Leeham News and Analysis
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Leeham News and Analysis
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Lessors to Take Growing Share of Fleeting the Future
By Kathryn B. Creedy
Air Lease Executive Chair Steven Udvar Hazy expects lessors to play a larger role in aircraft fleeting in the future, according to comments made during yesterday’s Aviation Week Fireside Chat with the lessor.
“I don’t see lessors going below 40%,” he told Air Transport World Editor Karen Walker. “I see it creeping up to perhaps 50% or 55% and that includes operating leases and various other exotic mechanisms.”
Udvar Hazy pointed to the poor financial shape of the world’s airlines which have used all their current levers to increase liquidity to ride out the Covid 19 crisis.
Air Lease Has $7 bn in Liquidity
“Lessors have demonstrated much stronger liquidity and access to capital than airlines,” he said. “If you look at borrowing, the spread between the treasury and what lessors are paying has come down. The best airline is probably 300 basis point different. Air Lease has $7 bn in unused liquidity, so we have a lot of firepower to transition through this cycle and help airlines modernize their fleets. So, I believe the relationship between lessors and airlines will continue to grow. We will be able to help the airline industry get through this crisis and beyond.”
He admitted both airlines and lessors were caught by surprise on the impact of the pandemic and the longevity of the recovery compared to previous financial shocks. For lessors it means a new level of discipline and policies on how to deal with the airlines.
Airlines Held On to Fleet Too Long in Search of Market Share
“Airlines have to take ever more drastic measures and they have approached government and lenders and tapped out all the available capital while leaning on lessors to re-optimize fleet and restructure leases,” said Udvar Hazy. “Airlines had held off on fleet retirements. They had too many aircraft that should have already been gone as they chased market share. So, there were a lot of planes flying in 2020 that should have already been retired. Airlines held on to them too long.”
As he watched airlines re-examine their fleets shedding the A380 the 747 and other aircraft he said these are the drastic changes required for both crewing and operational efficiencies resulting in contractions at both ends of the aircraft spectrum.
Throughout the crisis, he said, airlines and lessors have been in crisis management taking only a short-term view of how to navigate through the story.
“No one was looking at where we’ll be in five years,” he said. “Governments were increasing airline ownership positions, airline access to debt capital was limited and resulted in leveraging aircraft, slots and frequent flyer programs among other assets. That means access to capital in the future will be very limited because airlines are at the end of their borrowing capacity. If the recovery takes a long time, they will have to rely on outside sources and aircraft lessors are in far better shape in terms of capital allowing airlines to use lessors as a crutch.”
Spotty Recovery But Signs Appearing
The trends Udvar Hazy is seeing is the rapid recovery of the domestic China market and places like New Zealand at the expense of international services. Travelers have signaled they want to minimize exposure to the airport and reduce the touchpoints which is driving more non-stop and direct routes as passengers avoid connections.
“This has a negative impact on the network carriers but it is hard to say how the recovery will develop,” he told Walker. “The recovery is very spotty and there are no global trends we can see but we are seeing some positive signs. The key to all this will be lifting government restrictions on travel and sufficient vaccines to get people to trust the safety of travel. Hopefully, we will see signs of that in the first part of 2021 and that will begin to temper the negativity and fears about flying.”
Udvar Hazy pivoted to answer questions about the return of the Max and whether covid-related market conditions have created white tails as airlines restructured their order books.
Wait-and-See Game on How Order Books Affected
“When we entered the crisis in March there were 10,000 new single-aisle aircraft in backlog,” he reported. “That is almost 40% of the whole global fleet in backlog. Airbus has had production challenges and its supply chain couldn’t cope resulting in late deliveries. At the same time, Boeing hasn’t been able to deliver the Max since March 2019 and, in our case, we had 15 Maxes delivered and grounded. Today we have 50.”
He cited a contractual clause saying in most cases if the manufacturer cannot deliver or the airline cannot take delivery within 12 months of scheduled delivery, both are free to walk away.
