The world’s biggest lessor, AerCap, is concerned about the reliability of the latest generation of engines. Powerplants need to be removed from the wing for maintenance, repair, and overhaul much sooner than expected. In the current environment of supply chain problems, this is most unwelcome, AerCap remarked in its HY1 2022 earnings release. AerCap concerned about new-engine reliability. Reliability issues have been well-reported for various engines in the past few years. They include the Rolls-Royce Trent 1000 and 1000 TEN, the General Electric GEnx, the Pratt & Whitney Geared Turbofan, and the CFM LEAP. The Trent XWB has been less prone to durability problems. It was believed that OEMs had addressed these issues with costly redesigns and updates, but apparently, AerCap is noting something different. CEO Aengus Kelly presented a slide with a vicious circle for aircraft and engine supplies. Engine makers are under pressure to produce more as airframers (notably Airbus and Boeing) want to aggressively ramp up production. Kelly noted that there are some 2.000 fewer narrowbody aircraft flying today than the OEMs had expected in their 2018 forecasts. This is largely down to lower rates caused by a number of reasons, including certification issues (Boeing MAX), staffing shortages, and supply chain problems. This has forced Airbus and Boeing to review and reduce their projected rates for the near future. When new airliners are delivered, AerCap sees a trend that engines are coming off-wing earlier than expected because of durability issues. This only worsens the problem: engine shops suffer from the same supply and labor issues as the engine OEMs, resulting in a backlog of engines that need repair. In turn, this puts pressure on the engine makers to produce more spare powerplants, which eat into the backlog of engines for new aircraft. Shortage of spare engines The supply chain disruptions are challenging the OEMs to find a balance between supporting the in-service fleet of aircraft and new equipment deliveries. There is a shortage of spare engines at the moment as a result of increasing aircraft production rates, new technology maturation issues, and labor-related supply of spare parts. This means that airlines with aircraft on the ground are requesting spare engines to be diverted from new aircraft deliveries, thereby limiting new aircraft delivery rates from Boeing and Airbus", said Kelly. "The engine manufacturers are working to demand scenarios to appropriately allocate their limited supply chain resources, firstly, to support the in-service fleet of aircraft and secondly, to meet their production obligations to Boeing and Airbus." Kelly sees no quick fix to this problem, especially as OEMs like CFM and Raytheon have said that supply chain issues will continue into 2023 and maybe longer. AerCap is expecting supply chain problems to affect aircraft production for the next few years. "Airbus recently delayed their plans on the monthly production rate of 65 of the A320neo family to early 2024 from mid-2023. But even that seems somewhat optimistic, given all that is going on", Aengus Kelly said. The beneficiaries of this situation are the lessors, which have closer in-time delivery slots or can provide already built aircraft. With demand for new aircraft deliveries higher than airframers and engine makers can cope with, airlines have turned to lessors to source new aircraft, driving up lease rates in the process. "You have seen from the Farnborough Airshow a few weeks ago that the level of orders was relatively muted. This is not from lack of demand but rather lack of availability", said Kelly. HY1 loss caused by write-off on Russia AerCap reported a $339.8 million net profit for Q2 versus $249.8 million last year. Net income was $340 million, of $464 million as Adjusted income. Revenues grew to $1.670 billion from $1.232 billion. Maintenance revenues of $103 million were affected by $53 million in maintenance rights assets. It gained $35 million on the sale of assets or 29 aircraft. For HY1, the lessor recorded a $-1.661 billion net loss compared to a $477.8 million profit in the same period last year. Keep in mind that the 2022 result includes AerCap and GECAS, which was formally acquired in January. It also includes the $2.728 billion one-off write-off on 113 aircraft and eleven engines that are still in Russia and AerCap is unlikely ever to repossess as sanctions continue. AerCap submitted $3.5 billion in claims with insurers and continues to pursue these claims. The continued recovery of air travel and the reopening of more countries is supporting demand for aircraft, to the benefit of OEMs and lessors. Kelly said that airlines have underestimated the sharp recovery. He is expecting a strong rebound in international travel as seen in domestic. The further reopening of China will result in a massive surge in demand for narrowbody and widebody aircraft for use on long-haul travel. AerCap executed 184 lease transactions in Q2, including 125 lease agreements, sixteen purchases, and 43 sales. As airlines ramp up capacity and start to make money again, cash collection rates improved and lease deferrals decreased. Lease rents in Q2 totaled $1.462 billion and could have been higher without the exclusion of the fleet in Russia and without a $52 million lease premium amortization. AerCap ended June with $17 billion in liquidity and $45.6 billion in adjusted debt. AerCap’s total fleet includes 3.599 aircraft, engines, and helicopters. Included are 2.200 passenger aircraft, 68 freighters, 981 engines, and 350 helicopters. Freighters include the twenty Boeing 777-300ERFs that are being converted by IAI Aerospace Industries and of which 95 percent have been placed with customers. The lessor also sees strong demand for converted 737-800s. The lessor has 461 aircraft in backlog, of which 22 are scheduled for delivery this year. AerCap has 246 Airbus A320neo family aircraft on order, 131 Boeing MAX, 33 Embraer E1s and E2s, 26 Boeing 787s, twelve Airbus A330neo’s, and eight Airbus A220s. These are both direct orders for placement with airlines and director orders from airlines for sale and leaseback to AerCap. All new aircraft on order through 2023 have been placed with customers. Aengus Kelly is surprised by how quick aircraft leasing is going: "There is no question that leasing is growing much faster than I has expected before the pandemic. The OEMs between sale and leasebacks and director lessor orders, we are looking probably at 65 percent of all deliveries will end up in the leasing channels. The airlines are seeing the benefits of leasing and during the pandemic have appreciated the benefits of the flexibility that leasing brings. At one point, I didn't believe that leasing would surpass fifty percent of the market. We are way beyond that in terms of value and it is going only one way."
