As OEMs and MROs partner to provide power-by-the hour solutions to carriers in search of engines—encompassing the maintenance to keep them running—traditional engine lease firms still have a role to play. The key is their ability to offer carriers cash via a sale and leaseback arrangement. To do that, lessors have to keep their own cost structures lean. That may mean nailing down maintenance and material costs at point-of-purchase, and more aggressively pooling parts.

“The trend is for [engine] OEMs to be winning more and more of the business,” says Joseph O'Brien, executive vice president of Shannon-based Engine Lease Finance Corp. “The dynamic in the market is [moving toward] more power-by-the-hour.”

But PBH pacts don't necessarily presage long-term loss of business, at least not in Abdol Moabery's estimation. “Typically what happens,” contends GA Telesis' president and CEO, is that power-by-the-hour is often a mere starting point in the evolution of an airline's engine maintenance philosophy. After a while, after they begin to understand the physical and fiscal parameters of their powerplants, they well might decide to migrate into a time and materials contract. And then, he contends, is when they seek out traditional engine leasing firms.

As maintenance efficiencies within a carrier become more manifest, the pull of the comprehensive services that OEMs and MROs offer lessens, and airlines gravitate towards leasing companies. At least that's the lessors' contention. To pave the way for new business, the engine lease firm must “pay a good number for the engine, then offer a very attractive lease factor,” says O'Brien.

That said, how else can lease firms counter OEM/MRO ascendance in the engine marketplace? Oliver Wyman partner Tim Hoyland characterizes the bond between OEMs and MROs as “pretty strong,” and believes the two are “working well” together. He thinks one tack engine lessors can employ to become more competitive is effectively using spares pools. “We still do not see as much pooling in North America as we have in Europe,” he says, but, “We're starting to see it—especially as airlines seek to reduce assets.”

Hoyland also believes leasing companies are going to have to get more aggressive at point-of-purchase, the point at which they acquire a powerplant. The reason: “You're not going to get a second chance to [nail down] the…maintenance costs.” If lessors don't do that then and there, if they lose that point-of-purchase opportunity to do “a very intelligent and aggressive PBH agreement…it's going to be very difficult for them to reduce their costs.”

The Oliver Wyman executive believes trying to nail maintenance costs in place after the buy is all but futile. If the lessor procures the engine and then leases it, when the lessor subsequently tries to purchase maintenance, “there [is] a lot less competition at that point in time.” That's why he argues leasing company must fix the maintenance expenditures up front—and that includes inventory and material costs. He says lessors should obtain guarantees, again at point of purchase, as to how much those costs will escalate—guarantees that allow their material costs to rise less rapidly than those of the airlines.

There's another key observation by the Oliver Wyman partner, and it concerns parts manufacturer approval (PMA). “What we're seeing in the high-tech PMA market is a rapid…reduction in high-tech PMA components,” says Hoyland. He terms the survey results “stunning.” Hoyland attributes the fall off in high-tech PMA product to regulatory changes. He asserts PMA manufacturers are simply unwilling to assume what he terms “massive” financial risk. That trend, should it continue, could have a telling impact on market dynamics.