Pat Bergin NYC Air Finance conference April 3 · A Constant Balancing Act Spare engine investment dilemma ... CFM56-5B Application: Airbus A320 family 1185 A/C delivered Total Asset:

Customized

Flexible

Competitive

Air Finance JournalAir Finance Journal

3 April 20073 April 2007,, New YorkNew York

Key issues in Engine Key issues in Engine Leasing: The Leasing: The LessorLessor��s perspectives perspective

Pat BerginPat Bergin, , Managing DirectorManaging Director, SES, SES

www.ses.ie

� A spare engine leasing company

� CFM56 only: > 180 engines

� Over 100 customers worldwide

Shannon Engine Support: Who are we?

The Spare Engine Solution

Key issues in Engine Leasing � The lessor�s perspective

� A wholly-owned subsidiary of CFM International

�We offer customized solutions - From ad hoc leasing per day to operating lease- The only company offering a guaranteed availability with deliveries within 24 hours

� Pool locations on 3 continents� A dedicated team of 25 professionals ensuring an efficient customer friendly service

www.ses.ie

A brief introduction:

The spare engine dilemma:


A growing need for spare engine leasing

! Before: the legacy airlines used to purchase spare engines as recommended by the manufacturers

! Success in aviation led to new airlines operating small fleets with no or few spare engines " created a need for spare engine lessor

! Engine & Aircraft reliability + expansion of airline business (deregulation �) " multiplication of airline fleet fragmentation " competition " cost control " reduction of investment

www.ses.ie

AOGUnscheduled

removals

Acquisition costsUnderused assetsOverhead costs

A Constant Balancing Act

Spare engine investment dilemma

From an airline�s perspective


www.ses.ie

Key issues in spare engine leasing


Why is engine leasing attractive ?

What are the attractive engines?What is specific about engine leasing?

Adding value?

www.ses.ie

Why is engine leasing attractive ?


! Demand for aircraft is very strong� Increasing number of operators � Fragmentation of fleet from legacy carriers � LCC model� Air travel booming in emerging countries � Record orders for both Boeing and Airbus narrowbody aircraft

! Traffic growing steadily� 6% in 2005/2006� to remain strong at 4.5% over the coming years

www.ses.ie

� World demand for spare engines is strong � Significant Engine Shop Visits (maintenance) growth� Increasing need for spare engines


A favourable context for spare engine leasing

� Airlines� drive for cash make leasing attractive� Resulting from airline competition� Don�t want to tie up cash in assets

� Airlines considering less engine investment as the result of increasing reliability

- Why invest in an under-used asset?

www.ses.ie

What are the attractive engines?

Key factors:


Easy marketing / re-marketing

� Life cycle of the aircraft / engine (production engine or retirement engine?)

� Operator base (number of operators, large engine production, presence worldwide)

� Interchangeability / intermix of engines (to use on a large aircraft application range)

� High reliability (airlines are looking for trouble free engines)

� Maintainability (easy line and shop maintenance, MRO network worldwide)

www.ses.ie

All aircraft models appear to follow a similar cycle of 3 phases

1. Production phase:typically first 15 years

2. End of production / Maturity phase: about 10 years

3. Phase out or cargo conversion:after 25 to 30 years (at about 3 to 5% of total fleet/year)

0

20

40

60

80

100

120

1 4 7 10 13 16 19 22 25 28 31 34 37 40

years since introduction

% o

f fle

et in

ser

vice

Aircraft Life Cycle modelling

0

20

40

60

80

100

120

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41

years since introduction

%

B737 NG (-7)A320 (-5B)B737 Cl. (-3) B737 OG (JT8D)B727 (JT8D)DC9 (JT8D)MD-80 (JT8D)

Contributing factors to phase-out:� Age of Aircraft� Market price of NG vs old Aircraft� Economic downturn


www.ses.ie

CFM56-3Application: Boeing 737 Classic

1972 A/C deliveredTotal SES Asset: 90 Engines

CFM56-5AApplication: Airbus A320 family

529 A/C deliveredTotal SES Asset: 16 Engines

CFM56-5CApplication: Airbus A340

238 A/C delivered Total SES Asset: 16 Engines

CFM56-5BApplication: Airbus A320 family

1185 A/C deliveredTotal Asset: 32 Engines

CFM56-7BApplication: Boeing 737NG

2156 A/C deliveredTotal SESAsset: 42 Engines

SES Asset Base Vs Operator Fleet base (as of 31 March 2007)Key issues in Engine Leasing � The lessor�s perspective

We are investing in current / high production engines

www.ses.ie

�CFM56-5B familyA318 / A320 / A321

� CFM56-5B1� CFM56-5B2� CFM56-5B3� CFM56-5B4� CFM56-5B5� CFM56-5B6� CFM56-5B7� CFM56-5B8� CFM56-5B9

Thrust ranging from 21,600lbs to 30,000lbs

� CFM56-7B familyB737-600/-700/-800/-900

� CFM56-7B18� CFM56-7B20� CFM56-7B22� CFM56-7B24� CFM56-7B26� CFM56-7B27

Thrust ranging from 19,500lbs to 27,300lbs

Same hardware engines that can be used at the requested thrust

upon request


www.ses.ie

! Purchase Price

Key elements in engine leasing?


