Our colleagues at Commercial Aviation Online put together the story below on lessor and banker reaction to the Airbus A320neo announcement December 1.
We knew–and previously referenced here–reluctance on the part of these groups to the NEO concept, but even we were stunned by the blistering response toward Airbus.
This is reprinted with permission.
|Commercial Aviation Online
The launch of the Airbus neo programme on 1 December with plans for a 2016 entry into service for the initial model has generated a lot of talk in the aviation finance community, particularly concerning the impact on residual values.
CAO spoke to lessors and bankers about the move and here’s what they had to say:
Lessor 1: “I am not surprised by the announcement, but am disappointed, as I had hoped that a detailed analysis of the business case would reflect a balanced view of the risks along with the potential rewards. The capacity for this to impact other critical Airbus programmes (A380, A350, A400M) by redistributing scarce engineering resources must be very significant, with consequent implications for EADS shareholder value. The risks of delivering neo on time, on budget, with stated performance capabilities and with acceptably low operational disruption potential cannot be overstated and will be high on the agenda for customers. The economics of the aircraft itself still appear only marginal, with the net cash operating cost improvements at the low end of what has historically been the threshold for triggering a new aircraft launch.
“If Airbus is serious about charging a meaningful premium for the neo, much of the financial benefit will be eroded, leaving all of the operational risk in place, which has a real cost attached to it. Will airlines really be willing to commit to this proposition? If not, watch the premium evaporate, and where does that leave residuals for the current generation of aircraft? Boeing’s response will be telling, as will the relative number of orders taken for 737s over the coming months. IAE will also have to raise its game and resolve its parental differences if it wants to remain a serious on-wing contender for the remainder of the A320 programme.”
Lessor 2: “I do not object [to the neo] from a technological or business case point of view. I do object, though, to the way that Airbus has attacked its own investor base with the over supply of the A320 family and its recent development. Each decision it takes is with a disregard to the residual value of the aircraft. Airbus introduces sharklets with a long lead time to availability, no retrofit capability for production prior to the end of 2012 and no promise on when they will be freely available. Now, it rolls out the neo.
“The one thing I think the lessor community has learned with Airbus is that having an orderbook that covers more than a two to three years span leaves you potentially vulnerable to the narrow focus Airbus has and the lack of priority, or emphasis, it places on the residual value of its assets.
“Airbus really is like a supermarket or grocery store in that once that product is off the shelf and out the door – you’re on your own, the long-term ramifications to investors are a distant second to any short term gain Airbus can derive.”
Lessor 3: “The neo announcement is not unexpected. The re-engined A320 will not deliver the savings of the CSeries, as the latter is a wholly new design incorporating the latest technologies. The market still wants the 15% neo fuel burn saving proven contractually. At best it provides a temporary solution for existing operators who take the difficult step of accepting a mixed engine fleet.
“It is not good news for lessors with existing orders or large investments in the type, unless they take the view that this will stave off an all new design for another decade but the issue with that argument is what will Boeing do! Our guess an all new design sometime sooner.”
Lessor 4: “Real progress is always good and one should not be in the way of ‘real progress’. Historically ‘real progress’ in the aviation industry has involved the optimisation of entire systems. Short of a total systems level improvement approach, the incremental benefit as valued by airline customers will be limited and will be a strong function of the incremental price.
“Personally, from an engineering perspective, I think Airbus could have done better – much better. Remember the initial Airbus A350, before it became the 350XWB? It was essentially a re-engined Airbus A330 and look what happened. Is it that John Leahy (who has been the primary push behind the project) simply wants to leave some legacy behind when he retires in 1.5 years? Remember he will also be leaving the A318, A340-500 and A340-600 behind.
“So far this year, the market has spoken to all the buzz surrounding the A320 re-engining options with a strong bias for the Boeing NG product which has outsold the A320 family by a wide margin. What’s more impressive is that Boeing did not have to resort to heavy discounting to achieve that.
“Until Airbus approaches the market with actual pricing of the product and cuts some deals at market clearing prices it will be tough to tell what the implications will be. In the most likely scenario, the new engine options are sold heavily discounted at pretty much the same price as the existing aircraft. In that case, the losers would be:
– Bombardier C Series (just because of the continued confusion in the market);
– Airlines and lessors with large remaining A320 aircraft orders who will be taking delivery at high prices and are heavily reliant on residual values and remaining economic lives;
– IAE since the A320 family airframes will be adapted to the new engine options and they have now become an orphan engine choice;
– The trading market for new/nearly new A320 family aircraft (nobody knows what they will be worth in the future). This includes sale lease backs with airlines;
– Airbus, since they will have to discount the existing engine options to expand their backlog until the neo emerges.
