Combustion engines to financial engines: Willis Lease Finance Corp move into e-fuels

This week Al sat down with Austin Willis, CEO, Willis Lease Finance Corporation to discuss their diversification into Sustainable Aviation Fuel production. The conversation unpacks the transformative journey of Willis Lease, from its roots leasing engines to a broad-spectrum powerhouse, and shines a spotlight on their pioneering endeavour to produce sustainable aviation fuel in Teesside, UK. With a blueprint for a greener horizon, Willis Lease is charting a course for 2026, aiming to power the skies with synthetic fuels.

This episode is  a realistic look at the hurdles and headwinds the aviation industry faces as we transition into sustainable practices. Austin Willis gives us a technician's tour into the intricate world of Power-to-Liquid technology, the cornerstone of their sustainable fuel vision. He shares the environmental and economic challenges, from feedstock scarcity to investment complexities, offering an inside look at the mechanisms of de-risking such ventures. It's a conversation that goes beyond combustion engines and into financial engines that will drive or delay the advent of low-carbon flight.

Austin is optimistic as we discuss the forthcoming construction of the SAF plant and the broader mission of Willis Sustainable Fuels, illuminating the role they play in the global effort to decarbonize aviation.

If you enjoyed this episode, catch our previous discussion with Jean Paquin and how SAF+ International Group are approaching their e-fuel production facility in Montreal, Canada: https://www.buzzsprout.com/2202964/13512160

SAF Investor London

This conference serves as a nexus for innovators, customers, financiers, regulators, suppliers, and advisors, forging partnerships that will drive change. SAF Investor London 2024 isn't a conference for debating the merits of SAF; it's about convening the dealmakers who can effect real transformation.

Join over 200 leaders in the SAF Industry for two days of stimulating debates, discussions and plenty of networking.

You can find out more about SAF Investor and our conference in London here: https://www.safinvestor.com/

Host: Al Whyte, SAF Investor
Producer: Oscar Henderson, SAF Investor

Transcript

Speaker 1 0:05

Hi, welcome to the podcast. This week. We're absolutely delighted to have Austin Willis, ceo of Willis Lease Finance Corporation. Willis Lease Finance is a fascinating company. They've for years they've been building a large business leasing engines and an aircraft and maintenance, but they're actually developing their own power to liquid saff plant in the northeast of England and in this Austin explains how it happened and why they're hoping to get to production by 2026. We hope you enjoy it, austin. Thanks so much for joining us. So did you ever have a choice? Did you just have to go into aviation?

Speaker 2 0:51

You know, I actually originally, when I graduated college, I wanted to go into the end of the military. So I was in college during 9-11. And I told my parents that I wanted to enlist and they convinced me to stay in school a little bit longer. So I ended up starting a business after I graduated, kind of thinking. You know, the likelihood is it's not going to work out. Everybody hammered into my head the failure rate of new businesses. I knew it was in aviation, it was in jet engine parts, but despite my best efforts it actually ended up plugging along and doing okay. So long winded way of saying no, I never had a chance.

Speaker 1 1:34

I'm sorry it worked out so well. Do you want to explain a bit about Willis Lease finance to be redone?

Speaker 2 1:43

Sure, yeah. So Willis Lease was started in the early 80s by my dad, originally strictly an engine lessor, I think. He bought an engine because an MRO told them that they needed a lease engine and he mortgaged the house, bought the engine, put it on lease, found it was a pretty decent business and got a bit of financing from I think it was HSBC at the time Did a few more engines and just built a portfolio over time and then went public in 1996 on the NASDAQ secondary offering in 1998 and really just built the company incrementally over time to what it is today about 2.5 billion in assets owned, with around 4 owned and managed. In 2013, actually the company bought what was my parts business, jt Power, and that was sort of a vertical integration for Willis Lease. So they bought that and then in 2016, I believe, they bought the intellectual property from what was total engine support in the UK and that really gave them breadth and capability beyond what we had before from a technical standpoint and also being able to offer our technical expertise to third parties. So they started off doing engine shop as a management and built it into a fleet management. So for us it's a great way to offer a broader range of customers or lease engines when they have repairs.

Speaker 2 3:22

And in 2018, we actually before 2018, we got into the engine 145 repair business.

Speaker 2 3:30

So we've got what's called Willis Engine Repair Centers in both the US and the UK and we do hospital visits on engines.