“Some airlines cancelled to reduce their financial exposure,” he explained. “Other players exercised their cancellation authority in hopes of restructuring the deal on pricing later. What we have today is a huge inventory that has been built, many of which have been cancelled so it’s a wait-and-see game. Boeing has the largest inventory of undelivered aircraft in its history and it also has the 787 inventory that has been built. Airlines are reluctant to make long-term commitments in an era of uncertainty and, besides the pandemic, we have the uncertainty surrounding the certification and training requirements for the MAX. So, many regulatory hurdles remain to be overcome a no one can put an exact timetable on when it might return. I would say those ‘white tails’ are in transition and we do not know whether they will go to their original customers or lessors. Boeing has to make some tough decisions before the end of the year on these issues.”
He concluded the uncertainty has a short-term impact on values. However, growing environmental concerns and the efficiencies of new aircraft will mean the MAX will regain favor especially since Airbus is having delivery problems and, for many airlines, Boeing is in their DNA.
“It is not that easy to change manufacturers with all the infrastructure and personnel requirements,” he said, “The 737 will come back but it has suffered a black eye and it will take a while to gain equilibrium.”
Hurdle For Chinese Aircraft Will Be Product Support, Trade Issues
Pivoting again to the growth of Chinese indigenous aircraft, Udvar Hazy said the biggest barrier is customer support coupled with potential trade issues. He noted if trade disputes precluded the delivery of the Leap Engine already slated for the C919, other engines are available so it would go forward.
“In the last 20 years, China has made a very dedicated commitment to the development of its aerospace industry with a lot of investment – more than any other country on the face of the earth,” he said. “But to build and train professional pilots and engineers is another issue. It’s one thing to build and certify to western standards but to support customers outside the home market is a challenge no one has conquered outside Airbus, Boeing, Embraer and Bombardier. As long as airlines have government ownership, those airlines will be required to take a certain percentage of the C919 and to a lesser extent the ARJ 21. In future it will depend on the production capability that still is a small percentage – maybe 10% – of the overall demand in China. We do not see it dominating so the 737 and the A320 will continue to have a strong presence in the Chinese market.”
Airlines will not be able to shrink to profitability regardless of whether or not they are undergoing the equivalent of Chapter 11.
“Chapter 11 allows them to regauge their fleet, re-size the airline and re-examine their networks,” he said. “In every case, airlines will be smaller but once they clean up the attic they will have a better base to grow. Those airlines are already talking about new deliveries in 2023 or 2025 that would replace older, obsolete aircraft. While they were rejiggering their companies, they were asking where they go after Chapter 11, what will the network look like. The answers will dictate the airplanes they will need. They are looking beyond the cloud to emerge as a stronger, fitter company and how Air Lease can help them get there.”
Asked whether he was optimistic about the future industry, Udvar Hazy concluded by saying the last 50 years have changed the rules and predicted that would continue. “The world needs airlines and needs mobility. The airline business, coupled with technology, will mean changes and we will have to adapt. There is now a lot of awareness of what a pandemic can do but the industry will emerge strong, better understood and more appreciated for its role in the world.”
Does Udvar have any commitments on the 737MAX ? In that case his opinion and expectations might be colored by self interest.
His statements are consistent with what we know of the industry and airlines. Due to the pandemic, some airlines exercised their escape clauses in the MAX grounding, some took the cancellation penalty or renegotiated. Some have kept their orders active but are known not to have financing, so Boeing dropped them, but may be keeping those slots open in case of financial recovery.
The MAX should do well in the existing market after RTS. As he said, it has a black eye at present but that will fade with time and experience. Pilots will be well-versed in handling the improved NNC’s before stepping back into the cockpit. That is a major advantage, and apart from the MCAS fixes, is the second most significant improvement to the MAX fleet.
I think airlines are parking older generation aircraft and pushing out undelivered new aircraft as far as possible.
Cancellation rights as a result of culpable delays are executed to avoid unnecessary cash out. That is happening & lessors gets burned.
The higher efficiency and lower operating costs of new aircraft take time to see ROI. Airlines are trying to survive for the next 12 months.
“”I think airlines are parking older generation aircraft””
Alaska is parking younger leased A319 and use older owned 737-700. Maybe they use 737-700 till big maintenance checks and then push them out.
It’s the same for Delta. They use older owned A319 and have the only left but much younger owned 737-700 parked.
