The final panel at the ISTAT meeting is the much-anticipated lessors’ panel consisting of:
Jeff Knittle, president of CIT Aerospace, moderator;
Henri Courpron, Chairman of ILFC;
Ray Sisson, CEO of AWAS;
Norman Liu, CEO of GECAS; and
Steve Udvar-Hazy, CEO of Air Lease Corp.
HC: All hell broke loose in Europe and upended aviation. Looking at consolidation in Europe. America now had a lot of stability and discipline, and we’ll see that happen in Europe. More fuel efficient aircraft will be required in Europe. I see a lot of opportunity and challenges to come in Europe.
NL: Asia has been by far our most active market, with 70% of our airplanes going there. You have to look at different parts of Asia–you can’t generalize. LCCs in Japan. Always something going on in China. SE Asia, good organic growth. Philippines and Indonesia very interesting. South Asia has had travails.
SUH: North America is going through an interesting time. Canada is a duopoly situation with new Asian and Middle Eastern carriers entering the market. The US is very mature having gone through a lot of trial and tribulation, more disciplined [than before]. After 9/11 there was a slow-down in US carriers taking new airplanes. We have a bow wave of a requirement for new fleeting.
RS: Latin America is under-appreciated. We see rapid growth there. By 2015 may be 17%, 20% of our fleet. There is a remarkable amount of demand and opportunities for lessors.
JK: In our spare time we all like to give advice to the manufacturers. Concerning mega-order syndrome: several carriers have ordered north of 200 airfcraft. Why?
HC: It’s proof there are still a number of egos running airlines throughout the world. There is room with sophisticated and the way markets are developing, it doesn’t make sense to place small orders. You need visbility to investors, credibility to support fleet plan. There may be some double-counting of orders: what lessors order and lease to airlines, what airlines order directly. Boeing and Airbus are doing their job. Their mission in life is to build and sell aircraft, as many as they can to as many as they can.
SUH: I think it’s wrong to characterize all the mega-orders and put them into one category. The 100 Delta Air Lines 737-900ER order will replace 28-30 year old 757s. If you look at the American order, it’s to replace MD-80s. The Norwegian order and two large Asian orders are all looking at expansion. Each mega-order has own different flavor of ice cream.
NL: The orders are over 8-10 years and some are making market share bets.
Production orders and lead times:
RS: Manufacturers are trending production rates too high. I think you will see contraction. As lessors I have a great deal of trouble making speculative orders. That’s a long time to face escalation and PDPs. Long lead times make it unattractive to place speculative orders. I think you will be better off with cash on the day to do sale and leasebacks or purchase portfolio. The lessors without speculative orders will do better over time.
SUH: Our philosophy is to order 50% of the demand we see and the other 50% will evolve. In the next decade we will have more aircraft reach economic obsolesence than ever before.
NL: Tell me what’s going to happen with a China hard-landing, Persian Gulf. If that happens, then all bets are off.
HC: Why do we place speculative orders? When you are running a large scale leasing company, you can’t wait to show up with a bag of cash. This just doesn’t work. I would not trade my 787 and A350 slots for anything right now. I am very comfortable with my A320neo orders. A balanced approach is required.
SUH: I’ve heard a lot of negativity in last few days about residual values and lease rates. We’re operating in a low interest rate environment. If interest rates went up 200bp that’s $83,000 per month on a $50m airplane. Lease rates would go up. That will help older airplanes because lease rates will go up less. It’s premature to bury a lot of good, high utility aircraft just because A320 lease rates are on the soft side.
RS: Used airplanes are a great market for us. I have no intention of moving off 25 year life cycle. If you are playing in the 737-300 market, you need a strong credit team. It is a different strategy for that asset class vs newer airplanes.
JK: What are your thoughts about re-engining wide-body airplane.
HC: We put our money where our mouth was with the neo but this doesn’t mean re-engining is the right decision. When Airbus tried to re-engine the A330 to be the A350, that was an unmitigated debacle.
SUH: There is always a risk of balkanization of the wide-bodies that has too many engines. The only re-engine we’ve seen is the 747-8. I don’t really see that happening. Boeing is talking about a new engine on the 777 but it will have more changes with it. I don’t see it happening with the A330. Rejigging the wide body has significantly more risk. The A330-A350 debacle was a good lesson for Airbus and Boeing.
CSeries and EJets
SUH: The 190 has done really well. Good passenger acceptance, short haul and long haul. The lease yields are very healthy. There is a wide customer base and that’s what’s hurting CSeries right now. You have to sell airplanes. They have to get out and make some short-term sacrifices for long-term benefit. NEO impacts upper end and EJet squeezes on the low end.
SUH: A certain amount of success for the NEO was due to two engines. Boeing having a sole engine source is somewhat handicapped. If there was a choice, potentially the lessor marketplace would be broadened.
HC: Boeing doesn’t need 50-50 parity. It’s a self-regulating process. They will be 45-55 one year and next year go over 50%. Should MAX not be as efficient, Boeing and GE will have to make it up elsewhere. It’s not as if there is anything magical about NEO or MAX.
NL: I hope they would succeed on MAX. I understand Steve’s point. Boeing is trying to minimize development costs. I think CFM-Boeing are going to work hard to make things work the best they can.
SUH: I’m not prejudiced against one engine type. I bought over 500 737NGs between ILFC and ALC.
RC: I’m confident they will solve the issues.