Dec. 7, 2015, © Leeham Co.: Oil for West Texas Intermediate Crude closed Friday at $39.97. International Brent closed at $43.05. These figures continue to breathe life into used aircraft and raise questions about new orders.
In recent weeks, we’ve seen Delta Air Lines extend use of 15 Boeing 757s. Earlier United Airlines decided to refurbish 21 Boeing 767-300ERs. United is also leasing in 38 used Airbus A319s. Southwest Airlines is acquiring more than 20 used Boeing 737-700s through leases.
New aircraft orders are off for Boeing this year. Through Dec. 2, Boeing posted 568 net orders. Unless there is an explosive month in the remaining 24 days of this year, Boeing won’t meet a book-to-bill rate of one.
Airbus hadn’t posted its November orders as of Friday, but through October, the company recorded 850 net orders, comfortably more than a 1:1 book:bill. It announced 108 firm orders in November, with 14 of these representing a swap from A350-900s to A330-900s.
What is the affect of lower oil prices on the new airplanes?
During the Nov.10 earnings call for AerCap, the world’s No. 2 lessor, Michael Linenberg, the aerospace analyst for Deutsche Bank, recounted a conversation he had recently with an unidentified airline official. From the earnings call transcript:
Linenberg: I recently had a conversation with an airline management team and they were talking about the fact that fuel prices have come down a bit. And they said look, Boeing and Airbus, they’re going to have to start accounting for that in the pricing of new airplanes. And I said all right, well, how should we think about it? And they said look, if you look at a new airplane versus an older aircraft like a CEO versus a NEO, The NEO probably gives us $800,000 of savings a year or at least that is what it was when oil was over $100 a barrel.
That has now been cut in half and so the savings are more like $400,000 a year for the differential…. And then they went on to say that over time that they should probably see that in the lease rate as well. And I was just curious about whether or not is that accurate, is that how it plays out and if it does, does it ultimately find its way into the lease rate the lag? Can you talk about that.
Aengus Kelly – AerCap Holdings NV – CEO.Sure. We are placing NEO 787s 350s all the time. We observe still very good re-lease rates for the NEOs. As I said before, when the airlines are looking out 12, 14 years which is what they do when they take new aircraft, where fuel is today is not something they look at. The events of July 2008 are indelibly marked on their minds where when fuel went to $1.48–and airlines can’t hedge themselves [and] of course no bank will write a derivative for the long-term for an airline to hedge fuel. The only way to do it ultimately is have the most fuel efficient assets out there.
So we don’t see a deterioration in demand for the NEOs. Now it is true, of course, that fuel is a lot less so the benefit of the NEO is not $800,000, it was about–the benefit is closer to $1m a year….
In any event, we do see continued strong demand for the NEOs, the lease rates that we are putting them out at we don’t see much change. It is more influenced by interest rates to be fair than where oil has been on the NEOs at this point. They bounce around depending if you have very strong credit of course or weak credit or what have you but fundamentally it is more interest rate at the moment that have impacted us.
To be sure, this is but one data point—but it is worth remembering.