Speaker 2 3:40

And that really was started to do just our own engines because we found with the smaller work scopes, the lower dollars involved, we'd usually get pushed to the back of the line by the big MROs and it would take months to get pretty medial work scopes accomplished. So we brought that in-house and got the turn times down to a much, much lower time and we found that there was actually a lot of demand from third parties. So we got a lot of third party work and it turned profit on a third party basis about six months ago the two 145 repair stations. So then in 2018, we started looking at the aircraft business and it's an operation we have in T-side where we've got base maintenance, line maintenance, ground handling and a small FBO and really that was to try to capitalize on our aircraft leasing side of the business and also just use our capabilities and knowledge in the industry to drive business. So that's probably a little bit more than you wanted to know. But that's kind of a snapshot of Willis-Lease.

Speaker 1 4:53

Although it's interesting, isn't it from the outside, if people don't know the leasing business. You've sort of been fighting the whole time, haven't you? Against manufacturers. You invented a new thing, you've gone in, you've been fighting against manufacturers, fighting against repair shops. In some ways, you guys have always been quite contrarian, haven't you? Is that fair?

Speaker 2 5:14

Yeah, you know the OEMs have always been interesting bedfellows because we're big customers for them, but we've also been competitors. I think that notion may have changed a little bit in the last few years as the OEMs kind of look at who they ultimately want to be in the long run. You know, with GE getting rid of a GCass and other OEMs sort of focusing more on their core of the manufacturer, I think they view us a little bit differently than they did historically. But to your point, you know we've always had to fight for a place in the world and really we've done that with high quality products and just delivering the best service we can to customers.

Speaker 1 5:55

So will its sustainable fuel seems like a very different side of the market. Nearly everything you've done in the past has involved metal your engines and aircraft and now fuel, yeah.

Speaker 2 6:11

So it was definitely a big departure for us and it actually came from the conversations we were having with the local government in Teeside in the UK. They reached out to us and said you know, we're trying to develop jobs and develop industry, and particularly renewable industry in that region of the UK and they asked if we would have an interest in collaborating to develop a SAF plant there. And this was going on two years ago now. Our initial thought was you know, what do we know about the fuels business, the renewables business? It's all of nothing. But we were continuing the discussion and they basically said for the same reasons that you guys have been successful in diversifying into other areas of aviation, we think you can really add value here, and that's through distribution, so our knowledge of the end users and our ability to structure offtake agreements. So that's kind of what kickstarted the conversation. And then from there they introduced us to an engineering firm that really had the understanding and wherewithal of the SAF business and we kind of took it and started running.

Speaker 1 7:32

That's really interesting. So it wasn't you think we wouldn't have an ESG part, it was more very opportunistic.

Speaker 2 7:39

Yeah, I mean I'd love to tell you it was the result of hundreds of hours of management, consultants and everybody else coming up with all sorts of charts, but it was really more opportunistic. But it was also us looking for different ways to participate in a decarbonized future. We've definitely been thinking about what does our business look like in 10 years, in 20 years and I know for public companies it's thinking that far ahead is not always that common, but we were kind of struggling to think of what the industry looks like long-term and what are the different contributors to decarbonization. Is it electrification? Is it hydrogen? Is it hydrogen-electric powertrains? Is it SAP? Is it something else? And ultimately we felt and we felt before this opportunity presented itself that SAP is probably going to be the most realistic and material contributor to decarbonization for the foreseeable future.

Challenges and Considerations for PtL Manufacturing

Speaker 1 8:45

And say I suppose we should explain to people who don't know tea sites in the northeast of England. It was traditionally a very industrial area and it had a lot of mining, it had a lot of heavy industry and that's passed away. But going back to how did you get happy with the technology? Because this is an innovative powder-liquid plant.

Speaker 2 9:11

Yeah, so it's a good question. And so we started off by looking at what the different pathways are, right, so the kind of the three big ones, and there's a variety of different sub pathways. But we looked at HEPA, which basically takes fats and oils, uses conventional refining equipment to make SAP and that's generally the least expensive. But it has a lot of feedstock issues and most of the experts are at least the expert documentation that I've been reading suggests that they're gonna run into major feedstock constraints within the next five years to 10 years. So we felt that that's interesting and it's probably the low hanging fruit and easiest way to get into it, but it's probably not something that's gonna be the most scalable long term. So from there we looked at alcohol to jet fuel and, again interesting, probably more expensive to produce than the HEPA on a per liter basis, but it has issues as well.

Speaker 2 10:18

So Gen 1 feedstocks aren't allowed in the EU and in the US there's certain constraints on what types of feedstocks can be used as well.

