Leeham News and Analysis
There's more to real news than a news release.
Leeham News and Analysis
- Bjorn’s Corner: New engine development. Part 5. Turbofan design problems April 26, 2024
- Airbus 1Q2024 results: Airbus CEO: “A350 in-service experience drives positive reputation and orders” April 25, 2024
- A350-1000 or 777-9? Part 3 April 25, 2024
- Boeing CEO promises company is turning around…again April 24, 2024
- Solid start for stand-alone GE Aerospace despite cuts to LEAP output April 23, 2024
Risk-Adjusted Business Outlook
- A 2024 view of macroeconomic and indicators for the aircraft finance and leasing markets
By David Yu and William Loh
Feb. 13, 2024, © Leeham News: As we entered 2024, this is an interesting time for aircraft finance and leasing. As an industry and economy, we have come from historically low-interest rates (cost of funds) close to 0% to a federal funds rate of 5.5%.
The US Federal Reserve has indicated cutting rates going forward. The US economy is still ripping it on many measures and the threat of a hard landing has all but vanished, with inflation coming under control. That said, Wall Street consensus is a low 4% federal funds rate which would mean a lot more rate cutting. But this is not what the frothy economic indicator data suggests. Instead of immediate large cuts, we only see small and short cuts towards the end of the year.
This is not what some folks were hoping for when they entered into previous deals. They want to have the lowest rate possible, especially for those with debt coming to maturity and needing to be refinanced in 2024 (a significant number). Wherever interest rates end up, it will not be what investors have planned for, and too high a rate environment will all but ensure an increased pressure to sell.
Risk-Adjusted Business
By William Loh, International Aviation Advisors, and Dr. David Yu, CFA, Senior ISTAT Appraiser, AAVA Group, NYU Shanghai and Stern.
Nov. 21, 2023, © Leeham News: We have been involved in aircraft finance for long enough now to have seen many things, some good and some bad. Too many investors did not know what they didn’t know, and this eventually led some to make expensive and even ugly mistakes. One of the keys is to find a more independent market-oriented risk evaluation.
This means they have invested in the wrong aircraft/deals, got their numbers wrong, went broke, and then ended up wound up and kicked out. Not to mention their investors who were caught out and surprised at the same time. Not great, and once you break the eggs, you won’t be getting any more.
To help get the numbers right concerning the finer points of lease parameters, we’ve developed simulation models to forecast market values/lease rates, as well as analyze the IRR/NPV of lease deals. A single-point, 10-year forecast in a non-linear market like this has never made much sense. There is no 100% certainty with an outlook number 10 years away, but varying levels of confidence and associated probabilities. This is analogous to how we can’t forecast the temperature tomorrow without using a distribution.
We also study the population of aircraft and the many performance differences between them, since this influences the lessors and airlines who may need them, and their relative market valuations, useful lives, and equity returns over time. If you are not sure what that stabilizer is doing back there, you might need to know a little more about airplanes.
Risk Adjusted Business for leasing aircraft
By William Loh, International Aviation Advisors and
Dr. David Yu, CFA, Senior ISTAT Appraiser, AAVA Group, NYU Shanghai and Stern
Airbus A320neo. Credit: Leeham News.
Oct. 17, 2023, © Leeham News: We have seen over many years that mainstream commercial aircraft are attractive assets to own and lease. They are easily recoverable, and produced by a stable duopoly of manufacturers. In normal times, aircraft generate fairly predictable US dollar cash flows over their long economic lives. There is no near-term risk of technological obsolescence, especially for the latest generation narrowbody aircraft.
Demand for travel drives demand for aircraft. On average, the aircraft fleet has doubled approximately every 15 years as travel demand has risen by 5% annually. Passenger growth has grown by 1.6 to two times world GDP growth over the last 30 years, but these relationships have been shaken to the core since 2019.
The airline industry is a derivative of the economic cycle. It is also prone to occasional external shocks as the result of war, terrorism or as we’ve recently seen, disease. Historically the industry has a proven resilience to these shocks. Over the last 30 years, the industry generally recovered within a relatively short time, with demand reverting to the long-term trend line.
Such stability does not mean that investors should be lulled into a false sense of believing that they understand the details well enough. This is where the rubber meets the runway and good advice plus prudent models come into play.
In this article, we discuss our Internal Rate of Return/Net Present Value (IRR/NPV) Model and the results of changes in some of the parameters. The main drivers of the return are normally the equipment cost, the monthly lease rate, and future sale value (FSV) (and year). Downtime is obviously also important, but we will assume none in this case. The following is a table of (pre-tax, annual) IRRs based on changes in these parameters, for a 2023 Airbus A320-200neo. Note that the parameters that have changed from row to row are in bold.