Lessors Are Surprisingly Calm in this Crisis
- Financially strong aircraft lessors appear more or less relaxed about the airline industry’s epic meltdown. Count Air Lease Corp. (ALC) among them, feeling reassured by early signs of recovery, by stabilizing airline balance sheets thanks to prodigious public aid, and by the attractiveness of its modern aircraft. At the end of July, almost two-thirds of the world’s commercial airline fleet was back in active service. In April, two-thirds of all planes were grounded.
Last week, the U.S. State Department lifted its blanket advisory on avoiding international travel. U.S. air traffic, though stalled this summer, is certainly higher than it was in April. Also last week, Europe’s air navigation agency Eurocontrol said flight movements are now at 46% of 2019 levels, up from 10% in April. There are now more domestic flights operating in China than there were during January, before the pandemic (keeping in mind that summer is a busier travel season). In the Middle East region, a strategic one for global aviation, more than 1k flights a day are now operating, down from 3k just before the crisis in mid-March but up from 400 in April.
Some of ALC’s customers are still asking for payment deferrals. But many of these same companies are more than just airlines to their countries, but rather critical economic development agents. As such, governments won’t let them disappear. ALC suspects that bankrupt Aeromexico will ultimately still want to lease its planes. It stepped in during Virgin Atlantic’s restructuring with a deal to provide future widebodies to the carrier. Korean Air, a big customer for future B787-10s, actually moved up its contract with ALC, preferring to lease first and buy direct from Boeing later (it previously planned to buy first and lease later).
The point is, airlines are still doing lease deals. And with their balance sheets stretched, ALC expects leasing to become more attractive than ever. Taking a long view, it repeatedly emphasizes the growing importance of reducing emissions, which requires the latest-generation aircraft. It will be a decade at least, the firm believes, before another step-change in clean aircraft technology.
But are widebodies, slumping in demand even before the crisis, a dinosaur product? That’s a shortsighted view, it says. Carriers still want their B787s, A330 NEOs, and A350s, maybe not this year but for future years. The B787 does face a big China question, with the country’s airlines accounting for about a quarter of the jet’s total demand.
On the narrowbody side, A321 NEOs have emerged as the most coveted narrowbody in light of what’s happened with the MAX. Not many MAX customers are switching to NEOs though. ALC is separately bullish on the smallish A220-300, which some airlines are giving a second look as demand levels shrink. The plane can be useful as a replacement for A319s or B737-700s.
- Singapore-based but China-controlled BOC Aviation is bullish enough to have purchased five of TUI’s B737 MAX 8s, all delivering before next summer’s peak season, in a sale-leaseback deal. Aircraft lessors are simultaneously taking advantage of opportunities to buy popular planes like the MAX on the cheap, while also deferring and cancelling many of their own orders. Kuwait’s Alafco, for example, just cancelled 20 of its 40 MAX orders.
- Embraer reported a pretty ugly quarter, with only four deliveries, and nine total in the first half. The Brazilian airframer admits that most of its conversations with airlines now are about delivery deferrals. However, executives were cautiously optimistic on the company’s second-quarter earnings call.
The airframer sees regional operations beginning to resume, providing a lift to smaller markets as travel begins to thaw. It believes this will lead to more demand for its jets. Yet, executives also think the recovery will not begin until next year and are putting together a 2021-25 strategic plan to rebuild the business from this year’s collapse. A deal to join forces with Boeing, remember, fell apart.