What changed in this filing

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Item 1. Business

2023-03-10 compared with 2022-03-14 · 57 added, 70 removed, 159 unchanged (44% of the section changed)

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Our principal business objective is to build value for our shareholders by acquiring commercial aircraft and engines and managing those assets in order to provide a return on investment, primarily through lease rent and maintenance reserve revenues, as well as through management fees earned for managing assets owned by other parties.

As of December 31, 2021, our $1,991.4 million equipment held for operating lease portfolio and $115.5 million notes receivable represented 304 engines, twelve aircraft, one marine vessel and other leased parts and equipment with 76 lessees in 40 countries.

As of December 31, 2022, we had $2,111.9 million of equipment held in our operating lease portfolio, $81.4 million of notes receivable, $17.7 million of maintenance rights, and $6.4 million of investments in sales-type leases, which represented 339 engines, 13 aircraft, one marine vessel and other leased parts and equipment with 80 lessees in 41 countries.

In addition to our owned portfolio, as of December 31, 2022, we managed a total lease portfolio of 324 engines, aircraft and related equipment for other parties.

Willis Aeronautical Services, Inc.

(“Willis Aero”) is a wholly owned subsidiary whose primary focus is the sale of aircraft engine parts and materials through the acquisition or consignment of aircraft and engines.

Willis Asset Management Limited (“Willis Asset Management”) is a wholly owned subsidiary whose primary focus is the engine management and consulting business.

(“Willis Aero”) is a wholly-owned and vertically-integrated subsidiary whose primary focus is the sale of aircraft engine parts and materials through the acquisition or consignment of aircraft and engines.

Willis Asset Management Limited (“Willis Asset Management”) is a wholly-owned and vertically-integrated subsidiary whose primary focus is the engine management and consulting business.

Willis Asset Management had 289 engines, excluding WLFC engines, under management as of December 31, 2022.

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We transact business directly and through our subsidiaries and consolidated variable interest entities (“VIE”) unless otherwise indicated.

We maintain a website at www.willislease.com where our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available without charge, as soon as reasonably practicable following the time they are filed with or furnished to the SEC.

The SEC also maintains an electronic Internet site that contains our reports, proxies and information statements, and other information that we file or furnish at http://www.sec.gov.

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Furthermore, unscheduled events such as mechanical failure, Federal Aviation Administration (“FAA”) airworthiness directives or manufacturer-recommended actions for maintenance, repair and overhaul of engines result in the need for spare engines.

Based on industry data, we estimate that the total number of spare engines needed is around 12% of the total number of installed engines, including both owned and leased spare engines.

Our engine portfolio primarily consists of noise-compliant Stage IV commercial jet engines manufactured by CFMI, General Electric, Pratt & Whitney, Rolls Royce and International Aero Engines.

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We acquire engines for our leasing portfolio in a number of ways.

We enter into sale and lease back transactions with operators of aircraft, original equipment manufacturers of engines and providers of engine maintenance cost per hour services.

We enter into sale and lease back transactions with operators of aircraft, original equipment manufacturers of engines, and MROs.

We also purchase both new and used engines that are subject to a lease when purchased and on a speculative basis ( i.e.

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At December 31, 2022, approximately 72% of our on-lease engines, aircraft, and related equipment (all of which we sometimes refer to as “equipment”) by net book value are leased and operated internationally.

Substantially all leases relating to this equipment are denominated and payable in U.S.

dollars, which is customary in the industry.

Future leases may provide for payments to be made in euros or other foreign currencies.

Substantially all leases relating to this equipment are denominated and payable in United States (“U.S.”) dollars, which is customary in the industry.

Future leases may provide for payments to be made in other foreign currencies.

In 2022, we leased our equipment to lessees domiciled in seven geographic regions.

Spare Parts Sales

Our wholly owned subsidiary Willis Aero primarily engages in the sale of aircraft engine parts and materials through the acquisition or consignment of engines from third parties or from the leasing portfolio.

