Keeping the pressure and power on

Anca Mihalache, VP Engine Trading, and other industry experts talk to Michael Doran about Engine Leasing as part of LARA’s Finance & Leasing Special. Download a PDF of the article from the December 2020/January 2021 issue of Low-Fare & Regional Airlines magazine.

It seems that in the realm of engine leasing at least, after the recent crazy years of high demand and then pandemic, the lessors who take a disciplined approach to the market will have the brightest future. Michael Doran reports.

Well before COVID grounded the airline world, many in the industry believed a market correction was just around the corner and that the years of high growth, record profitability, booming investment and soaring asset values were simply not sustainable.

Aviation insight consultancy firm IBA Group tracks engine values. Its Senior Engine Analyst David Archer says that in 2015 people were already talking about a correction but the next six years were the most-off-the-chart years in aviation history and now nobody can define what a new normal will look like.

“What isn’t normal is when an engine comes to market and 40 firms are bidding on it, and that’s why we saw values get so high,” he tells LARA. “Even in December [2019] a lot of people were caught out buying engines at the peak and now, depending on what market you are talking about, if you were to sell an engine today, you are looking at a 30% cut on engines that were very attractive 10 months ago.”

IBA is in constant contact with lessors and regularly hear they are doing whatever it takes to keep their engines flying, which means some are barely breaking even to avoid taking engines back. Archer doesn’t believe this model is sustainable.


“The view of the leasing market is it’s very rough right now, and we expect to see some of the smaller parties fail and a bit of consolidation. In the medium term, we are optimistic that the market will work and the bigger lessors will weather the storm comfortably, we are just not there yet.”

On pricing, Archer says that anybody who is looking to sell today is having their hand forced and that anybody looking to buy knows there are big discounts to be had. Archer believes this is why prices are way below the established market values that IBA produces. “Every lessor we speak to is looking for 30–50% discount and their board will not sign-off on any pricing above that,” he explains. “That will vary a little bit for different generations and types of engines, but that’s pretty consistent.”

The lack of engine trades makes it difficult to produce values. This was particularly true at the start of COVID when the market suddenly collapsed, and while lessors expected values to soften, with nothing trading, there was no real data to rely upon.

So how does this view of the market line up with the everyday reality of the people battling it out on the ground, the engine lessors? LARA spoke with two quite different lessors to learn how they are faring and if their perspectives match those of the industry analyst.

Engine Lease Finance (ELF) is one of the larger independent players, with a primary focus on long-term leasing from a portfolio biased towards current-technology narrowbody engines. EVP and Head of New Business Julian Jordan says the narrowbody mix is around 65% current-technology engines, the CFM56 and V2500, with new-generation LEAP and GTFs making up the other 35%.

“We tend to be involved in the engine ownership lifecycle for a much longer period, and we keep a lot of our engines from birth to grave,” he tells LARA. “We’ve had practically zero available engines for the last couple of years, largely because demand outstripped supply.”

Now the cycle has turned into a buyer’s market and, as a long-term holder of assets, ELF is comfortable investing in well-priced engines and holding them until the market recovers. With airlines chasing liquidity, ELF is active in the sale and leaseback markets, which Jordan says present short and long-term opportunities, often with airlines they have not previously worked with.

“We’re pitching to airlines that there’s a good reason for you not to own these engines over the long-term and it makes more sense for you to let us do it as long as we can give you competitive lease rates that stack up against your finance cost,” he details. “As they get more accustomed to doing it, leasing engines will become more normalised, and that makes good sense for an airline.”


The engine leasing market is not immune from COVID impacts, and some lessors are likely going to find life a lot more difficult than it was when deals with razor-thin margins were negotiated. With previously sound airlines in trouble, rental payments halted and distressed assets losing value, this lack of discipline means some lessors will look back and wonder what happened.

Some airlines will not survive the pandemic or will restructure their business, and lessors are having to be a lot more flexible in their dealings than merely relying on enforcing contracts. The critical message from ELF is to be as flexible as possible to maintain relationships by taking a long-term view and trusting in the value of the engines on-lease.

US lessor Willis Lease Finance Corporation has adopted a different approach. It’s taking the administrators of Virgin Australia to court because it is not happy that its engines are being made available in Melbourne, rather than redelivered to the US at the airline’s cost.

ELF also has engines on lease to Virgin, which is scheduled to move to new ownership in November, and without making any direct comparison to Willis, Jordan talks hypothetically of another way to approach the same situation.

“Lessor B doesn’t really want the engines back so they play ball, listen to what the new guys have to say and decide whether they can live with the conditions, leaving the engines there for two months while the airline makes decisions about their future fleet. Who’s going to get the business for the next 10 years?”

