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Waterbomber2
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Inching towards a collapse of the leasing industry

Sun Jul 19, 2020 6:21 am

Not many media talk about the hardship that aircraft lessors are facing.

With all industries now pointing to state aid given to airlines in their respective states to claim their own state aid, repeat state aid to airlines is becoming very difficult to justify. Most state aid to airlines also had a major debt component, which means that they only provide short-term liquidity but do not improve airlines' balance sheets. With airlines about to announce heavy Q2 losses, while losses are expected to continue into the normally most lucrative Q3, bankruptcies are looming for the entire airline industry. When that occurs, lessors may be at risk of collapsing, toppling an industry worth hundreds of billions and cascading into an already weakened financial industry.

The industry is being thrown upside down as we speak.

-Airlines are not renewing leases, requesting deferrals and/or reduction of lease payments.
-There is no interest from airlines in taking delivery of brand new aircraft, yet lessors hold firm orders at steep discounts that the OEM's are reluctant to defer.
-Aircraft valuations are decreasing while lessors are highly leveraged.

Lessors have benefitted from their position as middle man, taking high margins with little perceived risk.
In times like these however, the risk is converted in real damage and is already poking at the industry.

Even if they can ride the first tide, lessors are very likely to get into deep trouble by next year.

An article discussing the subject:

https://simpleflying.com/aircraft-lessors-pressure/
 
Toinou
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Re: Inching towards a collapse of the leasing industry

Sun Jul 19, 2020 8:26 am

Well, investing in a financial model using very large amount of capital to buy something that is depreciating relatively rapidly and needing a constant flow of cash has always came with some level of risk.
I'm not saying anybody could have thought that this would happen but when you invest, you have to bear the risk.
 
davidjohnson6
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Re: Inching towards a collapse of the leasing industry

Sun Jul 19, 2020 8:44 am

A "collapse" of the leasing industry sounds a little over dramatic, but is it really such an unusual thing if a few firms go under ? In every industry, the only thing that really ensures long term survival of companies is seeing competitors fail and a desire to survive by avoiding excessive risk
 
Noshow
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Re: Inching towards a collapse of the leasing industry

Sun Jul 19, 2020 8:56 am

Just looking at big quads, many new ones like A380s are retired now after only one lease period. Technically they would be good for at least another 12 years and more. The leasing companies might have covered their own investment with the first term but the leasing companies investors didn't make their expected ROI. So nobody will give his money the next time.

After this experience for example Emirates was unable to lease new A380s at their old leasing conditions. This is what killed A380 demand and production. Even the spare parts lost their value with demand so low and an abundance of parked planes available.
 
moa999
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Re: Inching towards a collapse of the leasing industry

Sun Jul 19, 2020 10:27 am

I'd add a few global Airports to that list.
The privatised ones often operate under a heavy debt structure, often borrowing to pay returns as their 'asset value' increases.

The tide has gone out for many of these financially structured companies and the tsunami warnings are sounding.
 
MIflyer12
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Re: Inching towards a collapse of the leasing industry

Sun Jul 19, 2020 10:36 am

I mean, so what if a few leasing companies fail? It's not as if the aircraft go 'poof' at midnight with the restructuring filing. They will still have aircraft. They will still have a stream of income due. Aircraft assets are among the easiest things to repossess - they self-transport!, and there's a stable body of international law surrounding it. Leasing companies don't employ very many people relative to assets. Leasing companies are generally owned by large, should-be sophisticated investors. This is like crying, 'Oh, poor hedge fund managers! They're each down to their last $5 Billion in personal wealth.'
 
fsnuffer
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Re: Inching towards a collapse of the leasing industry

Sun Jul 19, 2020 10:51 am

MIflyer12 wrote:
I mean, so what if a few leasing companies fail? Leasing companies are generally owned by large, should-be sophisticated investors. This is like crying, 'Oh, poor hedge fund managers! They're each down to their last $5 Billion in personal wealth.'


Unfortunately a lot of ordinary people own shares in these leasing companies via their managed retirement accounts. So it is not only the poor hedge fund managers who get hurt.
 