Delta is phasing out CRJ-200, 717, 767-300, 777 fleets and have halved their 757 in recent years. https://onemileatatime.com/delta-retiring-crj-717-767/
I could see Alaska selling / returning everything but 737-800 while cancelling/ delaying their MAX / NEO orders. Come back in 3 years.
Keesje, do you think they would get rid of all the -900ERs? I’m surprised they don’t cancel the MAX and renegotiate a better price. It seems like any airline would cancel their MAX orders and find a better deal, either on used aircraft or by getting a better deal on a white tail MAX.
The production period for which MAX’s can be cancelled without penalty is March 2019 to October 2019. So that’s 8 months at 50 to 60 per month, or maybe 500 MAX’s altogether, but only if your order was scheduled for delivery in that interval. Many of those customers may have already cancelled, or renegotiated.
Others would have to pay a penalty for cancellation, so may be preferable to renegotiate to new terms that may include deferments. That leaves them with options as travel recovers in the future.
Kathryn, this is an excellent article, it provides a great deal if insight and rings true with all that we presently know about the crisis. Thanks for providing this level of detail.
VERY Nice piece of writing…,.
It appears that Leasing Companies have a dual pronged path to increased profitability. If they own more of the delivery market, they can use that quantity to drive for better pricing. Better lessor pricing increases their margins with their lessees.
Interestingly, the Leasing Companys are in a better place to start to simplify their fleets. I can see the Leasing Companies restricting interior passenger facing elements to perhaps 6 basic choices….. This greatly reduces the complications caused by having a a large number of customer specific interiors and the cost and complications involves in unique layouts….. Simplification will lower lessors costs and that adds to margins……
I would not put it beyond the realm of possibility to see the use of collaborative orders where non competing airlines with very similar missions might bundle their order to receive even better treatment…… I can see a Southwest/Ryanair order block as an example of it……..
The leasing companies provide a core product, each airline has its own color and interior setup (mfg seat type as well) that tends to fleet wide (there are times when its mixed when changing to a new plan so its not a given)
Upshot is the lessors don’t decide interior or exterior, the operators do.
So far branding far exceeds any efficiency gains so the lessors aircraft are brought up to the Airline spec.
Leasors order models but those are not an speculation, they have customers and those customers dictate what the whole setup is.
Converting from one airline to anther is costly, but airlines want their brand and standards so the cabin crew knows what is where on each flight and the customers get (or don’t get) what they expect.
Equally Airlines standardize on flight deck options so that when the pilot moves from aircrat to aircraft he is not looking at a different flight deck.
What is not mentioned is the leasing companies future skyline shows say 1000 aircraft coming out of lease in the next 12 months but low airline commitments for those planes. Like the airlines with parked planes the leasing companies have high capital costs to meet.
The focus has been on the manufacturers future production which is under pressure , both from airlines reluctant to take delivery and leasing companies who will have older ‘white tails’ of the own they want to move on at possibly great deals. Some planes that come out of lease and are 15 yrs old probably wont fly again.
I predict some bankruptcies from the leasors.
“”we had 15 Maxes delivered and grounded. Today we have 50.””
How did Air Lease get the other 35?
How cheap were those 35?
“”lessors are in far better shape in terms of capital allowing airlines to use lessors as a crutch””
Shows that lessors got too much of the cake. Could this be restricted since governments own airlines.
Can someone shed some light what he is trying to explain in the below comment? What do these percentiles represent?
“I don’t see lessors going below 40%,” he told Air Transport World Editor Karen Walker. “I see it creeping up to perhaps 50% or 55% and that includes operating leases and various other exotic mechanisms.”
I believe they represent the percentage of fleet lease rate by the airlines, as opposed to purchase/ownership. So he is saying at least 40% will be leases or other non-ownership options, rising perhaps as high as 55%, due to the current lack of liquidity available to airlines.
They have basically been forced to use their liquidity to keep their doors open in the COVID crisis. That effectively reduces their ability to exercise purchase options, making lease options more attractive as the air travel market resumes.
Leasing companies have some advantages over “normal airlines” as they order larger quantities of Aircrafts/Engines and Customer furnished equipment and get better pricing, their cost of capital is better and I assume they can reduce taxes by using different decpreciation schemes in different countries. So I think Udvar is correct, few Airlines besides DAL, Ryanair and the 3 big Chinese can compete with him on Aircraft purchase prices. The difficulty of Leasing companies are getting paid the right amount on the right day, reposess aircrafts and making sure documentation is correct for transfer to another airline/national register with modifications and repainting.
