The Role of Power-by-the-Hour (PBH) Agreements in Engine Leasing

A Shift in Maintenance Philosophy

Traditionally, airlines have been responsible for managing and paying for the maintenance of their own engines. However, in recent years, there has been a shift towards a new model: the power-by-the-hour (PBH) agreement. Under a PBH agreement, the airline pays the engine manufacturer a fixed fee for every hour the engine is in operation. In return, the manufacturer takes on the responsibility for all of the engine's maintenance, including both scheduled and unscheduled events.

Advantages for the Lessee

For the airline, the primary advantage of a PBH agreement is that it provides a predictable and stable cost for engine maintenance. This can be a significant benefit, as the cost of a major engine overhaul can be several million dollars. A PBH agreement also transfers the risk of unexpected maintenance events from the airline to the manufacturer.

Advantages for the Lessor

For the engine lessor, a PBH agreement can also be attractive. It provides a steady and predictable stream of revenue, and it ensures that the engine will be maintained to the highest standards by the original equipment manufacturer (OEM). This can help to preserve the value of the engine and make it more attractive to future lessees.

Disadvantages and Risks

Despite their advantages, PBH agreements are not without their risks. For the airline, the cost of a PBH agreement can be higher than the cost of managing its own maintenance, particularly if the airline has a strong in-house maintenance capability. For the lessor, the primary risk is that the manufacturer may not be able to provide the required level of service, which could lead to disputes with the lessee.

Impact on Engine Valuation

A PBH agreement can have a significant impact on the valuation of an engine. An engine that is covered by a PBH agreement will typically be more valuable than one that is not. This is because the PBH agreement provides a guarantee that the engine will be properly maintained, and it transfers the risk of unexpected maintenance events to the manufacturer. This makes the engine a more attractive asset for both lessors and investors.

The Future of Engine Maintenance

PBH agreements have become increasingly popular in recent years, and they are now the standard for most new engine types. As the technology of jet engines continues to advance, it is likely that PBH agreements will become even more prevalent. For airlines, they offer a way to manage the complex and costly business of engine maintenance. For lessors and investors, they provide a way to de-risk their investment and enhance the value of their assets.