Less Leasing Love From Lessors

Image: Courtesy JDL Multimedia

New airplanes are good for everyone; that’s the story aircraft manufacturers are pushing and even some airlines are buying in to. With greater fuel efficiency, longer range, and higher capacity, the push is on to get new aircraft into every airline’s hangars.

United Airlines predicts that it will save approximately two million annually for each Boeing 757-200 it replaces with a new Boeing 737-900ER in its domestic fleet, for example, but this prediction is based when aviation fuel prices were much higher. Meanwhile, Allegiant has made a different business decision of flying old–but reliable–aircraft until they break; then, Allegiant will replace them with another inexpensive, older plane, but it would seem that Qatar Airways CEO Akbar Al Baker has a much different different approach as he recently suggested that the 787s his airline has recently acquired will be out of the fleet in less than a decade, making way for newer and larger aircraft.

Boeing expects to be producing 52 of its 737 aircraft each month by 2018 while Airbus is increasing its A320 family output to 46 per month by Q2 2016. Some widebody aircraft, such as the A330 or 747-8 families, are seeing reductions in production rates to partially offset the increase while others, including the 787 family, see increasing production rates to counter large backlogs.

And then there are those who worry about the ever increasing pace of aircraft delivery and its potential impact on the market overall. Many of them are in the aircraft leasing and financing business who are faced with a rapidly changing market structure and demand profile, one which the major manufacturers are upsetting with increased production rates.

CIT Aerospace, a lessor with roughly nine billion in aircraft under management, and plans to buy 15 A330neo aircraft, pressed for caution amongst the manufacturers in the near future. The statement was made at the International Society of Transport Aircraft Trading (ISTAT) conference recently amidst talk of an even greater push by Airbus and Boeing to capture market share.

Much of it comes down to residual value and amortization over time. The lessors historically have depended on a reasonably strong secondary market, often in secondary or tertiary countries, where used aircraft can operate reliably well after the initial service run at a major carrier. Today, however, more and more airlines are buying new from Airbus or Boeing rather than taking planes second-hand. More airlines are focusing on providing the comfortable passenger experience rather than simply transportation from A to B.

So airlines are owning new planes for shorter lifecycles and buying or leasing fewer used planes. This glut of inventory pushes down costs in the secondary market which is understandably bad for the lessors, but what does it mean to the broader industry as a whole? Passenger experiences are generally better on newer planes and the environmental impact is hard to argue, but for the airlines, is it better to run the newer aircraft with higher capital costs and lower operating costs or the older planes with that ratio reversed? Especially if the secondary market continues to see declining prices. This will impact the first owners of new planes down the line as they look to unload and cash out on the airframe.

Ultimately, this could portend an inversion in the market where the traditional legacy carriers start operating more and more second-hand planes to better control total costs while the upstarts, flush with investor cash or loan guarantees, happily take the new planes off assembly lines around the world. And, in the middle, the private-sector financing groups will struggle to make a profit from the industry where public financing seems spectacularly easy to secure.