, Twin aisle 7,100 14,200 1, Single aisle 21,160 42,320 4,500 2,250 Regional jets 1,920 3, Total 6,700 3,170 5

6 Market Overview The Leasing Market 32% of the backlog of new aircraft orders are owned by leasing companies 50% of all aircraft are expected to be leased by 2020 Spare engines follow this latter trend but with a lag Spare engines to support this market are contracted: On OEM Total Care packages at point of sale (50%+) By sale and lease-back at delivery point, or By sale and lease-back later 6

7 Market Overview New Engine Deliveries Operating Leasing Market Growth Forecast 3,170 spare engines will be delivered and placed on operating lease between 2010 and 2029 Average $12m each = $38bn (2010 $) Average = $1.9bn pa new engine operating lease market 10 significant participants = overpopulated market All means downwards pressure on monthly rentals 7

8 OEM Support Programs These programs come with many names and alternative levels of engine support; Total Care, On Point, FHA(s). They are significant revenue sources for the OEMs but they hinder financing whether debt or leasing by capturing the majority of the engine security package. Primary issues for the Lessor community include: Security - no reserves Portability of fund Adequacy of fund Inflexibility of workscope Exclusion of competitive options For funding For MRO

9 OEM Support Programs Relief on the Way? Address the matters of security, access, transferability and flexibility referred to. Some new thinking going on in certain OEMs: 1. CFMI is designing a new lessor-friendly package for the LEAP-X. Why not the current generation? 2. IAE is now offering three variations of FHA portability although we have yet to test them (soon to change). 3. Rolls Royce is offering a product they call OPERA that looks similar to the IAE offering but it also has yet to be tested. 4. GE Nothing on offer we know of yet. 5. Pratt Same as GE

10 2011 Trends Industry consolidation and expansion ELF acquires Maquarie engine assets 47 owned and 7 managed Part of growth strategy for ELF ILFC acquires Aeroturbine ILFC gains engine exit strategy with liquidation business, Launchpad for full engine lease service provision? Willis launches JV with Mitsui CF34 and V2500-A5 Also diversifies into aircraft ST Aero & Marubeni JV entry into engine leasing One stop shop for CFM56 series SANAD - a dark horse 10

11 2011 Trends Operating lessors resorting more to short term leasing to place off-lease assets High levels of lease returns e.g. ELF managed over 65 remarketing events YTD Expected bow wave of CFM56-7B shop visits has not arrived Lessors resort to pooling and spot leases at low rentals to demonstrate on-lease status and at least receive maintenance reserve income All means downwards pressure on monthly rentals 11

12 2011 Trends - No large speculative engine orders being placed by engine lessors Uncertainty resulting from launch of NEO and MAX : - SIX competing mainstream narrowbody engine options in mid-decade V2500-A5 A320 CFM56-5B A320 CFM56-7B 737 NG LEAP-X A320 NEO GTF A320 NEO LEAP-X 737 MAX Concern over residual values Uncertainty over OEM levels of market support Aircraft order deferrals and cancellations expected following 2011 summer of irrational exuberance 12

13 Market Overview and the longer term There is a perceived funding gap in airfinance and some banks have recently exited aircraft financing but in engine leasing there is oversupply from existing market participants. The present economic turmoil will drive demand for engine finance and will produce opportunities to acquire engines but pricing will be thin as a result. Lessors will take great care in their investment decisions given the new engine options. The airline industry is global, largely unaffected by regional disturbances. It represents a sound long term growth opportunity because it essential for the world s Political, Economic and Social well being. It is large, carrying considerable momentum: regarding engines, CFMI alone have an order backlog of over 4,000 units. With a long-term view engines remain a good investment opportunity Proper management of these complex assets is the key for any passive investor.