Speaker 2 10:29

So again it's sort of a feedstock issue. And then you get to the point where are you importing the feedstocks via ships that are burning heavy fuel oil to get the feedstocks to produce the SAP and then you kind of ask yourself are you achieving the ultimate desired outcome? So from there we looked at the PtL, which effectively takes renewable electricity drives, electrolyzers which separate hydrogen from water to create renewable hydrogen, and then that combines with carbon, which comes from carbon dioxide, and a reverse water gas ship process and you combine the two through Fisher tropes to make kerosene effectively, with quite a few steps in between that I didn't mention and that we felt ultimately has the most promise for scalability long-term. But it definitely comes with the cost. It's certainly far and away the most expensive currently, but we feel that over time, as feedstocks get more expensive for the other pathways and more renewable electricity comes online, there should be a crossing of the expenses or the costs.

Speaker 1 11:53

So you've got your first project is in tea size. When are you hoping to start producing some?

Speaker 2 12:00

We're targeting 2026, but it's tough. We're definitely we're sprinting as much as we can to try to make that deadline. But in a lot of cases we're probably outpacing both the financing industry for their ability to finance a first of a kind project, which is challenging, but we're also probably outpacing policy in some respects in the UK. So the UK government's been great about being really supportive of these types of projects, but it's challenging to get all the different elements completely signed up until there's a little bit more clarity on policy.

Speaker 1 12:41

And does it just feel like 2026 is just getting closer and closer?

Speaker 2 12:46

Every day.

Speaker 1 12:48

DM, talking about the financing. You've put in a significant amount of pre-development financing. Is that right?

Speaker 2 12:58

I mean I'd say reasonable. We've put in the financing that's necessary to produce the engineering, to get a really good picture of what it looked like. We haven't put the money in yet for the project development in earnest and that'll come post final investment decision.

Speaker 1 13:15

So you've put enough to get the project to final investment decision. We're getting there and you're actively out looking for other sources of finance for that stage.

Speaker 2 13:27

We've begun those discussions. We're really trying to have as many of the loose ends sewn up as we can before we go to solicit different investors and lenders.

Speaker 1 13:40

Because you're on the engine side of the business. You guys are pretty sophisticated. You're very happy to set up a bank syndicated loan. You've done securitisation on the portfolio. Are you finding this? Is this just an area where the banks aren't familiar with what's going on?

Speaker 2 14:00

To an extent. I think the industry as a whole, the renewable fuels industry as a whole, is fairly young. There are players in it who are participating, but in that region the PtL subset is even newer and there really hasn't been a first of its kind plant that's been constructed yet. Until that happens, I think it's a little bit challenging getting the traditional commercial lenders on board. I think the more you can de-risk a project, the more likely it'll be that ultimately that happens. That's really what we're driving for. We think we've got a good shot of achieving that.

Speaker 1 14:44

Are we talking about de-risking or technology risk insurance You're talking about?

Speaker 2 14:50

everything. The complexity of these projects never ceases to amaze me. The technology side is a big factor. You've also got to have a very creditworthy long-term off-take agreement, and you've got to de-risk it from a policy perspective as well.

Speaker 1 15:11

You can't do that one. The two you can do risk are technology and off-take, I guess.

Speaker 2 15:20

Policy risk is policy risk. It's just a question of who, ultimately, is going to be the one to take it.

Speaker 1 15:27

You can influence policy makers in the UK, but you can't get them all the US. You can't get them to act fast, you can't get them to speed up.

Speaker 2 15:37

No, absolutely. The point I'm trying to make is who, ultimately, is going to take that policy risk. Is it going to be the producer or is it going to be the user?

Speaker 1 15:50

Is that your biggest frustration? Is it that legislation takes long?

Speaker 2 15:59

I think so. I'd say that's the biggest roadblock or hurdle that we need to overcome is getting certainty there. Once that happens, I think everything else will move pretty quickly.

Speaker 1 16:14

Price certainty. Are you looking at floors and caps?

Speaker 2 16:19

I can't really get into too much detail on our pricing mechanism at this point, but I'll tell you we're doing what we can to de-risk it.

Speaker 1 16:26

You've also got a great excuse that you're a public company. Not everyone has. I'll take it. Once you've got to find an investment decision, are you more confident about finding the project infrastructure finance?

Speaker 2 16:42

Yeah, no, we are Provided we can get to FID with the risk parameters that we expect to. We think there's a lot of parties who are really interested in lending in this space. I think we've got a good shot at getting a few across the line.