Our wholly-owned and vertically-integrated subsidiary Willis Aero primarily engages in the sale of aircraft engine parts and materials through the acquisition or consignment of engines from third parties or from the leasing portfolio.

This business segment enables us to provide end-of-life solutions for the growing supply of surplus aircraft and engines, as well as manage the full lifecycle of our lease assets, enhance the returns on our engine portfolio and create incremental value for our shareholders.

COVID-19 Impact

As a result of the COVID-19 pandemic, we have continued to temporarily close our headquarters and other offices, require our employees and contractors to predominately work remotely, and implement travel restrictions, all of which represent a significant disruption in how we operate our business.

We have also taken various proactive actions in an attempt to mitigate the financial impact of the COVID-19 pandemic.

During 2020, 9% of our employees were either furloughed, or subject to a form of reduced compensation which was subsequently reversed in 2021.

The operations of our partners and customers have likewise been disrupted.

The worldwide spread of the COVID-19 virus has resulted in a global slowdown of economic activity, and more specifically within the aviation industry.

While the duration and extent of the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time and the ultimate societal and economic impact of the COVID-19 pandemic remains unknown.

In particular, the ongoing COVID-19 pandemic has caused significant disruptions to the airline industry and has resulted in a dramatic reduction in demand for air travel domestically and abroad, which is likely to continue for the foreseeable future.

Lower demand for air travel in turn presents significant risks to our Company, resulting in impacts which have adversely affected our business, results of operation, and financial condition.

Lower demand for spare parts and engine and airframe leasing has negatively impacted collections and accounts receivable, caused our lessee customers to not enter into new leases, resulted in reduced spending by new and existing customers for leases or spare parts or equipment, resulted in lower usage fees, caused some of our customers to go out of business, and limited the ability of our personnel to travel to customers and potential customers.

We are not able to evaluate or foresee the full extent of these impacts at the current time.

During the year ended December 31, 2021, we continued to experience a reduction in lease rent and maintenance reserve revenues as compared to the pre-COVID-19 environment, as well as a decline in spare parts and equipment sales.

Additionally, we have, in certain situations, agreed to rent concessions which resulted in a total reduction to rent revenues of $0.5 million during 2021.

Rent concessions during 2020 resulted in a total reduction of rent revenue of $6.5 million.

The COVID-19 pandemic has materially affected our business and financial results for the year ended December 31, 2021, and may continue to do so indefinitely thereafter.

The scope and nature of the impact of COVID-19 on the airline industry, and in turn our business, continue to evolve and the outcomes are uncertain.

Given the uncertainty in the rapidly changing market and economic conditions related to COVID-19, we will continue to evaluate the nature and extent of the impact to our business and financial position.

The ultimate extent of the effects of the COVID-19 pandemic on our Company will depend on future developments, and such effects could exist for an extended period of time.

In January 2022, the Company lifted travel restrictions and subsequently reopened its corporate headquarters and other offices for employees and contractors to work from.

The Company has experienced and continues to experience various degrees of disruption due to the COVID-19 pandemic.

Lower demand for air travel presents significant risks to the Company, resulting in impacts which have adversely affected the Company's business, results of operations, and financial condition.

The Company is not able to evaluate or foresee the full extent of these impacts at the current time.

The scope and nature of the impact of COVID-19 on the airline industry, and in turn the Company's business, continue to evolve and the outcomes are uncertain.

Given the uncertainty in the rapidly changing market and economic conditions related to COVID-19, we will continue to evaluate the nature and extent of the impact to the Company's business and financial position.

The ultimate extent of the effects of the COVID-19 pandemic on the Company will depend on future developments, and such effects could exist for an extended period of time.

INDUSTRY BACKGROUND - THE DEMAND FOR LEASED AIRCRAFT ENGINES

Historically, commercial aircraft operators owned rather than leased their spare engines.

As engines become more powerful and technically sophisticated, they also become more expensive to acquire and maintain.

In part due to cash constraints on commercial aircraft operators and the costs associated with engine ownership, commercial aircraft operators have become more cost-conscious and now utilize operating leases for a portion of their spare engines and are therefore better able to manage their finances in this capital-intensive business.

