Full interview at inpractise.com
We recently interviewed a Former VP at AerCap on how to look at the impact on residual values and lease rates for aircraft held by the lessors.
In the full interview, we cover:
- Outlook on the potential oversupply in narrowbody and widebody markets
- Potential impact on residual values and aircraft lease rates
- How airlines will be looking at managing fleets post-COVID
- Relative attractiveness of AerCap versus Air Lease's fleet
- Potential long run impact on the economics of aircraft leasing
In what scenario do you see a large write-down, to the books of the lessors, the book value of the aircraft?
Right now, it’s probably around the worst point, which is about 30%, on the book value of the older aircraft, because there is no appetite. Everybody wants to replace and go onto the newer aircraft. The newer aircraft values are, pretty much, okay. There isn’t a big drop. But anything that is over 10 or 15 years old, the book value of those aircraft has gone down significantly.
So when we look at a fleet like AerCap, for example, where they have a huge proportion of their fleet in newer tech aircraft, the Neo, the 87S, the impairment to these aircraft will be relatively low?
Correct. The majority of AerCap’s fleet is single-aisle aircraft, anyway. They’re not in the big wide-body market, so they don’t have a huge exposure to 747s or 380s or even the 777s. They have a few. The majority of their fleet is single-aisle aircraft, but there is an impairment, which they’re going to have to write-off, over the next few years.
Do you think the impairment will be across the whole fleet? How do you look at the impairment that they will have to write-off, potentially?
I think the impairment process will apply mainly to the 10 to 15-year-old aircraft. The older fleet of aircraft are just being parked much quicker and then there is a secondary market for spare parts, from these aircraft; the break-up values. That’s how they are generating some revenue from the aircraft.
What’s the recovery rate on some of those older, 10 to 15-year-old aircraft, in scrap?
There is always a secondary market for these aircraft. Without going into geographical region, if I looked at Russia, if I looked at parts of Asia, if I looked at parts of Africa, I’d be prepared to go back into the market for a 10 to 15 year old aircraft at, let’s say, $150,000, $180,000 a month, instead of trying to find a brand-new aircraft at $350,000, $385,000 or even $400,000. There is a demand and that demand is going to soak up some of the capacity that we have, but at much-reduced rates. The rate is going to be considerably less than what you would expect in a competitive market.
Even for the likes of the big lessors, such as AerCap, as you said, most of their fleet is narrow-body, a portion is wide-body, but I assume that that portion is the state-owned flag carriers, in the US or China? The CEO of AerCap mentioned that, roughly, 70% of the fleet are around US and Chinese flagship carriers. This softens the blow to the values, I assume, if these flag carriers can still afford to pay the leases, because they’re getting government-backed loans? Or do you think these big flag carriers will still not pay the leases, for the next six months, as you mentioned?
They’re going to take advantage of what the net present value is, of parking the aircraft, because they’re still having to pay something for those aircraft. To be fair, China is recovering much quicker than anybody anticipated. I know they’ve got a few more problems, generally speaking, but the Chinese travel market is recovering much faster than the rest of the world. They’ve managed to get their act together. If you compare it to the previous financial crisis, or even to 9/11, because 9/11 was short-lived but this one is a little bit longer term, then if I was the CFO at an airline, I’d look at extending it as long as I can. Probably, that six months and then a renegotiation of the leases that they are talking about, which is a possibility, because lessors never used to like doing it, before. But now, even they have an understanding that there might be a difference in the approach that they are taking, because the most important point for them, is to keep the lease alive. Somehow, keep the leases alive, because they are dealing with an uncertain future.
If I’ve got a five year or an eight-year lease, with four or five years remaining, my main interest will be to preserve that lease, rather than threatening people and saying, look, I want my money, which would be the wrong approach. They have an interest in having a look at the long-term future, which is, let’s decide, six months or a year from now, what the way forward is, for any of the aircraft.
The airlines will know this and, therefore, arguably, the bargaining power has shifted slightly in their direction, to renegotiate leases?
Absolutely. The airlines are fully aware of what’s going on. I think the airlines have a very good statistic in front of them, which is there’s nobody flying. At the end of the day, you can do what you want. In the worst case, you’re doing me a favor by taking aircraft away from me, because I don’t have to pay. It’s not repossession; it’s an agreement that you take aircraft back. A lot of the airlines will look at that, as a solution to say, look, if you’re going to threaten me and say you have to pay and try and bully my cash out of me, when I don’t have the cash, then fine; take the aircraft away. Take the aircraft back and do what you want. But there isn’t a secondary home, so there’s more interest in preserving the lease, rather than saying, look, you’re not paying me, so I’m going to take the asset away.
This is interesting because, in previous crises, obviously, the big global lessors, such as AerCap, Air Lease, GECAS, when an airline went bust, they could just reallocate the aircraft to a different airline. But because all the airlines are in the same situation, where there’s very little demand, the collective bargaining power of the customer is, arguably, higher?
Normally, what you would do is, you would have five customers per aircraft. As a lessor, you would have identified customers, per aircraft placement. As a lessor, you have bargaining power, because you’ve got a choice of five, at the end of the day, in terms of the quality of the credit, in terms of the lease rate, in terms of the length of the lease, in terms of whether we have any confidence that you can finance the aircraft. But right now, the problem is that there isn’t a secondary home. There aren’t five airline customers, lining up, queuing up, to say, I want this asset next month, next week or even looking forward, because you will have placed the aircraft a long time ahead of time. But at the moment, there isn’t a single airline that’s saying, actually, I can see a vision of December this year or the middle of next year, when I actually have a need for the aircraft. But they’re saying, I’m quite happy for the aircraft not to come right now, because I have to figure out what I’m going to do with the asset.