Over 25 years ago Rolls-Royce formed a subsidiary to help finance spare engines and ensure that airlines could secure the engines they require operationally through long-term financing agreements.
Today, Rolls-Royce & Partners Finance (RRPF) is one of the largest lessors of spare engines in the world. RRPF manage the largest portfolio of Rolls-Royce and IAE V2500 spare engines in operation today and their business looks set to grow significantly in the coming years.
Bobby Janagan, General Manager for RRPF, talks about their origins, their approach to the market and his future plans.
How did it begin?
In the early days the thought process was very much about helping small airline customers by providing them with the financial support required to secure the spare engines they needed, which helped keep their Rolls-Royce powered aircraft in operation.
Today, the market is very different. Now many of our customers are household names, such as British Airways, Singapore Airlines, Lufthansa and many others. There has been a notable shift in mindset over the years. Airline customers used to think it was important to own the equipment themselves, but now they see the wider benefits of leasing key equipment.
Why is that and how does it work now?
Airlines lease aircraft and engines for three reasons: Firstly, some big carriers will look to replace their fleet with different aircraft every 12-15 years, we see this trend particularly with Middle East and Asian airlines. Therefore, some airlines have opted to lease 50 per cent of their fleet and own 50 per cent. They do this because it gives them fleet flexibility – meaning they can adjust the lease duration and the return of their aircraft and engines to lessors, to seamlessly match the introduction of the new replacement aircraft types and engines.
Secondly, today airlines don’t like to tie up so much capital in their assets (aircraft and engines).
Leasing provides airlines with a source of funding to finance their fleet, leaving their general bank facilities and overdrafts to fund the day-to-day business. And thirdly, airlines lease a proportion of their fleet in order to mitigate their risk to the long-term value of the aircraft and engines. If a programme (aircraft/engine combination) is successful and values remain high, the operator may see a benefit in owning their equipment. If a programme is not so successful then the opposite is true. With leasing, this risk sits with the owners of the equipment such as RRPF.
Engines need special financing attention because they are the most technical part of the aircraft and the single biggest dollar investment once the aircraft has been purchased. Even a specialist aircraft leasing company does not look at engines as its core activity. A major aircraft leasing company may have over 1,500 aircraft on its books, but it will own less than 100 spare engines.
Spare engines are our core business, we have around 400 engines on our books.
How does it work with a customer buying new aircraft and spare engines?
The quantity of spare engines required by an airline will be driven by the size of their fleet, but will also be depend on how they operate the aircraft and whether they are operating in a harsh environment, etc. Generally, for every five aircraft you operate, you will need a spare engine to keep your aircraft flying during the periods that your other engines are being overhauled. So a customer would come to us and say we are buying these new aircraft, we need spare engines and will need to finance them. We would then ask how long the aircraft will be in operation with them, how long is their TotalCare® contract, and we would define our proposal based on these factors.
And for mature engines that have been in service for 10-12 years?
When a large aircraft fleet migrates from the original operator to the next airline, you will usually see the fleet start to fragment. So what might have been a fleet of 50 aircraft with the first customer tends to split into multiple smaller fleets with numerous other operators. The original operator returns the leased spare engines in line with their fleet phase-out plan and then we follow the aircraft and look to place the original spare engines with the new operators.
Looking ahead what is the future for RRPF?
There is huge shift in spare engine values now. There is a lot more technical value in terms of better fuel burn, lower emissions and so on, in a new large engine like a Trent XWB. One of these new large engine types will cost an amount that will not be dissimilar to the value of small narrow-body aircraft. Not many airlines have the scale of available cash needed to make such acquisitions, so we envisage that our market and business will grow substantially as deliveries of Trent XWB and Trent 1000 engines come through in larger volumes. The market is currently leasing about 35 per cent of its engines and the trend is showing that by 2020, 50 per cent of spare engines will be on lease.
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