– CFMI because they play in both camps;
– P&W- the A321 programme, which now becomes a true Boeing 757 replacement alternative;
– Airlines that in the future will be able to realise operating cost benefits and might not have to pay much for them;
– Boeing who can now sit back, observe and then possibly leapfrog Airbus with a better product.”
Lessor 5: “Airlines need to make their own decisions. Airbus needs to offer what the customers want. Let them improve the aircraft and let really experienced engine manufacturer show us what the market can offer. I saw the engine running over two years ago and was most impressed. We need something new. Pratt & Whitney has tremendous civil experience. Let’s see some activity in the market.”
Banker 1: “While the improved efficiency and technological gains provided by LEAP-X and the PW1100G are to be applauded, the approach of Airbus is disappointing to say the least. Airbus and Boeing have sold thousands of aircraft and encouraged a certain view of the economic lives and thereby the residual values of those aircraft. They are now fundamentally changing the landscape without concern for investors and financiers of previously produced aircraft on who they ultimately depend.
“They argue the new technology is to improve fuel efficiency and reduce environmental impact which on its own a commendable objective. But this argument is only viable if the overall benefit is reached. Their sales forecast of 4,000 is not achievable without either significantly increasing the global fleet of aircraft (and total RPK flown) or reducing the economic lives of existing young/medium age aircraft. They are misleading investors about the economic lives of aircraft and/or distorting green credentials in order to launch a new product for which demand is more than likely to be artificially supported through the ECA’s.”
Banker 2: “I don’t approve of the move. Airbus cannot afford to develop a new aircraft so this is a bandaid.”
Banker 3: “I don’t imagine there will be much of an option for buyers by 2016; new orders will be incentivised to equip from either of the two new engine variants. IAE and more specifically Rolls Royce would seem to be the losers. Residual values of the incumbent A320 family fleet will be impacted; but likely not until the end of the decade, at the earliest.”
Banker 4: “All industries must continue innovating and improving technologically. This is especially true when this can lead to significant cost savings in fuel consumption and more importantly improvements to reduce the carbon footprint and overall ecological impact of the industry. The A320neo appears to be geared to be headed in that direction.”
Banker 5: “On non-recourse financing with open ended balloon, I think the bank may be less aggressive on the amortisation and offer lower residual balloon at the end of the 10/12 lease.
“The impact [on the market] will depend on the pricing policy for the neo. If the neo is more expensive than the A320 by say $6 to $8 million, then may be the impact on recent A320 will be limited because the fuel saving may not be well higher than the price premium. For full recourse financing without open residual risk, the impact of financing should be fairly limited.”
Banker 6: “If I were a [EADS] shareholder, I would be extremely suspicious on the profitability for the whole project. Resources at EADS are already stretched to max with A400 and A350XWB.
“Spending so much resources and goodwill for what remains an interim solution is difficult to understand. Can this thing be sold at a premium? No way, so the shareholder would probably be worried.
“If I am an airline already client of the A320, I won’t be too happy to see a competing product that going to impact the residual value of my existing fleet, again for an interim solution. I won’t be too happy either to see banks and lessors a little more cautious in pouring liquidity to an ‘interim’ product.
“If I am an airline not client yet of the A320, I’ll be delighted to see Leahy desperate to sell a new toy that no one has really asked for, and on the other side Boeing lowering the price tag of the -800 to ‘cut the wings’ of the neo.
“If I am a lessor with already A320s in my books, I will ask Leahy to provide me with a new neo order at the same price as the current A320s model because I’ll tell him that he is hurting the value of my existing book – and possibly force me to change my depreciation policy – with a product I never asked for.
“If I am an investor, I will lower my price tag for sale and leaseback.
“I wonder if there is any winner in this story. And the 800 ‘almost secured’ book order is a joke, except if you sell at zero, or close, premium.”
Banker 7: “Technological advancement is a good thing in any industry particularly if, as Airbus claim, this brings with it financial and environmental benefits. Personally I am not convinced the benefits are sufficient to justify the additional cost nor offset the potential impact on the existing A320 fleet, in terms of value performance or investor appeal.”