Sumisho Aero Engine Lease B.V. Investing in Engines A comparison with investing in Aircraft Tony Kondo 21 st March 2018 2ND AIRLINE ECONOMICS GROWTH FRONTIERS KOREA 1
Agenda Introduction Engine market Engine lease market overview Comparison between aircraft and engine Exit strategy Conclusion Q&A 2
Agenda Introduction Engine market Engine lease market overview Comparison between aircraft and engine Exit strategy Conclusion Q&A 3
2 JVs 2 Business Models, in Amsterdam from 2013 Lease Services 90% 10% 20% 80% Sumitomo as Majority Shareholder Engine Portfolio MTU as Majority Shareholder MTU Engine Pool Long Term Lease Sale & Leaseback Short Term Lease Engine Pooling Engine Parts Trading 4
Sumisho (SAEL) Long-term lease (over 1 year lease period) Sumisho Aero Engine Lease Corporate structure & business model Joint-venture between MTU (10%) and Sumitomo Corp. Group (90%) Holds mid- and long-term assets Looking for engine purchase opportunities to grow portfolio Service portfolio Long-term leasing Sale & lease-back transactions Financing services Target Engine Portfolio CFM56-5B/7B V2500-A5 LEAP-1A/B GE90-115B GEnx-1B CF34-10E *Other engine types can be supported on request Sumisho Aero Engines Lease offers comprehensive financial solutions for engines 5
MTU-MLS Short-term lease (less than 1 year lease term & part out) Lease Services MTU Maintenance Lease Services Corporate structure & business model Joint-venture between MTU (80%) and Sumitomo Corp. Group (20%) Holds short-term assets and assets for teardown Strong backing from MTU s MRO business Service portfolio Short-term leasing (spare engine support) Pool solutions Engine stand-by agreements Engine Parts Trading Engine types* V2500-A5/D5 PW2000 CF6-50/-80C2 GE90-115B CFM56-3/-5B/-7 CF34 Series *Other engine types can be supported on request Benefits: Growing engine pool, increased availability for airline customers 6
Agenda Introduction Engine market Engine lease market overview Comparison between aircraft and engine Exit strategy Conclusion Q&A 7
Engine Market Limited players 8
Engine Market Oligopoly Market. Strong Entry Barrier. (Safety, Huge investment, etc ) Different from other free competitive market. Supplier controlled market. Stable residual value. 9
Agenda Introduction Engine market Engine lease market overview Comparison between aircraft and engine Exit strategy Conclusion Q&A 10
Comparing with Aircraft leasing, Engine lease market is relatively small, But, Value of engines is stable. 11
Why small?? 12
Target asset for engine lease is (mainly) Spare Engine 13
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Overview of engine lease market Total Spare engine Market size is $50bil $25bil is market size of engine lease. ($350bil for aircraft) 15
but market is growing 16
Why stable?? 17
Business model of engine OEM (CF image) v Huge initial investment. v Sale installed engine with loss and get profit from sale of spare engine, spare parts. v Long term business case (50+years) 18
Aftermarket is crucial for engine OEM for whole economics of each engine program. Continuous escalation and market dominance is existing. 19
280 260 240 220 200 180 160 140 120 100 80 Escalation Escalation on LLP for CFM56-7B 2003 2005 2007 2009 2011 2013 2015 2017 Source : CFM Life Limited Parts (LLP) is major parts for engines Escalation on LLP represents same on other engine parts Escalation rates are normally between 5-7% Parts prices are doubled every 10-12 years. 20
Different Value carve (engine vs aircraft) 120.00 Appraisal Value 100.00 80.00 60.00 40.00 20.00 0.00 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 737-800 vin 2012 CFM56-7B26E Source : AVAC, AVITAS 21
Agenda Introduction Engine market Engine lease market overview Comparison between aircraft and engine Exit strategy Conclusion Q&A 22
Market size # of Lessors nmany Aircraft Lease n$350bil nadditional $40bil per year Engine Lease n$25bil nadditional $2bil per year nless (OEM related, independent Lessors) Residual Value ndecline nstable Unit Cost n45mil~ (NB), ~200mil(WB) n10mil~(nb), ~35mil(WB) Ownership Registration Lease Term nyes at lessee s jurisdiction nmainly Long Term Transition Cost nexpensive nminimal ninternational Registry nshort term (2-3months) to Long Term (10YR+) 23
Agenda Introduction Engine market Engine lease market overview Comparison between aircraft and engine Exit strategy Conclusion Q&A 24
For both Aircraft and Engine, exit strategy is key. Exit Strategy Extract value from asset as much as possible. 25
Lease or Sale? Engine is easy to extract value. 26
Lease For aircraft, short term lease is difficult due to transitional cost and time (change of configuration including seat, livery, etc ) For engine, because of minimal transition cost, short term lease is good method to maximize value. And airlines have demand for short term lease to cover one shop visit only. 27
Sale Value of airframe (aircraft minus engine) has been declining over their age. Value of engine is stable due to maintained or escalated value of parts. 28
Data Source : Avitas 29
User of used parts is engine MRO for shop visit. Because 70-80% of engine performance restoration cost is for materials. Many parts players in the market. ($2bil size market) Maintain liquidity of engine parts. 30
As engine investor, we need to have a good access for these market. Reason why set-up JV with MTU 31
Agenda Introduction Engine market Engine lease market overview Comparison between aircraft and engine Exit strategy Conclusion Q&A 32
ENGINE LEASE IS Relatively small market, but, Stable residual value (Escalation etc ) Growing market along with Aircraft. Exit Strategy is always important. Different method from aircraft to maximize value. (short term lease/ part out) Good asset to invest. 33
Agenda Introduction Engine market Engine lease market overview Comparison between aircraft and engine Exit strategy Conclusion Q&A 34