Less desirable aircraft for lessors

Discussion

Parameters

Before discussion the table of aircraft that lessors, and our own analysis, say won’t make good leasing assets, it’s important to note that these aircraft all will make good airline assets (with the jury still out on the Chinese and Russian models).

For example, the Airbus A319neo and Boeing 737-7 have between 50-90 orders from fewer than six customers.

The “liquidity” of the aircraft is small. The customer base is highly concentrated. Lessors want assets that have hundreds or thousands of orders that is in demand by a large number of customers across the globe.

This means that when it comes time to re-lease the aircraft at the end of the initial lease term, there will be good demand for the aircraft. This is also true in the event the lessor wants to sell the airplane out of its portfolio.

lessor-list-undesire-protected

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Good airline asset

But airlines that buy the airplanes and fly them for 20-25 years don’t care about liquidity or customer base.

Southwest Airlines of the USA is a prime example. It’s the launch customer for the 737-7, with an order for 30. It historically will fly the aircraft for its useful life (about 25 years) and then scrap it.

Similar examples can be seen for the A319neo.

Size matters

In the world of sexual innuendo, for lessors smaller is better.

Few lessors like wide-body aircraft, preferring the single-aisle Airbus and Boeing models. When it comes to wide-bodies, the smaller ones are preferred: Airbus A330s and Boeing 787s.

A few added the Boeing 777-300ER to the portfolio, but others believe this aircraft is too big.

This will work against the 777X. The 777-8 is about the same size as the -300ER, but the 777-9 has 40 more passengers, putting it outside the size most lessors like. The prospective 777-10 is bigger still.

It’s way early in the game, but so far the customer base for the 777X is highly concentrated, only about a half dozen and carriers in the Middle East account for about half the orders so far.

As yet, the A350-1000 has little lessor interest. Size matters, but there are also fewer than 200 sales.

Size, customer base and liquidity also works against the Airbus A380 and Boeing 747-8. More than 300 orders for the A380 have been placed, but one airline—Emirates—has nearly half of them.

Lessor Amedeo, formed specifically to buy and lease the A380, hasn’t placed one of the 20 orders. It’s had to defer its order once and likely will do so again.

A few special purpose companies were formed to lease A380s to Singapore Airlines, Emirates and others, but these may come to regret the move. Singapore will return the industry’s first A380 off lease next year. Aside from no apparent secondary market, the cost to reconfigure and perform maintenance on the monster jet runs into the tens of millions of dollars—as it does with the 777-300ER. Lessors are loathe to take this level of risk, for in addition, it also means down time measured in months to more than a year.

Getting down to specifics

The chart lists more than a dozen aircraft currently in production or about to enter service within the next four years. We’ve already talked about some. Here are why others are on this list.

  • A321LR: This is the high gross weight, long-range version of the A321neo. One lessor that has a portfolio of A321ceos and an order for the neos is cool to the A321LR. There are enough features unique to the LR to make the airplane an oddball in the portfolio.
  • 737-900ER/9: Liquidity of the -900ER and the small customer base, so far, for the MAX 9 work against these as attractive leasing assets.
  • COMAC C919, ARJ21: These are the first Chinese jets. The ARJ21 was 12 years from launch to EIS. GECAS ordered a handful, but since sibling GE Aviation supplies the engines, this is viewed as a relationship order. The C919 has more than 500 orders and options, including from lessors, but nearly these are state-mandated deals with Chinese companies. The ARJ21 won’t get any traction outside China. The C919 might, but Western lessor penetration will be minimal.
  • Irkut MC-21, Sukhoi SSJ100: The big overhang is that these airplanes are from Russia. The current political environment alone is enough for Western lessors to avoid the airplanes. While the SSJ100 proved to be a good airline asset, product support and keeping delivery schedules remain issues. The MC-21 hasn’t entered flight testing. In addition to the same issues as for the SSJ100, the MC-21 needs to prove itself.
  • CSeries: Lessors agree Bombardier designed and produced a winner. Aside from Macquarie Airfinance, which intends to be a market-maker for the airplane, only the small lessor LCI in the West also ordered the airplane. A Russian lessor also has done so, but this deal has been downsized and Canadian sanctions against Russia cast doubt over whether the order will be fulfilled. The customer base is still relatively small, but the big order for 75 from Delta Air Lines is a solid endorsement. This airplane has the greatest potential to move off the undesirable list.
  • E-Jets: Embraer’s E1 won a good number of orders from lessors, but some now complain that when it comes time to re-lease them following the end of the initial lease term, too many airplanes are chasing too few customers. Customer credit also is a concern. This could inhibit lessor participation in the E2.
  • MRJ90: Mitsubishi has been producing airplane components for decades but this is its first airliner. The OEM has to prove itself. The customer base is narrow, with more than half the orders from two US regional airlines. US Scope Clause labor contracts overhang even these orders.

Exceptions to the rule

As with anything, there are exceptions to the rule. Mega-lessor ILFC, at one time with a portfolio of more than 1,000 aircraft, often ordered wide-bodies, including the 777-300ER and A330. It even was a launch customer for the A380.

But after parent AIG came close to failure in the 2008 Global Great Recession, ILFC swapped the A380s for A320s (a reflection on the A380 as much as its own financial troubles). ILFC since was sold to AerCap, which favors single-aisle aircraft to wide-bodies.

Mega–lessor GECAS, larger still than ILFC, also has a portfolio of wide-bodies, but speculative orders represent a small portion of the portfolio. Like ILFC, single-aisle airplanes are favored.

Guggenheim Aviation Partners was one lessor with a business model of acquiring through purchase-leasebacks and speculative orders wide-body aircraft: 777s, A330s and an occasional 747F. In recent years, it began adding single-aisle aircraft to its fleet. This month management bought GAP from its parent and renamed it Altavair. Its new business plan will continue to add single-aisle airplanes.

Intrepid Aviation originally was founded with an order for 20 A330-200Fs. New ownership swapped these for the A330-200/300Ps and added an order for 777-300ERs. Through a series of miscues in and out of its control, the company struggled and still has challenges.

But the bottom line is that single-aisle airplanes are favored by lessors over wide-bodies, by a wide margin, and lessors are selective in what they buy in both sectors.

 

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