At the recent Airline Economics’ conference in London, senior experts from the worlds of aircraft & engine procurement, leasing and asset management debated the state of the market. Rob Watts, Director of Consulting at ACC Aviation analyses the varied opinions as the sector looks for pockets of opportunity. “Experience gained over many market peaks and troughs indicates that the current market strength will soften, but when exactly is the key question. The world wants to travel – passenger demand continues to outstrip aircraft supply, and this has driven strong post-pandemic pricing for aircraft and engines.”
Aircraft and engine values at an all-time high
All participants agreed that prices are at an all-time high whether that be leases, aircraft or engines. The question being asked however, especially as we come into the Winter period, is: for how long will the market be able to support this?
But even though the industry is on a roll, all panellists believe there are obstacles ahead,” says Watts. “If passenger demand softens, the OEMs ramp up production, and the multitude of lease extensions come to a concentrated end, this could very well reverse the aircraft value cycle. While this is a concern, it could be 2030 before this occurs.”
Residual value risk is critical for lessors
With aircraft and engine values where they are today, lessors and traders will need to exercise caution when entering the market – making sure that they do not overpay now and get caught out on future residual value risk. The panel agreed that on popular assets, pricing can be as high as 30% above the expected norm.
Watts suggests that lessors and airlines are pricing differently, “Airlines generate income from selling seats, not on lease rates and residual values, and with demand where it is, it’s plausible for them to overpay in the current market. Lessors, however, need to be more conservative for fear of being exposed to future residual value risk under different market circumstances.”
Lease-encumbered vs. naked aircraft
Are trades for lease encumbered aircraft as strong as naked aircraft? “Aircraft deals with leases attached buy the lessor time whilst generating revenue. If they take on naked aircraft then they bear all the costs from day one and the lease rate reduces every time they pick up the phone. Planning is crucial and if the aircraft are mature, then the right scenario for end-of-life has to be factored in,” he says.
Chapter 11 and technical condition risks
The value of the aircraft is crucial in this trading environment and although some less experienced lessors are buying at the top of the market, forthcoming Chapter 11s may see an influx of aircraft from the likes of Spirit and Azul entering the market. It will be interesting to see whether these aircraft continue as flyers or are torn down for their major components given their likely precarious technical condition.
According to Watts, “Aircraft coming up against high capital cost maintenance events will drive teardowns. We are seeing relatively young aircraft being parted out for spares, such as the 787, and some A320NEOs, as the costs and lead times for engine overhauls and other components are too high.”
Opportunities exist, but caution is advised
The asset procurement specialists all agreed on one key point, the recovery of the market since the pandemic has been unprecedented. There are great opportunities for aircraft and engine investors to meet current and future demand, but the next 5 years will see OEM supply chain delays resolve and inevitably this will spark competition, and operators will face new challenges. As Watts concludes, “The advice is to be cautious and have a get out plan in mind.”