About values and re-entry of the 737 MAX, Jordan says it is normal to see some softening of values when a new-generation engine becomes available. Still, the talk of a glut of retirements is unlikely.

“The predictions are that there’s going to be a flood of engines harvested from early retirements all coming into the spare engine space smashing values to pieces, but that’s not going to happen,” he says. “The supply of spare engines may temporarily increase, but it’s not going to devastate values.

“I agree with the forecasters that despite almost no trading happening now values have dropped, but I don’t think that’s going to stay all the way through,” Jordan predicts. “The 737 MAX re-entry might make a tiny blip, but it will be a gradual move across time.”

Looking to the future Jordan says that ELF has a broad portfolio of high-quality engines at different stages in their lifecycle which takes away any need to get involved in deals that don’t meet their disciplined financial and valuation approach.

“Like any downturn, there will be opportunists and stupid deals on offer, but we’re not going to do that and then under collect on our reserve kitty and ruin the lease-end assumptions about an asset’s value,” he says. “There’s enough business for all of us there to have some of that stuff dip in and out, and tourists will fly in and out, but we’ll still be doing the same thing in 30 years as we were doing 30 years ago, it’s that simple.”

APOC Aviation started out in 2015 as an aircraft part-out business and in March 2019 added engine trading to its portfolio. Headed up by its Vice-President of Engine Trading, Anca Mihalache, it focused on CFM56 and V2500 engines, variants of which are used in 737 and A320-family aircraft.

An initial hurdle was the lack of engine supply to purchase. Mihalache explains that back then it was a seller’s market, and although APOC Aviation did buy some engines, most of its activity has been in 2020.

“We purchased a few engines last year but most of them this year after the crisis started, so of the three CFM5As we got, one came with a lease to Condor who have operated nicely over the summer,” she says. “For the other two, we are interested in leaving it for a while and then parting them out by ourselves or sell them for part-out. So, when we are looking at buying an engine, we are looking at it from a leasing perspective and from a part-out perspective.”

When searching for engines, APOC’s criteria is to find ones with 2000+ cycles remaining before a shop visit and good exhaust gas temperature margins, an indicator of engine performance. Still, the difficulty now is matching buyer and seller price expectations.

“Engine owners don’t want to decrease the price too much from their stock value, and there is demand from companies like us with the cash to buy, but transactions are not easy when the prices don’t match,” she tells LARA. “We are buying if there is a lease attached, but it’s hard to start a new lease unless you’re talking to a cargo operator.

“The airlines are negotiating a lot right now, especially around power by the hour or lease holidays and we have agreed to a holiday with one with the lease going back to the original terms at a set date,” she says. “We have airlines interested in engines, but now that we are going back to April flying levels and lockdown, I don’t see any new operators starting leases.”


Although MRO shop visits are being deferred and airlines are cannibalising engines for parts to keep them running, Mihalache believes the market for good, serviceable material is strong. This is particularly so for the hot parts, the engine blades, and the line replaceable parts. With MRO demand forecasted to peak in 12–24 months, holding the parts is not an issue for APOC.

“Nowadays there are all kind of transactions and people want to help the airlines survive, so we are going to do our best as long as we have the cash to help support them and not to try to put them in the ground, because that’s not going to help anybody.

“Also, now we have new investors that are interested in aviation that were not interested before because the prices were too high,” she explains. “So, what’s happened in the past is that some airlines would go bankrupt and some new ones would be born, and I hope I am right on that.”

With the 737 MAX set to return in soon, it’s likely that several earlier-generation 737 and A320 aircraft will be retired, but for Mihalache that is another new opportunity she has in her sights.

“When the MAX returns, the more financial airlines will try to get rid of older assets. I also expect there are going to be new airlines that are going to be in the market for cheaper assets, for example, the 5A engine, but with few on the market and a good flat rate we are very happy with this engine.”

For cash-strapped airlines, the temptation to do a sales-leaseback transaction on their engines to release cash is proving a popular option. Still, again it’s finding that buyer-seller balance that’s elusive.

“They need cash to keep their employees and their fleet, but there has to be a synergy between the purchasing price and the lease rate they are willing to pay, so it’s still a negotiation,” she says. “They want a lower lease rate just because we are in a crisis, but they still want to sell it to you at the higher price.

“Airlines are not flying a lot right now, but I think they are going to recover because people will eventually have to fly, to go back to work, see their family and travel. And if a vaccine becomes available, I do think the recovery will start before the end of 2020.”

After all that, it seems the message is that good engines make excellent and profitable long-term investments and that while the market is currently suffering, lessors who take a disciplined approach to the market have good times ahead to look forward to.

© 2021 Aircraft Part-Out Company Europe B.V.