CEO INTERVIEW: Engine leasing market reaches “equilibrium”; “frantic” selling over: Jon Sharp, ELFC
Jon Sharp, the CEO of engine leasing specialist ELFC believes the market has reached an equilibrium in engine supply and demand after the “frantic sell activity” of 2008 and 2009. Mr Sharp also provides a unique industry viewpoint of the prospects for 2010, the Airbus-Boeing narrowbody re-engining debate and the new regional jet programmes under development.
CAPA: 2009 was a better year than many had expected for the airframe leasing sector in general. Was that the experience of the engine lessors as well and how is 2010 shaping up?
Ours is a very cyclical industry and those participants who build that fact into their strategic thinking fare better than those who do not.
In the so-called 'good times', when the economy is booming and air travel is strong, lessors experience strong demand for engines they have available for lease; however there is less demand for financing by means of an operating lease (e.g. through a sale and leaseback) and furthermore it becomes difficult to purchase engines to grow the portfolio at attractive prices.
When the downturn comes, the demand for off-lease engines falls - as does the available rental rate - but the demand for financing will increase as airline become cash constrained; also engines become available at better purchase prices, which is countered by the fact that reasonable sales opportunities become rare.
We at ELF recognise that cycle and try to optimise the positive aspects at all times.
Consequently 2006 and 2007, the peak of the 'good times' saw us with everything on lease, yet selling more engines than we were buying. Conversely, in 2008 and 2009 our off-lease assets started to build up, but sale and leaseback activity was strong and we purchased more engines than in any previous two-year period.
Air travel is in mid 2010 showing strong signs of recovery (except in Europe) and the frantic sell activity of 2008 and 2009 has subsided. I believe the industry has reached a certain equilibrium in engine supply and demand, although one cannot generalise across all engine types - the market remains very patchy.
CAPA: How are the various activities performing; operating leases, sales & leasebacks and portfolio management services?
On the back of the above answer, I can say that all sectors are performing steadily, but none is at the peak.
CAPA: The core of the ELFC portfolio is built on CFM56, CF6-80, V2500 and PW4000 powerplants. How do you see this portfolio developing over the medium term?
The majority of the portfolio is in the modern, ubiquitous narrow body engine types. This will continue, for obvious reasons, for the foreseeable future, but we do wish to ensure that the portfolio is spread over different types, avoiding concentrations in particular market sectors and for that reason we continue to buy selected quantities of the larger engines, as well as regional jet powerplants.
Click here for the rest of this exclusive CAPA Q&A with Jon Sharp, answering the following questions:
- There is a lot of debate about Airbus and Boeing re-engining their narrowbody programmes. Where do you see them heading - and when?
- If Airbus and Boeing do decide to re-engine, what would this mean for ELFC?
- How significant will the competition be from the Mitsubishi RJ and Bombardier Cseries and Embraer for the established players in the narrowbody segment?
- There are some exciting breakthroughs on the way in engine technologies to drive efficiencies. What are your views on geared turbofan, advance ducted turbofan and open rotor technologies?