Speaker 1 17:03

Looking at other projects, or is the focus now on getting one out of the way?

Speaker 2 17:07

so we actually we've had a lot of Different parties come to us and we've reached out to a few to look at different opportunities globally, because the UK is a good spot to Do this first project but there are other places internationally that probably offer a more compelling economic. I guess structure or more compel, what's the word. I'm looking for just Better economics for doing the plant, but the complexity these plants and just the limited manpower we have to put on them. We're really trying to get the first one across the line or at least close to FID, before we pursue the others. But but we definitely have a few in the back pocket.

Speaker 1 17:55

You run, you know in your dates they buzz, or in your entire aviation career You've always dealt with, you know, huge numbers of regulations from civil aviation authorities. Are you finding the South market much more Political, much more sort of, so many more regulatory nuances compared to the traditional aviation?

Speaker 2 18:18

I Wouldn't say regulatory, but I would say policy. For sure you know, from a regulatory standpoint, you've got the, the governing bodies who determine what you know, what fuels can and can't be used. The policy Framework is much, much more complicated and it's it varies so much by jurisdiction. So I don't I don't pretend at all to be an expert on policy, but it is. It is something that's challenging to navigate and do you find it?

Speaker 1 18:46

It? You know it's changing all the time. We've recently had the Biden administration giving advice, like saying it's gonna use grief for Alcohol to jets we had EU refueled. Are you finding it that it in some ways it's changing too much and otherwise it's changing too slowly?

Speaker 2 19:06

Yes To both questions. I think I think what what any industry, what any capital intensive industry needs to succeed is is long-term stability and policy certainty, and we we don't really have that yet. I think Europe is better than the US is at this point. I mean, I think the US probably has more lucrative incentives. It's, you know, sort of a sticks and carrots, but what it has, an incentives, I think it lacks in in long-term clarity on what the policies gonna look like past, you know, two, three, four or five years.

Speaker 1 19:44

Well, there, it does have a better capital market, and so that, again, although it does have better, sort of deeper capital markets and Deeper support from people like that, you know, the Department of Energy.

Speaker 2 19:57

Yeah, yeah, yeah. But you know, we don't know, we don't know how long a lot of that policy support is gonna last.

Speaker 1 20:05

The em. One of the strengths you've got is that you've got many years of experience of dealing with senior airline people. When you're discussing off-takes, are you seeing a lot of demand?

Speaker 2 20:20

We are, we are. We're seeing a lot of demand and the sophistication among the airlines really runs the gamut in terms of how they intend to fill that demand. You've got some airlines who have entire departments just wholly dedicated to it, who are trying to work with big corporate customers to develop different strategies for who, ultimately, is going to pay the green premium. And then you've got other airlines who are essentially out there saying look, we know we need it. We don't know how we're going to get it, but we want some. And it's challenging too, you know, in terms of how ultimately it's going to be distributed to the customers, because the off-take requirements to get a bankable deal are such that the off-take has to be a very, very credit-worthy party and, you know, not all airlines can qualify as an investment-grade counterparty. So I think that'll be a challenge.

Speaker 1 21:22

Do you think you've got an advantage with Pact to Liquid? There's a lot of airlines have done deals for Heifer. You know some are doing biomass. Are you getting some of the more sophisticated ones keen to have a different pathway?

Speaker 2 21:38

Yeah because, there are going to be, depending upon the jurisdiction, different sub-mandate requirements. So in the UK and the EU there will be a PtL sub-mandate, or we expect there to be PtL sub-mandate as well. So they're definitely seeing the need for it and while they're aggressively pursuing Heifer, they're also starting to pursue PtL as well.

Speaker 1 22:05

When you yeah, I think everyone knows that an uptake agreement is great if you're trying to get funding, but how do you decide what the balance is For your first project? Are you happy to do 100% uptake or would you like to have the flexibility to have some spot market, particularly if there's a shortage, particularly if a PtL mandate comes out?

Speaker 2 22:25

Yeah, I think for PtL, since it is a newer technology, everything needs to be done to de-risk it, and we will probably do that to the detriment of some yield or yield possibility, to get the first one across the line.

Speaker 1 22:42

And do you think, willis, sustainable Fields is going to have 50 projects around the world, or are you looking at maybe demonstrating with one and then maybe your business is advising, or you?