As engines become more powerful and technically sophisticated, they have also become more expensive to acquire and maintain.

Engine leasing is a specialized business that has evolved into a discrete sector of the commercial aviation market.

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• the proportion of engines that are leased, rather than owned, by commercial aircraft operators.

While COVID-19 has significantly impacted engine leasing, we still believe leasing will increase over the long term but more slowly as we emerge from the pandemic.

While COVID-19 has significantly impacted engine leasing, we still believe that engine leasing will gradually increase over the long term, but at a slower and less predictable pace than historically, as we emerge from the pandemic.

Increased number of aircraft, and therefore engines, in the market

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Aircraft equipment manufacturers have predicted such an increase in aircraft to address the rapid growth of both passenger and cargo traffic in the Asian markets, as well as demand for new aircraft in more mature markets.

While we believe these predictions are accurate over the long

term, COVID-19 has materially disrupted the airline industry and significantly slowed down passenger growth globally, including in the U.S., and we believe such growth and demand may be negatively impacted over the short to medium term.

While we believe these predictions are accurate over the long term, COVID-19 has materially disrupted the airline industry and significantly slowed down passenger growth globally, including in the U.S., and we believe such growth and demand may be negatively impacted over the short to medium term.

See “Risk Factors” below.

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• the number of spare engines an aircraft operator requires in order to ensure coverage for predicted and unscheduled removals.

We believe that commercial aircraft operators are increasingly considering their spare engines as significant capital assets, where operating leases may be more attractive than finance leases or ownership of spare engines.

We believe that currently 35% of the spare engine market falls under the category of leased engines.

Industry analysts have forecast that the percentage of leased engines is likely to increase over the next 15 years as engine leasing follows the growth of aircraft leasing.

We believe that commercial aircraft operators are increasingly considering their spare engines as significant capital assets, in which operating leases may be more attractive than finance leases or ownership of spare engines.

Industry analysts have forecasted that the percentage of leased engines is likely to increase over the next 15 years as engine leasing follows the growth of aircraft leasing.

We believe this is due to the increasing cost of newer engines, the anticipated modernization of the worldwide aircraft fleet and the significant cost associated therewith, and the emergence of new niche-focused airlines which generally use leasing in order to obtain their capital assets.

ENGINE LEASING

As of December 31, 2021, the majority of our leases to air carriers, manufacturers and MROs were operating leases with the exception of certain failed sale-leaseback transactions classified as notes receivable under Accounting Standards Codification (“ASC”) 842.

Under operating leases, we retain the potential benefit and assume the risk of the residual value of the equipment, in contrast to finance leases where the lessee has more of the potential benefits and risks of ownership.

As of December 31, 2022, the majority of our leases to air carriers, manufacturers and MROs were operating leases with the exception of certain failed sale-leaseback transactions classified as notes receivable under Accounting Standards Codification (“ASC”) 842 and investments in sales-type leases.

Under operating leases, we retain the potential benefit and assume the risk of the residual value of the equipment, in contrast to finance leases in which the lessee has more of the potential benefits and risks of ownership.

Operating leases allow commercial aircraft operators greater fleet and financial flexibility due to the relatively small initial capital outlay necessary to obtain use of the aircraft equipment, and the availability of short- and long-term leases to better meet their needs.

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Characteristics of a long-term lease also include specified return conditions.

Return conditions can be met by the customer through a maintenance overhaul in advance of asset return or a cash settlement at lease end resulting in maintenance revenue at that time.

Maintenance reserves are often used for payment of maintenance overhauls in advance of asset returns.

The cash settlement may, in some instances, be taken from maintenance reserves paid throughout the course of the lease.

Return conditions can be met by the customer through a maintenance overhaul in advance of asset return or a cash settlement at lease end resulting in maintenance revenue to the Company at that time.

Maintenance reserves, also referred to as use fees, are often used for payment of maintenance overhauls in advance of asset returns by the lessee to the Company.

