Lessors could help fill the role of GECAS on Embraer's next E-Jets

Source: Flightglobal.com
This story is sourced from Flightglobal.com

Embraer's decision to equip the second-generation E-Jet family with Pratt & Whitney's PW1700G and PW1900G geared turbofans (GTF) could see the Brazilian manufacturer increasingly turning to operating lessors for financing support on its new product offerings.

By choosing the GTF over GE's eCore-derived NG34 powerplants for its next version of the E-170 and E-190 aircraft, Embraer potentially loses a major financing partner and customer, GE Capital Aviation Services (GECAS) - the world's largest aircraft lessor and lender by revenues, net income, fleet value and size.

The 100% GE-owned lessor accounts for 10.2% of the total in-service E-Jet family fleet, 13.3% of the stored base and 3.6% of outstanding orders, according to Flightglobal's Ascend online database. The lessor also maintains 13% of all E-Jet options.

"This is significant considering these figures exclude any financing or leases done by the General Electric group," says Bert van Leeuwen, managing director of aviation research at DVB Bank.

The majority of aircraft in GECAS' portfolio and orderbook are equipped with GE engines. While there are exceptions, the non-GE powered aircraft tend to have been acquired from airlines and then leased back or are units the US engine manufacturer does not equip with a powerplant.

PK Air Finance, GE's provider and arranger of asset backed financing, has also stepped up financing for the E-Jet family. A 2012 PK Air Finance brochure indicates the financier had exposure to 24 Embraer 190, five Embraer 170 and 18 Embraer 175 aircraft.

Despite this shift in powerplant suppliers, Embraer says GECAS will remain a strategic partner.

"GECAS will continue to be a key partner in opening up new operators for the E-Jet family, particularly as their original leases come to their termination," says John Slattery, Embraer's chief commercial officer of commerical aviation, adding: "GECAS can certainly do sale and leasbacks on non-GE powered aircraft, but I accept its less likely it will make a speculative order on the new E-Jet."

No doubt the move to Pratt & Whitney paves the way for parent company, United Technologies, to increase its backing of the aviation market, possibly through the creation of a financial arm, following in the footsteps of its rival.

This undertaking would be welcome by the financial markets during a time of tighter bank lending, particularly for riskier investments such as new aircraft, as well as more costly export credit fees due to new regulation.

It would also underpin United Technologies' chief executive officer Louis Chenevert's overhaul of the company that involves a tighter focus on aerospace.

Pratt & Whitney declined to comment on such a move.

Slattery remains "confident" that Pratt & Whitney will play an "appropriate role" in supporting the GTF-powered E-Jets.

"However, I would point out that Embraer has traditionally had to support very few transactions with direct funding since the entry into service of the first E-Jet in 2004. Demand has been robust from bank debt, the capital markets and the lessor communities," he says.

According to Slattery, 20% of E-Jet deliveries were supported by the Brazilian export credit agency in 2012 which is "lower" that Airbus and Boeing and "significantly lower" than those of its direct competitors.

"This is a powerful and discrete testament of the demand of the markets to finance E-Jets," he says.

In the absence of a dedicated financing unit, the leasing market could help fill the role GECAS played in supporting the first generation of E-Jet family aircraft.

According to Slattery, Embraer is already experiencing "significant appetite" from existing and new lessors to the E-Jet programme "that are interested in ordering the aircraft for delivery towards the end of this decade and into the next."

However, he stresses Embraer will continue to exercise discipline in the volume of E-Jets directly sold to lessors to "ensure the market remains firm throughout the cycle".

"Its this discipline that has encouraged so many new lessors to join the programme over the last few years and has today got the E-Jet recognised by the appraiser community as an investment grade asset and superior to the offerings of our competitors in the 70-120 seat category," he says.

Rival Bombardier has been busy trying to secure lessor support for the Pratt & Whitney PurePower PW1500G-powered CSeries as its general policy is not to provide manufacturer finance. The Canadian manufacturer expects to sell up to 50% of all CSeries aircraft to leasing companies.

Bombardier has so far inked orders from lessors Ilyushin Finance and Lease Corporation International (LCI).

Russia's Ilyushin Finance has ordered 32 units, while Irish lessor LCI emerged in 2009 as the second CSeries customer after Lufthansa, and the first to order the larger-capacity CS300. LCI will receive three CS100s in the second quarter of 2014, while delivery of the 17 CS300s will start in the first quarter of 2015.

GECAS served as a strong customer of Bombardier's CRJ family, accounting for a respectable 16.6% of the total in-service fleet, according to Ascend. The lessor also has 12 CRJ family aircraft in storage.