PoleHillSid
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Re: Inching towards a collapse of the leasing industry

Sun Jul 19, 2020 10:55 am

MIflyer12 wrote:
I mean, so what if a few leasing companies fail? It's not as if the aircraft go 'poof' at midnight with the restructuring filing. They will still have aircraft. They will still have a stream of income due. Aircraft assets are among the easiest things to repossess - they self-transport!, and there's a stable body of international law surrounding it. Leasing companies don't employ very many people relative to assets. Leasing companies are generally owned by large, should-be sophisticated investors. This is like crying, 'Oh, poor hedge fund managers! They're each down to their last $5 Billion in personal wealth.'


Agree. I do not know the exact numbers, but I would not be surprised if most had "highly efficient tax structures" i.e. all run through tax havens, contributing little to societies. Live by the (capitalist) sword, die by the (capitalist) sword.
 
b747400erf
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Re: Inching towards a collapse of the leasing industry

Sun Jul 19, 2020 11:06 am

Waterbomber2 wrote:
Not many media talk about the hardship that aircraft lessors are facing.

With all industries now pointing to state aid given to airlines in their respective states to claim their own state aid, repeat state aid to airlines is becoming very difficult to justify. Most state aid to airlines also had a major debt component, which means that they only provide short-term liquidity but do not improve airlines' balance sheets. With airlines about to announce heavy Q2 losses, while losses are expected to continue into the normally most lucrative Q3, bankruptcies are looming for the entire airline industry. When that occurs, lessors may be at risk of collapsing, toppling an industry worth hundreds of billions and cascading into an already weakened financial industry.

The industry is being thrown upside down as we speak.

-Airlines are not renewing leases, requesting deferrals and/or reduction of lease payments.
-There is no interest from airlines in taking delivery of brand new aircraft, yet lessors hold firm orders at steep discounts that the OEM's are reluctant to defer.
-Aircraft valuations are decreasing while lessors are highly leveraged.

Lessors have benefitted from their position as middle man, taking high margins with little perceived risk.
In times like these however, the risk is converted in real damage and is already poking at the industry.

Even if they can ride the first tide, lessors are very likely to get into deep trouble by next year.

An article discussing the subject:

https://simpleflying.com/aircraft-lessors-pressure/


Ran out of spam posts and had to pull an article from April :banghead:
 
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SEPilot
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Re: Inching towards a collapse of the leasing industry

Sun Jul 19, 2020 1:06 pm

The airline industry is one of the most capital intensive ones out there with a relatively poor rate of return and also one of the riskiest. There are so many things that can disrupt it. War, economic difficulties, disease, volcanic eruptions, bad weather, and so many other things can disrupt air travel. And the airline business is also one of the most brutally competitive as well. So you have an industry that relies on pieces of capital equipment costing from eighty to two hundred million dollars each, that require immense amounts of money in terms of highly trained crew members, maintenance and fuel to operate, and you therefore need to fill nearly every seat on every flight in order to make a profit day in and day out. What could possibly go wrong? Well, we are finding out. The simple fact is that any disruption in air traffic is going to affect EVERYBODY involved in the industry. Why should lessors be exempt? If planes aren’t flying, or if they are flying empty no money is coming in. And that means anyone with a financial stake in these multimillion dollar machines is going to be hurting.
The problem with making things foolproof is that fools are so doggone ingenious...Dan Keebler
 
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SEPilot
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Re: Inching towards a collapse of the leasing industry