Spot on. If you are going to survive in the lease business, you need to make a profit.
Because profit is not always what it seems. Sure the lease rate may look good, but per claes, it runs out and they have to revamp the aircraft.
My brother was an Aviation Tech (Helicopters and regional turbo prop for the most part). You get a contract for Forrest Service for a Heli Fire Attack operation, bring in a choppper and the fun beings to get its radio systems up to the contract. Some radios comes out, others go in. Lease it to State Forrest the next year and you do more swaps.
If the leased bird comes off lease, it has to be converted to the new customer interior and cockpit (big costs) and its not making revenue.
That all costs.
Short term contracts cost more.
‘However, growing environmental concerns and the efficiencies of new aircraft will mean the MAX will regain favor especially since Airbus is having delivery problems and, for many airlines, Boeing is in their DNA.’
I’m thinking that due to the covid pandemic and the need for airlines to push deliveries out for a couple of years, those issues that Airbus had, will not be much of a problem anymore. Indeed, just take a look at the A220 production list – they have 7 – A220-100’s made (some since March) that haven’t been taken and 7 – 300’s that have been ‘flight testing’ or waiting for a first flight – for awhile, including the first -300 for Delta made in Alabama, that they were supposed to take in September.
Airlines are in self preservation mode. What you do see more of, is airlines selling aircraft to lessors in a sale/leaseback arrangement, to stockpile cash, to deal with the daily burn.
62 Max white tails, according to Aviation Week. That is what Boeing has to try to dump.
What’s missing in all this is the price of oil, its low now but when the recovery begins the price will go up and demand for new fuel efficient aircraft will be a priority. I for one expect the owned/leased aircraft mix to change dramatically for airlines with more focus on having between 60-70% in favour of leased aircraft. This pandemic has shown that if you own a lot of your fleet and still paying it off and then your market disappears, your stuck with a lot of fixed costs and a lot of debt. The landscape will change in these areas which make the aircraft leasing companies in the drivers seat for massive growth.
“”if you own a lot of your fleet and still paying it off and then your market disappears””
If you need a loan to buy your plane then still your bank owns the plane.
Leasing companies make so much money, much more than airlines. This money can be saved if you buy your plane with your own money.
Not a big problem if the market disappears, planes should not lose much value without flight hours. Especially if you want to keep your planes the whole life, plane values don’t matter much. But if you leased them, planes don’t add flight hours, you don’t earn but you still have to pay the lease.
To get a good price if you want to buy a plane you could buy together with other airlines.
For a 5 year old 737-800 the monthly lease rate was $282k on Jan 1, so you had to pay $3.384m per year. Much money, it seems you chose the wrong job because your lessor could be on vacation the whole year and let you work for him.
Holiday ?
The lessor has a fleet of say 50 to 150 planes and they spend all year chasing deals to lease 2 planes for 6 months here another for 5 years there and so on. On top of that they are always arranging the finance for new delivery’s, refinancing deals on existing fleet or making proposals for an airline that wants sale and leaseback deals for its own planes.
Once that year is over they do it all again for another year. I recall one leasing mogul who had a 737 as a flying office as he and his staff spent so much time travelling they may as well take the office with them and where better to do deals than where a lot of airlines are located – or nearby.
Well, his huge pockets should help. 😉
(Presumably he is managing defaults and returns during the panicdemic.)
As for Communist China, it has struggled for decades to be able to produce good airliners in quantity. Product support is a huge question, even Airbus had to improve to match Boeing. That’s an organizational shortcoming typically – ability to develop fixes expeditiously but well, stock parts, and communicate.
Some herein are old enough to remember Boeing’s teething problems with jetliners, it took airlines to take the lead in some cases. And suppliers – Garret Airesearch was infamous for technical ineptness and lack of will on APU reliability, it took a couple or more CEOs and a couple of twobyalongside events to wake the company up. (Airlines pushed Boeing to change supplier, and some airlines fomented an alternative brand and installation).
Both CC and totalitarian Russia have political variability, internally and in relations with free societies. Russia has an aeronautical background, CC does not..