Where a cash settlement is agreed upon, it may, in some instances, be taken from maintenance reserves paid by the lessee to the Company throughout the course of the lease.

Short-term leases typically have an original lease term of less than one year.

Short-term leases also include non-refundable, usage-based maintenance fees, which are billed at contractual rates and recognized as revenue over the term of the leases.

Payment terms of our leases are predominately monthly in advance for rent and in arrears for usage.

Payment terms of our leases are predominately monthly in advance for rent and in arrears for the expenses associated with the use of the engines.

As of December 31, 2022 and 2021, 21% and 31%, respectively, of the Company’s leases by net book value were short-term leases.

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For example, we analyze the credit risk associated with a lessee before entering into any significant lease transaction.

Our credit analysis generally consists of evaluating the prospective lessee’s financial standing by utilizing financial statements and trade and/or banking references.

In certain circumstances, we may require our lessees to provide additional credit support, such as a letter of credit or a guaranty from a bank or a third party or a security deposit.

We manage our interest rate risk through maintaining a balance of fixed and floating rate debt which allows us to limit our exposure to interest rate movements while also allowing us to benefit from low short-term interest rates.

The Company utilizes our credit facility as a warehouse facility to aggregate purchased assets.

Generally, when the Company aggregates a critical mass of assets through revolver financing, we refinance the assets through the issuance long term fixed rate debt through the Asset Backed Security ("ABS") market.

Generally, when the Company aggregates a critical mass of assets through revolver financing, we refinance the assets through the issuance of long-term fixed rate debt through the Asset-Backed Security (“ABS”) and other markets.

The maturity profile of the ABS term financings tend to better match the long life characteristics of our long life asset base.

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At December 31, 2022 the Company had $1.1 billion of fixed rate financing.

Our credit analysis generally consists of

evaluating the prospective lessee’s financial standing by utilizing financial statements and trade and/or banking references.

In certain circumstances, we may require our lessees to provide additional credit support, such as a letter of credit or a guaranty from a bank or a third party or a security deposit.

We also evaluate insurance and expropriation risk and evaluate and monitor the political and legal climate of the country in which a particular lessee is located in order to determine our ability to repossess our engines should the need arise.

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The security deposit is returned to the lessee after all lease return conditions have been met.

Under the terms of some of our leases, during the term of the lease, the lessee pays amounts to us based on usage of the engine, which is referred to as maintenance reserves or use fees, which are designed to cover the expected future maintenance costs.

As mentioned above, under the terms of some of our leases, during the term of the lease, the lessee pays amounts to us based on usage of the engine, which is referred to as maintenance reserves or use fees, which are designed to cover the expected future maintenance costs.

For those leases in which the maintenance reserves are reimbursable to the lessee, maintenance reserves are collected and are reimbursed to the lessee when qualifying maintenance is performed.

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Our management believes that our attention to our lessees and our emphasis on maintenance and inspection helps preserve residual values and generally helps us to recover our investment in our leased engines.

Upon termination of a lease, we will either enter into a new lease, sell or part out the related engines or airframe.

Upon termination of a lease, we will either enter into a new lease, sell, or part out (disassemble and sell the parts separately), the related engines or airframe.

The demand for aftermarket engines for either sale or lease may be affected by a number of variables, including:

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See “Risk Factors” below.

The value of a particular model of engine is heavily dependent on the status of the types of aircraft on which it is installed.

We believe values of engines tend to be stable as long as the host aircraft for the engines and the engines themselves are still being manufactured.

Prices will also tend to remain stable and even rise after a host aircraft is no longer manufactured as long as there is sufficient demand for the host aircraft.

The value of a particular model of engine is heavily dependent on the status of the types of aircraft on which it can be installed.

We believe engine values tend to be stable as long as the host aircraft for the engines and the engines themselves are still being manufactured.

Prices tend to remain stable and may even rise after a host aircraft is no longer manufactured as long as there is sufficient remaining demand for the host aircraft in the market.

However, the value of an engine begins to decline rapidly once the host aircraft is retired from service and/or parted out in significant numbers.

