SOUTH BEACH, Fla - The ground-breaking securitization backed by aircraft engine leases has yet to hit the runway, but the potential for this asset class, particularly in a post-Sept. 11 market, was one of the hot topics at last week's SRI ABS Industry Summit in Miami.

Experts outlined the steady demand and pricing for aircraft engines as the industry has changed dramatically since last year's terrorist attacks.

Unlike actual aircrafts, the engines have inelastic demand and practically no residual value depreciation, as long as they are maintained properly. Akin to a spare tire, carriers need extra engines - just in case. As a result, noted Don Nunemaker, executive vice president of Willis Lease Finance, "When a grounded aircraft needs an engine [airlines] do not haggle over price and are more concerned over how fast we can deliver it." Willis is planning its inaugural term ABS offering next month.

Touting the less cyclical - and therefore less volatile collateral - structural innovator Mostafis Shahmohammed of UBS Warburg said that engine ABS could approach the aircraft lease sector in both volume and per annum deal count down the line.

While the industry was shell shocked after the terrorist attacks, described as a turtle with a head in its shell, "The last thing an airline wanted to talk about was resigning a lease for three engines, [as] they were unwilling to make commitments," Nunemaker said. But in actuality, leasing volume dropped off only slightly, hitting a break lease-rate factor of 1.21% in April before rebounding to the current level of 1.18%.

New aircraft engines cost between $5 million and $15 million apiece, and given the current state of the airline industry, leasing of engines is becoming a more integral way of doing business rather than purchasing their excess engine supply, panelists said. Also, the lag-time between order and receiving of a purchased aircraft engine can be up to six months.

When maintained properly, the life of an engine can be upwards of 40 years. The engines are generally interchangeable with one another throughout the life of the asset, said UBS' Shahmohammed. Additionally, maintenance fees are typically paid by the carrier.

According to Willis' Nunemaker, the demand, and therefore ability to re-lease engines, is greater and easier than re-leasing an entire aircraft. Furthermore, an aircraft engine may be re-leased numerous times. His company, for example, leases many of its engines on a 90-day basis and then re-leases to the same carrier or to a new one. Willis stipulates that, with certain specialized engines, it has the right to nullify a current agreement and re-lease to higher bidder with a 45-day notice.

However, the narrow spectrum of the sector and the limited number of engine lessors raises the question of servicer risk, should an originator find itself facing bankruptcy. According to servicer sources, unless large players were to purchase the servicing rights, it would be unlikely that either of the two remaining smaller issuers would be able to handle the additional capacity. New entrants are viewed as unlikely, as Nunemaker sees further industry consolidation.

Responding to questions regarding the beaten-down U.S. airline industry, Nunemaker added that just 17% of Willis' engines are leased to U.S. carriers. Roughly half of the engines are leased to European airlines independent carriers, both flagship and small. In all, Willis leases to 58 clients in 28 countries.

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