Guide to financing and investing in engines 2013 | Supplement | Airfinance Journal

Guide to financing and investing in engines 2013

 

 

PML inches closer to practice

Last month Gecas finally signed an agreement to participate in CFM International’s Portable Maintenance for Lessors (PML) programme.

CFM’s product is a lessor-friendly fixed flight-hour maintenance agreement available for the CFM56-5B and the CFM56-7B engines. Unlike other standard flight-hour agreements, the programme exists as a contract directly between the lessors and CFM. The benefits, which include full shop visit coverage, as well as non-performance restoration shop visits, are then passed on to the lessees.

Under PML the lessors are free to negotiate an independent rate with their lessees for maintenance reserves; a transaction in which CFM does not need necessarily get involved. A lessee is still paying for the maintenance event but it is fully covered within the maintenance reserve funds it has with its lessor.

“The appeal for lessors is simple,” states one interested lessor. “What you can get is an assignment of the flight-hour agreement with cash available. If you work with GE, or IAE, or Rolls-Royce on their flight-hour agreement you get an assignment of the benefits – ie, a shop visit at the same rate or an ability to take credit, but you never get the cash.” Allowing lessors to hold the reserves offers them additional security. CFM also argues that it encourages greater portability because it means there is little payment reconciliation required if engines drop in and out of the programme because the lessor retains most of the maintenance reserve payments.

 

Delays to the programme

Translating PML into reality has been slower than anticipated. The biggest hurdle has been introducing a pricing matrix with which lessors are comfortable.

“You have to anticipate a different bunch of thrust classes, engine configurations, operating environments and flight legs, so it is a big pricing matrix discussion,” explains Brian Ovington from CFM’s services group.

“Structuring and building out the pricing to align with the lessor’s reserve rates, versus our traditional products with airlines, has taken some time,” he adds. CFM designed a product that allowed lessors to switch operators fairly easily, which CFM states is a benefit under the programme because the second operator knows it has access to previous maintenance reserves.

However, one of the tough challenges CFM has had to face has been to accommodate the need for lessors to sell the assets themselves. Lessors needed a truly portable agreement that would travel with the operator even if the aircraft changed owners.

A second issue has concerned spare engine lessors. Last year CFM signed a memorandum of understanding with ELFC regarding the PML programme.

Insiders state that the short-term nature and frequency of different leases associated with spare engine lessors is difficult to reconcile under the PML programme. The main sticking point is the transition from one operating environment to another. “If you put an engine into India, which has the highest hourly reserve rates in the world, and then you take it back after six months from India and lease it to Iceland, which has one of the lowest reserve rates in the world, you have to charge the India rate for the rest of the life of engine until its next shop visit,” says a lessor.

Under the PML programme the harsher initial environment is now the benchmark for all future reserves until a comprehensive shop visit. Spare engine leases are as short as 30 or 90 days, while airframe lessors generally have leases of at least five years, which normally accounts for the first shop visit, which minimizes the problem. The nature of the PML programme means that lessors are obviously restricted to CFM shops, which have fixed rates, minimizing the competitive advantage for spare engine lessors to quote to their clients. Spare engine lessors intimate that given these restrictions the PML product is difficult in reality for just a handful of engines but would work better for a larger amount of engines under a longer-term lease with an airline client.

 

Now available for airlines

It might be six months later than expected but the good news is that CFM has its first master agreement in place with Gecas. The benefit of a contract with a lessor is that the lessor can offer smaller airlines the benefits of fixed maintenance costs. CFM states the initial talks with lessees have gone well because they can see the benefits of a product that should help provide assured maintenance costs within reserve rates and the reduced need for lease return shop visits.

The portability of the product needs to be tested but through Gecas the programme is now available to airlines. Airfinance Journal understands that CFM is in advanced talks with SMBC on signing another master frame work agreement. It appears that the product is much closer to being a real option for airlines.

DICKON HARRIS,
Editor, Airfinance Journal

 

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