Speaker 2 22:58

So we would definitely like to develop multiple projects worldwide. I can't really comment as to how many and where and what timeline, but the intent isn't to produce one and then stop. It's to produce one and then continue to develop elsewhere.

Speaker 1 23:15

Okay, and I'm giving you a key question for future guidance by Axstom.

Speaker 2 23:19

That's all right.

Speaker 1 23:23

And I'm quite interested in your global footprint because I see, willis, as you guys have always. You know your US company. You've historically always had very strong ties with Japan. Is that a market you're looking at?

Speaker 2 23:37

From a SAF standpoint, yes and no. I think we're looking at it to the extent that we can collaborate with our joint venture partners in Japan, but right now PtL doesn't look like it's going to be immediately in demand. From what we're seeing, there's other pathways which are being pursued in Japan.

Speaker 1 24:03

So how long have you been working on this project? For now.

Speaker 2 24:07

I'm trying to think it's going on almost two years, a little less than two years.

Speaker 1 24:13

How many times in those two years have you regretted it?

Speaker 2 24:17

Every time I wake up at three o'clock in the morning and say, god, this is so complicated, how are we going to get this done? It's happened many, many times, but what else?

Speaker 1 24:27

would make your life easy. If you could have a New Year's wish, what would be the one thing you'd like?

Speaker 2 24:38

Oh, I think a counterparty sense of urgency like we have, you know there's a lot of people who have a lot of interest. But you know, we're a pretty nimble entrepreneurial company and when we say let's get something done, we, you know, we go full speed ahead and do everything we can. Not every other counterparty has that same sense of urgency.

Speaker 1 25:04

There's a lot of talk from aircraft blessers about getting involved in South and there's been a few sort of announcements of joint ventures or memorandums on the sunny, but that hasn't been as much action as Willis has done. Do you see other deals coming in that market or do you see some of it? As you know, press releases.

Speaker 2 25:26

You know I can't speak to aircraft lessors from a press release standpoint, but I will say just industry as a whole. There's an awful lot of press releases, a lot of talk, a lot of noise. We've chosen to pursue a different path where we try to say less and do more. Ultimately it comes to the point where the cat's out of the bag because we're applying for public funds. You know, we applied to the UK government for a grant which we received, and other things were just public domain. So at some point you kind of have to start talking about it. But you know, if we had our druthers we wouldn't say anything and then, when we have something really material and concrete, we would make a statement.

Speaker 2 26:08

In terms of other lessors participating in the development of SAF projects, it's hard to say. I mean I think I would expect to see a number making more passive investments in the space, because I think it tells a good story to the interested parties in aviation trying to actually contribute to its decarbonisation. Whether they get as proactive as we have remains to be seen. I mean, it's a time commitment and it's been an awfully steep learning curve. So I suspect not, but I'd love to be surprised.

Speaker 1 26:51

What advice would you give to a company in looking at doing a similar process of getting hands on being very active, you know, trying to do their own project rather than just doing a small investment?

Speaker 2 27:04

I'd say be bold and be collaborative. One thing I've learned about this business, which is a bit different from our leasing space, is people really want to help and make something happen. So much of what we do on the leasing side is really a cut through of business, but the SAF plants everybody wants to see it happen, for all the right reasons. So I'd say reach out to people who are smarter than you are which is what I do every day and ask how you can participate and what you can do and how they might be able to help you achieve something.

Building SAF Plant, Decarbonizing Aviation

Speaker 1 27:46

When you get to commercial finance conferences, there's hundreds of people out there putting up charts showing how important SAF is going to be and how much is needed. As you're actually trying to build a SAF plant, are you confident that the industry forecasts will be met, that there'll be enough supply for the demand?

Speaker 2 28:06

I think it would be really challenging. Frankly, I don't see that supply being filled in the near term. The ramp up is going to have to be enormous.

Speaker 1 28:22

And do you think there's enough capital to support that?

Speaker 2 28:25

I do. Yeah, I think that the capital isn't necessarily the question. It's getting all the other different moving pieces into place and it's got to happen really, really fast in order to achieve those goals.

Speaker 1 28:40

Okay, final question Sure, when you go back to sleep after your three o'clock in the morning worry, and you wake up in the morning, probably at seven. Are you pleased that you launched Willis Sustainable Fields?

Speaker 2 28:55

I am and I'm excited that we've got the opportunity to actually play a real material role in decarbonizing aviation.

Speaker 1 29:03

Brilliant, awesome. Thanks, so much Thanks.

Speaker 2 29:06

Alister.