Key lessors see strong wide-body market despite worries

Discussion
AerCap

Air Lease Corp and AerCap each reported earnings for the second quarter last week. Each took the opportunity to express faith in the strength of the wide-body sector.

Aengus Kelly, CEO of AerCap, which is the second largest lessor (after GECAS) by unit count but first in portfolio value, not only reaffirmed the future strength of the market, but said the secondary market for 777s is doing well.

“The 777 market is one where we’re placing airplanes all the time into it,” Kelly said on the call, according to a transcript from SeekingAlpha.com. “The types of carriers that are taking the 777s, in some cases it’s scheduled network carriers; in other cases, it’s charter operators. And the 777-300ER is a tremendous airplane. If an airline can fill that airplane, it will make money. Even at $100 a barrel, it is the most efficient large twin out there. Any airline that can fill it, loves it. And so, we do see a market evolving in the charter market, where we see airlines looking at putting over 450 passengers on it in either — in a premium economy and economy configuration are all aligned to potentially go to closer to 500.”

Air Lease Corp.

John Plueger, CEO of Air Lease Corp., said on his earnings call that concern over the wide-body sector is overdone, according to the SeekingAlpha transcript for the earnings call.

“There is a lot of undue concern about wide-bodies,” Plueger said. “Yes, we know the Middle Eastern guys are deferring. American [Airlines] deferred A350s, but I think we have given you some color on use and pathways for wide-bodies over the next three to five to seven years, so we just don’t share that level of concern.

“I just think that frankly it’s much to do about nothing,” he said.

Plueger said that any deferrals by the Middle Eastern airlines may open an opportunity for ALC to accelerate its own delivery schedule in the 2019-21 period.

AerCap didn’t address this prospect, and it hasn’t announced the delivery schedule for the 30 787 orders it announced at the Paris Air Show. The Airfinance Journal Fleet Tracker lists the deliveries for 2026, but this is unconfirmed.

Good demand in the Middle, not so at the top

ALC’s chairman, Steven Udvar-Hazy, said, “there is a tendency on Wall Street to sort of put everything in one category, and from our advantage point the wide-body market really has two very, very clear segments: one is the very top in that wide-body market, which is represented by the A380, 747-8 Intercontinental and the future 777-9X.

“Those aircraft have a different demand profile and different customer base than a lot of the 787, A330, A350 transactions that we’re doing,” he said, according to the SeekingAlpha transcript.

“On the middle segment, which is as I said the 250- to 350-seat aircraft, we’re seeing a lot of demand, a wide breadth of airline customers that are both buying and leasing those aircraft, which is totally different than the environment at the top end of the wide-body market, which is the 400-seat-plus aircraft.”

Examples of demand

“To give you examples of what we are seeing in the market, on the wide-body side, we just announced a placement with TAP Portugal on Monday that includes four new airbus A330-900neo aircraft on long-term lease,” Hazy said.

“ALC was able to lease TAP four incremental A330-900s delivering throughout 2018 and ’19 that will revamp its wide-body fleet.

“Other recent wide-body placements this year include five new Boeing 787-9s to China Southern, one new 787-9 to Air New Zealand, one new 787-9 to Aeromexico and two new Boeing 787-9s to Air Canada,” he said.

Lessors own 44% of the Airbus A330s in service. The time is fast approaching where the first-time leases will expire and significant numbers of these airplanes will come off lease.

Used aircraft demand

AerCap’s Kelly’s remarks about the secondary market for the 777-300ER is significant.

An analysis of the Fleet Tracker data shows a large number of A330s and 777s coming off lease within the next few years.

First-time wide-body leases typically are for 10-12 years, sometimes up to 15. Airlines outside the US and Europe usually like to turn over their fleet at this age, rather than renewing leases. (US and European carriers will often retain aircraft for 20 or more years.)

Leased aircraft

The percentage of leased 777s and A330s is not insignificant. Although the pure unit numbers pale in comparison with Airbus A320s and Boeing 737s, the customer universe is far smaller and the money involved is far greater.

Lessors own 32% of the Boeing 777s in service. The time is fast approaching where the first-time leases will expire and significant numbers of these airplanes will come off lease.

Aside from the capital costs going in, reconfiguring 777-300ERs easily can exceed $10m and if maintenance on the airframe and engines have to be performed by the lessor (it depends on the return conditions written into the lease), the cost can another $20m or more—plus the down time during which no rental income is received.

Reconfiguration and MRO costs for the A330 are not as expensive as the 777, but a good chunk of change is required nevertheless.

Since the 777 entered service in 1994, there are 1,366 in operation through 2016 (LNC excluded 2017 because the year is incomplete). Fully 32% of these aircraft are leased by lessors.

The A330 entered service in 1992. Through 2016, there are 1,244 in operation—44% of these are leased, according to the Fleet Tracker data based.

There are 59 A330s that are 12-15 years old that are ripe for re-entering the market. If this is expanded to include 10-11 year old airplanes, another 51 A330s could be coming to market soon.

There are 54 777s that fall within the 12-15 year range. Another 44 are 10-11 years old that could hit the re-leasing market.

That’s a whopping 208 A330s and 777s that potentially hit the market soon.

Airbus and Boeing hope sales will rebound by 2021, when retirements accelerate. Except for a few spot deals, like the AerCap 787s at the Paris Air Show, Emirates and a few others, the next few years could still be lean if lessors are able to creatively find homes for the used aircraft coming off their first lease terms.

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