! Value Depreciation & Residual Value

! Maintenance Costs

! Financing Costs

! Other Costs

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! New Engine Prices are driven by OEM Catalogue Price

!No significant deviations

Purchase Price

Paying the right price is key


! Used Engine Prices

!Significant deviations can be observed (+ or -10 to 40%)

!Especially in turbulent times (significant growth or contraction in the cycle)

!Strong impact of supply and demand

www.ses.ie

Value Depreciation and Residual Value


Residual Value Assessment is the biggest Risk

Engines and Aircraft values behave similarly in the early phase

! Then Engines outperform Aircraft value retentions

! At the end (after 15 � 20 years in some cases) the aircraft is worth the price of the engines

� Aircraft last over 30 years

� Engines last much longer : over 40 yrs

! Virtually all the parts would have been replaced after 3 shop visits.

What is the Residual Value?

!Too early to test who has the right answer

!Main stream lessors will not keep the engine that long

www.ses.ie

! Honeymoon period!First 4 to 5 years � up to 7 / 8 years depending on utilization

!Airworthiness Directives (AD) risk

Maintenance Costs (Shop visits, SB, ADs�)

Long Term Maintenance Costs are well understood


! First Shop visits! Heavy maintenance in specialized repair centres!OEM Warranties would limit any huge exposure

! Mature Engine!Long run maintenance costs are rather well assessed!But require engine expertise

www.ses.ie

! Interest Rate

!The lower the better!

!But does the airline have enough equity and enough security

Financing Costs

Lessors get better rates than Airlines


! Loan terms

!Duration

!Balloon

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! Storage and Management

!Hangar, Security system

!Engine paperwork, traceability�

Other Costs

Value can leak through inadequate management


! Transportation

! Insurance

! Short Term lease market = Multiple users : increased Lessee Risk / Default

www.ses.ie

! Provide operational solutions to Airlines

!Asset management type service

! and engine expertise

Adding value

Two complementary services


! Provide financial solutions

!From standard to highly structured type services

!Based on Lessee/airlines credit rating

www.ses.ie

Operational Solutions� Rentals

� Short-term (30-90 day) rentals� Medium / long term leases

� Guaranteed Availability� Spare engine available within 24h

� Advanced Reservations� Reserve future spare engine

rental� Engine Exchange

� Trade used engine for ready-to-install engine

� ��Low

Standard

Highly Structured

FinancialProducts

Medium-Term Operating Lease and Loans

Long-term Operating Lease

Finance Lease

Investments in Asset Securitization

Lease In / Lease Outs

Tax-Based Financing

Sale-Leaseback

HighLessee�s Credit Rating

Financial Solutions

Maximising customer benefit with tailored solutions

Increased range of services offered by lessors


www.ses.ie

! Asset Management!Technical and specific market Knowledge

!Core business

! Remarketing Specialist!Access to a broader market increases utilisation helping reduce rental

! Financing Advantage!Strong connection to financial institutions

!Better understanding of risk and rewards

Advantages of Leasing Companies FinancierAsset Manager

➼Maintenance Costs

➼Value Depreciation & Residual Value

➼Other management costs

➼Financing Costs

➼Purchase Price


www.ses.ie

� A growing demand for engine leasing as a Value AddingService

� Engines are very attractive assets, providing they are properly managed and maintained - quality of maintenance is essential to keeping the value!

� Good engines = liquid assets

� Operational support and asset financing are two different jobs

� Market & Product knowledge combined with effective asset management and technical expertise are key factor for success.

Conclusion


www.ses.ie

Shannon office Aviation HouseShannon Industrial Estate Shannon County Clare Ireland

+353 61 36 0056 phone +353 61 36 0614 fax

Sales Enquiries: [email protected] Technical Enquiries: [email protected] General Enquiries: [email protected]

Contact Information

SES: The Spare Engine Solution


Documents

Pat Bergin NYC Air Finance conference April 3 · A Constant Balancing Act Spare engine investment dilemma ... CFM56-5B Application: Airbus A320 family 1185 A/C delivered Total Asset: