ELF CEO: Leased engine demand picks up, but Omicron knocks industry confidence – A contribution by Tom Barrett with Eduardo Mariz/Ishka Insights


Engine Lease Finance (ELF) has seen an improvement in engine demand in the past three or four months, but uncertainty sparked by the new Omicron variant is “taking a little bit of the optimism out of that momentum,” says ELF President & CEO Tom Barrett. “It’s too early to see definitive signs, but I do have a sense in speaking to our customers, our partners and so on that some of the confidence has been taken out of the recovery,” Barrett tells Ishka.

Barrett reflects on a record year for investment by the engine lessor – 75% of which has been in new technology. He explains that both ELF and some of its well-capitalised engine leasing rivals have kept the sale/leaseback (SLB) market for new tech “extremely competitive.” “We have seen some crazy pricing below 0.5 [LRF], which we have not pursued,” he comments.

The engine lessor – owned by Mitsubishi HC Capital, the resulting entity of Mitsubishi UFJ Lease & Finance’s merger with Hitachi Capital earlier this year – owns a portfolio of around 325 engines leased to over 70 customers, the bulk of which are narrowbody engines.

A ‘slower’ recovery than anticipated

The Covid-19 pandemic has taken many twists and turns since August 2020, when Barrett admits he still held some “unfounded optimism” about the recovery (see Insight: ‘ELF CEO: Optimism ahead – but for the “good” asset managers’). Like for many other lessors, ELF’s operating metrics have gone through a bumpy patch in the past year, with engine utilisation going from 80% at the end of 2020 to “at one point as low as 70%” through a largely “static” 2021 – compared to around 90% pre-pandemic.

However, the downward trend “turned the corner in the last three months,” with utilisation climbing since. “I would say the recovery is clearly underway, notably in North America, but coming back slower than we would’ve anticipated globally,” Barrett adds. Also turning a corner have been requests for temporary deferrals, which declined from up to 75% of lessees in mid-2020 to a “very modest number” largely concentrated in regions lagging in recovery, such as South Asia and Southeast Asia.

New tech gains speed in ‘record’ year

Despite the lulls in demand, ELF has continued to acquire engines. “We’ve done what we said we will do through any downturn and which we have done historically: this year will be our record year for investment in equipment,” remarks the lessor chief.

Last October, ELF completed its largest-ever deal, a purchase and leaseback of 25 GTF engines valued at $400 million with Pratt & Whitney (P&W), the majority of which are PW1100Gs powering the Airbus A320neo family with some PW1500Gs powering the Airbus A220 family.

Together with Willis Lease Finance, which completed a similar deal in February 2021, ELF has become one of the first engine lessors to add the PW1500G to its portfolio, underscoring the growing momentum for the A220 among leasing firms (see Insight: ‘A220 lease rate factors fall further in latest round of SLB bids’).

Like-minded competitors put pressure on LRFs

ELF has not been alone in pursuing an aggressive acquisition strategy. Barrett says direct rivals like SMBC Aero Engine Lease, Marubeni-backed Total Engine Asset Management (TEAM) and GE Engine Leasing (now AerCap-owned) – all well-resourced entities – among others have kept the new-tech engine SLB space “extremely competitive.”

“On a one or two-engine deal, there will be four or five names there, and it will be extremely competitive because of the criteria that we all share for growth,” he comments. LRFs on the P&W GTF and CFM LEAP engines were moving below 0.6 pre-pandemic, but limited deliveries of spare engines in the past year and strong bidding have meant LRFs, depending on lessee credit and jurisdiction, around 0.5 have not been uncommon.

“We have seen some crazy pricing below 0.5, which we have not pursued, but any consistent return to the 0.6s I think will have to wait for a stronger recovery and probably an increasing interest rate environment, which I think we’re beginning to see,” Barrett adds. Ishka understands that CFM LEAP have been placed on long-term leases at rates of around $90,000 per month, a figure which Barrett says is, on some lower thrust LEAP models, “about right.”

Current-tech restraint

As for investments in current-technology engines, ELF is being more selective. “Though we still invest in that technology, we would be looking for quite a bit higher than 0.6 lease rate factor, but that is just a function in the price of the asset.” Right now, Barrett says current-technology engines remain in a period of oversupply, which has done “real damage” to placement lease rates – at times, depending on the engine condition, dipping as low as “50% or 60%” through the crisis – but this is temporary and “normalised rates” will come “in the next year or so.”

For older narrowbody current-tech engines, the lessor often had to get “creative” to re-lease them, at times aggressively pricing engines with only a few thousand hours remaining before sending them for part-out. “The CFM56-7B is the most desirable of the three narrowbody engines. We’re a little bit different from maybe some of the competition in that we’re finding the [IAE] V2500-A5’s in our portfolio are operating better and in greater numbers than the CFM56-5,” Barrett comments, noting that a greater number of -5Bs were returned to ELF by bankrupt airlines that ceased operations.

The Ishka View

Omicron is casting a big shadow over short-term airline recovery, despite the end-of-year seasonal demand cushioning its effects in key markets including  Europe or North America. However, with Covid-19 cases soaring and new restrictions in place (or looming), the start to 2022 could present revenue challenges for airlines and lessors alike. However, ELF’s strategy is unlikely to change. The Shannon-based lessor will continue to leverage its strength and scale to buy new-tech engines with a focus on long-term leases, limiting the impact of short-term demand variations on its growth plans.

ELF believes that demand is also set to rise of sales of used serviceable material (USM) parts. Though its majority-owned parts company INAV, acquired in 2017, ELF has a “considerable amount” of USM stock ready for shop visits, which Barrett notes are forecasted to increase materially in 2022. FTAI Aviation recently began pursuing similar synergies in vertically integrating part-out and parts sales for their engines (see Insight: ‘How FTAI plans to corner the CFM56 aftermarket’).