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Regional & narrow body engines, February 2017

The fleet of in-service, passenger configured regional and narrowbody aircraft has increased by one-third over the past 10 years. This growing fleet will require used spare engines for various purposes, including the provision of cover for maintenance shop visits. Aircraft Commerce has analysed the regional and narrowbody used engine market to provide a summary of demand, value and lease rate trends.

Engine sourcing options

Once a requirement to source a used engine has been identified, operators need to decide whether they will obtain one via an outright purchase or through a lease. Several types of engine lease deals are available, including finance and operating leases. “We are increasingly finding finance leases dressed up as operating leases,” explains Graeme Crickett, senior vice president and head of technical at Sumisho Aero Engine B.V.

Finance lease deals are increasingly likely to be arranged for new engines with the current low interest rates helping some lessees. They establish agreed lease rental payments between the lessor and operator over a relatively long period. “Newer finance leases are typically eight to 12 years long, where the terms used to be five to seven years,” says Crickett. At the end of the payment term the operator assumes ownership of the engine and the associated residual value risk, so a finance lease can be considered a method of outright purchase.

Used engines are more likely to be sourced via an operating lease, whereby the operator pays the lessor agreed monthly lease rentals and maintenance reserves. The lessor will then access the reserves for specified maintenance events agreed in the lease contract. The engine is returned to the lessor at the end of the lease term, after undergoing any maintenance required in the lease return conditions. The lessor carries the residual value risk for engines on operating lease. Operating leases can be short- or long-term. “IBA defines engine operating leasing in terms of long-term, short-term or all-in green-time lease rates,” explains Kane Ray, head analyst of commercial engines at the International Bureau of Aviation (IBA). “Each of these categories means the engine will have at least some operational life remaining.

“A long-term lease is in excess of one year, and is common for thriving engine variants,” continues Ray. “A short-term lease could be up to 12 months and in many cases significantly less. Short-term leases are commonly used for shortages relating to unforeseen events, entry-into service requirements or short-term cover. “An all-in green-time lease would be for a set period of time, usually not exceeding three years,” adds Ray. “This is common for mature engine and aircraft pairings, and involves building an engine to last for a specific time period.”

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