Values of engines also may decline because of manufacturing defects that may surface subsequently.

As of December 31, 2020, our $1,886.6 million equipment held for operating lease portfolio and $158.7 million notes receivable represented 291 engines, eight aircraft, one marine vessel and other leased parts and equipment.

Engine values also may decline because of manufacturing defects that surface subsequent to initial manufacture and deployment.

As of December 31, 2021, we had $1,991.4 million of equipment held in our operating lease portfolio, $115.5 million of notes receivable, and $22.5 million of maintenance rights, which represented 304 engines, 12 aircraft, one marine vessel and other leased parts and equipment.

As of December 31, 2022 minimum future rentals under non-cancelable operating leases of these engines, related equipment and aircraft assets were as follows:

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We believe the loss of any one customer would not have a significant long-term adverse effect on our business.

We operate in a global market in which our engines are easily transferable among lessees located in many countries, which stabilizes demand and allows us to recover from the loss of a particular customer.

As a result, we do not believe we are dependent on a single customer or a few customers, the loss of which would have a material adverse effect on our revenues.

We operate in a global market in which our engines are easily transferable among lessees located in many countries, which stabilizes demand and allows us to recover from a loss of a customer.

We provide other engine leasing related services such as engine storage, Part 145 maintenance and aircraft tear down services to our customers as well.

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Each partner holds a 50% interest in the joint venture.

WMES owned a lease portfolio, inclusive of a note receivable, of 37 engines and five aircraft with a net book value of $292.5 million as of December 31, 2021.

WMES owned a lease portfolio of 35 engines and five aircraft with a net book value of $255.5 million as of December 31, 2022.

Our investment in the joint venture was $41.0 million as of December 31, 2022.

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AIRCRAFT LEASING

As of December 31, 2021, our operating lease portfolio and notes receivable included five A319-111 aircraft, four ATR 72-500 aircraft, one A320-233 aircraft, one A321-200 aircraft and one Boeing 737 with an aggregate net book value of $126.6 million.

As of December 31, 2022, our operating lease portfolio included five A319-100 aircraft, four ATR 72-500 aircraft, one A320-200 aircraft, one A320-233 aircraft, one A321-200 aircraft, and one Boeing 737-700 with an aggregate net book value of $134.5 million.

Our aircraft leases are “triple-net” leases and the lessee is responsible for making the full lease payment and paying any other expenses associated with the use of the aircraft, such as maintenance, casualty and liability insurance, sales or use taxes and personal property taxes.

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The lessee is required to continue to make lease payments under all circumstances, including periods during which the aircraft is not in operation due to maintenance or grounding.

We provide other aircraft leasing related services such as engine storage, Part 145 maintenance and aircraft tear down services to our customers as well.

SPARE PARTS SALES

The sale of spare parts is managed by the Company’s wholly owned subsidiary, Willis Aero.

Willis Aero primarily engages in the sale of aircraft engine parts and materials through the acquisition or consignment from third parties or from the leasing portfolio.

The sale of spare parts is managed by the Company’s wholly-owned and vertically-integrated subsidiary, Willis Aero.

Willis Aero primarily engages in the sale of aircraft engine parts and materials that it acquires via acquisition or consignment from third parties or from the leasing portfolio.

This business segment enables our Company to provide end-of-life solutions for the growing supply of surplus aircraft and engines, as well as manage the full lifecycle of our lease assets, enhance the returns on our engine portfolio and create incremental value for our shareholders.

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ASSET MANAGEMENT

Willis Asset Management is a wholly owned subsidiary whose primary focus is the engine management and consulting business.

Willis Asset Management is a wholly-owned and vertically-integrated subsidiary whose primary focus is the engine management and consulting business.

Willis Asset Management had 289 engines, excluding WLFC engines, under management as of December 31, 2022.

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Our competitors compete with us in many ways, including pricing, technical expertise, lease flexibility, engine availability, supply reliability, customer service and the quality and condition of engines.

