Large Lessors Expect Fleets To Double In Coming Years

Wouldn’t it be nice to own many aircraft and let them fly around the world without having to deal with airport and air traffic control delays, the operational nightmares of more demand than you can handle, pilot strikes or unruly passengers and problems such as faulty engine parts that ground some of your narrowbodies for the next six months for inspections and repairs?

Under such circumstances, a company could focus on reaping the benefits of the strong return of air travel demand and watch profits come back as part of the industry’s COVID-19 recovery. Although it might sound unrealistic, those are basically the circumstances in which aircraft lessors are operating now.

• As airlines chase capacity, aircraft leasing companies enjoy higher rates
• Fewer players are controlling bigger fleets

It is no big surprise that most of the big leasing companies cannot believe their luck—and have little reason to expect that anything will change to cause them any major concern about the future of their businesses. It is true that interest rates have jumped in a short period of time, but they also may be close to their peaks. Sure, aircraft delivery delays are affecting not just airlines but also lessors. However, there is another way to access increased capacity: buy portfolios or finance aircraft through sale-and-leaseback transactions. It is only when airlines get in serious financial trouble that lessors become nervous, but so far their customers have been scraping by.

“I don’t think anyone has ever seen a recovery in lease rentals or market values as strong as we’ve seen over the past 18 months,” Avolon CEO Andy Cronin said on the sidelines of the International Society of Transport Aircraft Trading (ISTAT) Europe, Middle East and Africa conference in London. “Airlines are day by day increasing the price they’re prepared to pay to secure lift. Based on appraiser data, narrowbodies are now 25-30% above their pre-COVID level.”

Cronin’s lessor colleagues at ISTAT could not agree more. “We are enjoying an enormous lift in lease rates,” Dubai Aerospace Enterprise (DAE) CEO Firoz Tarapore said. “Real lease rates are jumping significantly and continue to do so” with the imbalance of demand and supply here to stay, Aviation Capital Group CEO Thomas Baker said. “We see lease rates accelerating. Demand is really going through the roof,” Air Lease Corp. (ALC) CEO John Plueger added. The increases are great enough to compensate for the higher interest rates that will make borrowing more expensive for them, lessors predict.

The lease rate hikes are not only for new deliveries coming through the orderbooks of major players such as Avolon, AerCap and ALC. Rates for older leased aircraft have risen, too, but most airlines are eager to extend leases on older aircraft they already operate nonetheless. As some carriers have seen, if they are not quick enough to renew, lessors may place aircraft elsewhere at better terms—leaving the carriers struggling to find capacity.

“Everybody is extending leases,” Plueger said. “I can count on one hand the number of leases that are not extended.”

The business models of most lessors are not just limited to leasing. Many also are very active aircraft traders, constantly adjusting their portfolios to increase or decrease exposure to certain aircraft types or geographies.

Much of that trading was put on hold during the pandemic, simply because there were far fewer buyers, leading to depressed values. Those that could afford to hold onto their fleets—which was true for the vast majority of the larger lessors—did so. Now the situation has changed once again.

“We have really enhanced our aircraft sales,” Plueger said. “We hit pause during the pandemic. Now we are selling more than we ever have. A bit of making up for lost time, but we are achieving gains we are happy with.”

ALC is not the only lessor selling aircraft. Avolon sold 14 in the third quarter and has agreed to sell 15 more. DAE bought seven aircraft but sold 16 in the first half.

“The market is a bit different at the moment,“ Cronin said. “You’ve got this raw demand from airlines, and they are providing quite a convincing bid to own aircraft, to buy them outright now as well.”

While there are always new entrants—few of them as financially powerful as AviLease, Saudi Arabia’s new venture—the delivery stream of new aircraft into the lessor channel is more focused on big players than it used to be several years ago. And with the planned production increases at Boeing and Airbus between now and the second half of the decade, the top lessors are likely to be able to grow their fleets faster than the rest of the industry. “All large lessors will double their fleets over the coming years,” Orix Aviation CEO James Meyler predicted.

The growth is expected to come through direct orders and sale-and-leaseback deals financing orders placed by the airlines themselves. The barriers to entry are also “higher than five years ago, [as] the size to be relevant is bigger,” Cronin noted.

In his view, the concentration is not a coincidence. “I think it’s a strategy from the manufacturers. Last time around, there were people printing business cards, creating a [special-purpose company] and going to place an order,“ Cronin said. “That’s not happening now because the manufacturers have been more thoughtful. They’ve seen what happens when you’ve got too many irrational players, destroying the market. They want five, six or seven large-scale lessor partners who will behave rationally rather than having 25 lessor orders on the orderbook program.”

It is no surprise, then, that those with large orderbooks are more confident than ever. “I have never felt better about an orderbook,” Plueger said. “I feel excited about the organic growth ahead,” Cronin added.

Both ALC and Avolon have more than 300 aircraft on firm order. DAE, a lessor that has not had an orderbook with manufacturers before, recently acquired a 64-unit Boeing 737 MAX yet-to-be-delivered portfolio from China Aircraft Leasing Group for delivery in 2023-26 and is looking for more direct orders, prices permitting.

While the performance of low-cost carriers in the U.S. and Europe shows some signs of weakness, lessors agree that demand will stay strong for the foreseeable future, both from airline passengers and in terms of aircraft capacity. For lessors as for their airline customers, “the biggest concern is how many aircraft you have to park,” Plueger said, referring to Pratt & Whitney’s PW1100G inspection and repair program (AW&ST Sept. 18-Oct. 1, p. 18).

Baker warned that smaller airlines may not be able to sustain the damage inflicted on them by the delays and groundings. “This becomes a credit issue for smaller carriers,” he said—and as a consequence lessors would also have to deal with the fallout. Indian low-cost carrier Go First blamed Pratt for its insolvency as it was forced to ground a large part of its Airbus A320neo fleet because of the persistent reliability issues. However, the airline has had financial issues for some time unrelated to the Pratt engines.

In one regard, airlines and lessors are in the same boat. They are competing for scarce aircraft coming off the Airbus and Boeing production lines and the even scarcer engines to power them. Because of the engine and other supplier constraints, Plueger forecasts that Boeing and Airbus production ramp-ups will be “slower than expected.” ALC has had “routine creeping delays at Airbus, less so at Boeing,” he noted. “We have been told to expect more delays in 2024.

In particular, Plueger expects that the additional large-scale engine inspections and repairs of powder metal contamination in the PW1100G program will “take even more engines out of the delivery supply chain to Airbus than what we know today.”

With engines in such short supply and nearly 600 aircraft expected to be grounded in the first half of 2024, Pratt will have to decide who will get the few new engines that will be available. “There is a tremendous amount of very active dialog between Airbus and [Pratt] these days,” Plueger said. In his view, the engine-maker is now stepping up to face the issues.

Conflicts among airlines, lessors and OEMs are all but certain. Nonetheless, Plueger said, “What are you going to do when you are Pratt and you [have] big airline CEOs screaming at you for engines for aircraft that are currently parked or that you know will be parked? . . . We all say: Give it to us and forget these other smaller airlines. Look who is your biggest mouth-feeder.”

The big lessors clearly propose that it is them.