The leasing of aircraft into China is a well-documented industry, participated in by a broad swathe of domestic and international lessors. Aircraft engine leasing, on the other hand, is more unexplored territory, with fewer foreign players venturing into the space.
“Engines are not big ticket assets compared to aircraft and you need high technical expertise to do it,” explains David Yu, executive director for Asia operations at the International Bureau of Aviation (IBA).
“There are many Chinese lessors wanting to get into engine leasing. They want to increase exposure, but it’s hard to get scale due to the size of each deal.”
Whereas airlines who lease aircraft will almost certainly be looking to utilise that equipment to the fullest extent possible, engines are often leased as spares for short term periods. Many airlines in China, especially the larger state-owned carriers, prefer to purchase their own spare engines rather than lease them.
However, Yu says that there are “a lot of new entrants that have recently entered into this space globally and are competing for deals and scale”.
Guangzhou-based Legend Financial Leasing told Airfinance Journal in a February 2017 interview that it had leased five spare ERJ-145 engines to Tianjin Airlines.
Engine leasing in China is often a side-business for participants rather than a majority part of their leasing activity. Legend, for instance, focuses on equipment leasing, such as underground piping, medical equipment and environmentally-friendly public transport vehicles.
Bob James, managing director of UK-based AerFin, says that he is not aware of specific Chinese lessors focused on engines, but believes engine leasing “should be considered as strategically important as aircraft leasing and it will only be a matter of time before this business is developed in China”.
Chinese lessors looking to lease engines should make sure they are well-versed in the technicalities of that business before starting,” James advises.
“Given the technical nature of engine leasing, the wide variety of engine types and the potential impact on residual values and remarketability if not appropriately managed, any Chinese lessor investor seeking to invest in the engine leasing business would be well advised to acquire engine lease management expertise from which to develop its own technical and commercial competencies,” he says.
An executive from one Chinese leasing company, who declined to be named, says that although engines are among the most common types of aerospace equipment, lessors in China “seldom touch” them.
Jon Sharp, group president and CEO of Engine Lease Finance (ELFC), says that the “huge influx” of Chinese money into aircraft and engine leasing has “disturbed the market”. Sharp argues that this has “distorted” the sale-and-leaseback market and has given airlines increased bargaining power with lessors, due to the increased supply over demand. “What that has done is to completely distort the sale-and-leaseback market, which is the traditional route for most lessors to acquire new product. The influx of capital has rendered the sale and leaseback market unattractive to lessors, so in order to achieve better economic returns, the lessors are turning to buying aircraft direct from the manufacturers’. “I think the biggest trend in China is in them putting the money into these products themselves. I do expect to see more growth of China-to-China leasing, and I think that will largely exclude the foreign lessors. That is a disappointment in some ways for us, but that’s the market and that’s what you have got to adapt to.”
Chinese cities tend to suffer from high levels of air pollution. The country’s busiest airport, Beijing Capital, serves a metropolis often plagued with severe levels of pollution. In December 2016 359 flights from that airport had to be cancelled due to heavy smog reducing visibility levels, according to Hong Kong newspaper South China Morning Post.
Aircraft engines also suffer from the pollution, deteriorating much faster than they would in a cleaner air environment.
“Narrowbody engines appear to exhibit significant premature deterioration in terms of engine performance resulting in an increase in engine shop visit costs as a consequence of the non-benign operating environment in China. Engine lessors may need to carefully consider the deterioration rates and associated impact on maintenance reserves and engine residual values,” says AerFin’s James.
ELFC’s Sharp says that a typical narrowbody engine tends to last “half as long” on wing in China compared with one operating in Northern Europe, due to atmospheric pollution. “It’s that bad,” he says, adding: “That means there is a lot of emphasis on return conditions and usage rates and reserves.”
Airfinance Journal recently reported about how repossessions of aircraft from China presented several challenges and could take time, although they are relatively uncommon compared with other jurisdictions. Engine repossessions are even more uncommon, and usually would form part of an overall aircraft repossession with the engines included rather than engines on their own, IBA’s Yu says.
ELFC’s Sharp says that one of the difficulties in assessing the risk of doing leasing business with China is that nobody has any experience of engine repossession. “There have been some aircraft repossessed, but not engines – that’s a different case. So there’s a bit of a question mark over that, but generally speaking engines are easier to repossess than aircraft,” Sharp says.
Despite the challenges, the prospects for the development of the engine leasing market are generally good.
IBA’s Yu says, however, that the majority of engine leasing deals are still finance leases.
AerFin’s James says the exact level of growth is difficult to calculate due to the lack of reliable statistics on engine leasing in China.
“However, it is known that such entities as Hainan Airlines and the larger carriers such as China Southern have been supported by OEMs with engine leases, particularly on the larger big fan engine types,” he says.
“The engine leasing market is not considered mature in China, but given the greater than 13,500 forecast new aircraft deliveries over the next 20 years, the engine lease market will inevitably grow and there are not seen to be barriers that would prevent this from increasing.”