Fast 5: ELFC COO On The Engine Leasing Segment

Richard Hough, chief operating officer at Ireland-based Engine Lease Finance Corp., discusses the lease market for both current and next-generation narrowbody engines.

How many engines does ELFC have in its portfolio? What is the percentage split between narrowbody and widebody engines?

Our current portfolio is 360 engines, and 90% of them are narrowbody engines, with the remaining 10% being widebody engines for the A330, A350, B777 and B787.

Still in its infancy as programs, how does ELFC see the lease market for the CFM Leap and Pratt & Whitney GTF engines developing? 

We see the lease market for both engine types to be very strong. Typically in the initial years after a new aircraft enters into service, the primary support comes from the OEM, and it takes some time for an independent engine leasing market to develop. However, with these latest-technology narrowbody aircraft, the unprecedented ramp-up in delivery rates from both Airbus and Boeing, combined with the well-publicized technical issues, has resulted in an unanticipated level of early demand for MRO support, with a knock-on effect of increased demand for spare engines. This increased spare engine demand has accelerated the growth of the independent leasing market. There will be some supply and demand challenges in the years ahead, but given the numbers of aircraft already in service and on order, we expect that the Leap and GTF markets will mature into bigger and even more independently supported MRO and leasing markets than any of the preceding technologies.

How have supply chain challenges related to new engine deliveries impacted demand for current-generation variants of CFM56 and V2500 engines?

It has had a positive effect on the demand for CFM56 and V2500 (what we call the “post-production technology”) engine models, and we expect it will continue to do so for a number of years. Retirement rates for A320 classic and 737NG aircraft are much lower than the historical average, reflecting the sustained shortfall in capacity that cannot be met by new aircraft deliveries, compounded by the grounding of many of these new aircraft due to technical issues.  Of course, the CFM56 and V2500 engine models are not immune to the same supply chain issues that impact delivery schedules of new engines, and there is also a shortfall in the supply of new parts for these engines. Used serviceable material makes up some of the shortfall, but the MRO supply chain is even struggling to cope with the demand for repairs of these parts, further compounding the problem. All of the above increase shop visit turnaround time, which in turn increases demand for spare engines to keep aircraft in service. 

What is influencing your airline customers in terms of new engine selections? Is weighing up fuel burn savings versus unplanned maintenance a key factor?

Alongside purchase price, fuel efficiency will always be the predominant factor in an engine selection. However, given the magnitude of the unplanned maintenance requirements resulting from technical issues in the latest-technology narrowbody and widebody aircraft, durability and reliability are carrying much more weight in the overall decision-making process than they would have historically.

Are you seeing continued demand for minor and specialist engine repairs with the aim of delaying shop visits?

There has always been a demand for minimum-workscope repairs or specialist “surgical strike”-type maintenance events. While initially limited in their capability, technology and experience have improved to such an extent that it is now a common occurrence to exchange modules and replace parts such as turbine blades and vanes without performing a full engine teardown. I expect the demand for these services will increase for two reasons. Firstly, there are persistent supply chain issues within the MRO sector, which is not only increasing shop visit turnaround times, but for many engine models there is a waiting time of months just to get an induction slot. Secondly, with the significant increase in MRO costs (particularly material), there is a greater incentive to maximise the operating time between full refurbishment events, and if the surgical strike event is going to cost less than the maintenance value that can be recovered, it is an option that will always be sought.