Many of our competitors have greater financial resources than we do, or are affiliates of larger companies.

Many of our competitors have greater financial resources than we have, or are affiliates of larger companies.

We emphasize the quality of our portfolio of aircraft engines, supply reliability and high level of customer service to our aircraft equipment lessees.

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In addition to requiring full indemnification under the terms of our leases, we require our lessees to carry the types of insurance customary in the air transportation industry, including comprehensive third-party liability insurance and physical damage and casualty insurance.

We require that we be named as an additional insured on liability insurance with ourselves and our lenders normally identified as the loss payee for damage to the equipment on policies carried by lessees.

We require that we be named as an additional insured on liability insurance policies with the Company and our lenders normally identified as the loss payee on policies carried by lessees for damage to the leased equipment.

We monitor compliance with the insurance provisions of the leases.

We also carry contingent physical damage and third-party liability insurance as well as product liability insurance.

We also carry contingent physical damage and third-party liability insurance as well as product liability insurance at levels determined to be appropriate by the Company.

GOVERNMENT REGULATION

Our customers are subject to a high degree of regulation in the jurisdictions in which they operate.

For example, the FAA regulates the manufacture, repair and operation of all aircraft operated in the United States and equivalent regulatory agencies in other countries, such as the European Aviation Safety Agency (“EASA”) in Europe, regulate aircraft operated in those countries.

For example, the FAA regulates the manufacture, repair and operation of all aircraft operated in the U.S.

and equivalent regulatory agencies in other countries, such as the European Aviation Safety Agency (“EASA”) in Europe, regulate aircraft operated in those countries.

Such regulations also indirectly affect our business operations.

All aircraft operated in the United States must be maintained under a continuous condition-monitoring program and must periodically undergo thorough inspection and maintenance.

All aircraft operated in the U.S.

must be maintained under a continuous condition-monitoring program and must periodically undergo thorough inspection and maintenance.

The inspection, maintenance and repair procedures for commercial aircraft are prescribed by regulatory authorities and can be performed only by certified repair facilities utilizing certified technicians.

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For example, jurisdictions throughout the world have adopted noise regulations which require all aircraft to comply with Stage III noise requirements.

In addition to the current Stage III compliance requirements, the United States and the International Civil Aviation Organization, or “ICAO,” have adopted a more stringent set of “Stage IV” standards for noise levels which apply to engines manufactured or certified from 2006 onward.

At this time, the United States regulations do not require any phase-out of aircraft that qualify only for Stage III compliance, but the European Union has established a framework for the imposition of operating limitations on non-Stage IV aircraft.

In addition to the current Stage III compliance requirements, the U.S.

and the International Civil Aviation Organization (“ICAO”) have adopted a more stringent set of “Stage IV” standards for noise levels which apply to engines manufactured or certified from 2006 onward.

At this time, the U.S.

regulations do not require any phase-out of aircraft that qualify only for Stage III compliance, but the European Union (“EU”) has established a framework for the imposition of operating limitations on non-Stage IV aircraft.

As of December 31, 2022, most of the engines in our lease portfolio are Stage IV engines and are generally suitable for use on one or more commonly used aircraft.

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FINANCING/SOURCE OF FUNDS

We, directly or through our Willis Engine Structured Trust III, IV, V and VI (“WEST III”, “WEST IV”, “WEST V” and “WEST VI”) asset-backed securitizations (“ABS”), typically acquire engines with a combination of equity capital and funds borrowed from financial institutions.

In order to facilitate financing and leasing of engines, each engine is generally owned through a statutory or common law trust that is wholly owned by us or our subsidiaries.

We, directly or through our Willis Engine Structured Trust III, IV, V and VI (“WEST III,” “WEST IV,” “WEST V,” and “WEST VI”) asset-backed securitizations typically acquire engines with a combination of equity capital and funds borrowed from financial institutions.

In order to facilitate financing and leasing of engines, most of our engines are generally owned through a statutory or common law trust that is wholly-owned by us or our subsidiaries.

We usually borrow up to 85% of an engine purchase price.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business