Sun Jul 19, 2020 1:26 pm

Another thought about lessors. Whenever there is an extremely expensive item that is in demand, there are going to be those who need it that cannot afford conventional financing. The result is that people come up with creative ways to get it into their hands. And leasing is a common way to do it; look at automobiles. Many people lease cars that they otherwise could not afford. But these leases always carry risks, and auto leases usually have provisions to transfer as much of that risk to the lessee as possible. One of the primary risks is residual value. Auto leases pay close attention to this; they limit mileage, they insist any damage be properly repaired and that the car be properly maintained. And there are penalties attached to these provisions. But they start with an estimate that the residual value at the end of the lease for that model will be a certain percentage of the new value. What happens if the value of that model crashes? The lessor takes a bath. And the same thing happens to airliners. I am 100% sure that when the A380 entered service that not one of the lessors imagined in their wildest dreams that at the end of the initial leases the value of the planes would be scrap value. But it happened. But now we have something much worse; there is NO market for used airliners of any type, and in fact there is no market for new ones either. So lessors are caught in a nightmare situation that none of them could have ever expected. And this is likely to drastically affect how airliners are financed for years to come.
The problem with making things foolproof is that fools are so doggone ingenious...Dan Keebler
 
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Revelation
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Re: Inching towards a collapse of the leasing industry

Sun Jul 19, 2020 1:28 pm

Waterbomber2 wrote:
Not many media talk about the hardship that aircraft lessors are facing.

With all industries now pointing to state aid given to airlines in their respective states to claim their own state aid, repeat state aid to airlines is becoming very difficult to justify. Most state aid to airlines also had a major debt component, which means that they only provide short-term liquidity but do not improve airlines' balance sheets. With airlines about to announce heavy Q2 losses, while losses are expected to continue into the normally most lucrative Q3, bankruptcies are looming for the entire airline industry. When that occurs, lessors may be at risk of collapsing, toppling an industry worth hundreds of billions and cascading into an already weakened financial industry.

The industry is being thrown upside down as we speak.

-Airlines are not renewing leases, requesting deferrals and/or reduction of lease payments.
-There is no interest from airlines in taking delivery of brand new aircraft, yet lessors hold firm orders at steep discounts that the OEM's are reluctant to defer.
-Aircraft valuations are decreasing while lessors are highly leveraged.

Lessors have benefitted from their position as middle man, taking high margins with little perceived risk.
In times like these however, the risk is converted in real damage and is already poking at the industry.

Even if they can ride the first tide, lessors are very likely to get into deep trouble by next year.

An article discussing the subject:

https://simpleflying.com/aircraft-lessors-pressure/

State aid was based on the premise that CV19 would be squashed in 2-3 months and recovery would then begin to kick in. Unfortunately in many locales the work needed for that to happen was resisted and now the V has become a U so yes, repeat aid is going to be very difficult to get.

Noshow wrote:
Just looking at big quads, many new ones like A380s are retired now after only one lease period. Technically they would be good for at least another 12 years and more. The leasing companies might have covered their own investment with the first term but the leasing companies investors didn't make their expected ROI. So nobody will give his money the next time.

After this experience for example Emirates was unable to lease new A380s at their old leasing conditions. This is what killed A380 demand and production. Even the spare parts lost their value with demand so low and an abundance of parked planes available.

A380 was already trending in the wrong direction before CV19 hit. SQ had retired four with no takers on a second role other than the one HighFly airplane. Air France had already decided to retire half the fleet. LH had cut orders and was exercising buyback options.

I think that A&B will have to make more production cuts. Bloomberg has an article today about 787s piling up at CHS and PAE. Of course financiers don't want to finance more planes, especially not long range wide bodies.
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VSMUT
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Re: Inching towards a collapse of the leasing industry

Sun Jul 19, 2020 2:24 pm

Noshow wrote:
Just looking at big quads, many new ones like A380s are retired now after only one lease period. Technically they would be good for at least another 12 years and more. The leasing companies might have covered their own investment with the first term but the leasing companies investors didn't make their expected ROI. So nobody will give his money the next time.

After this experience for example Emirates was unable to lease new A380s at their old leasing conditions. This is what killed A380 demand and production. Even the spare parts lost their value with demand so low and an abundance of parked planes available.


You are right, but singling out the quads is a bit off if you ask me. Over the past decade, we've increasingly been seeing younger and younger aircraft getting scrapped. A318 and A319, E-jets, 737-600s and -700s and 777s. Many of the Singapore Airlines 777s only saw 15-16 years of service before getting parted out, not too different from the A380s. Quads definitely suffer more due to their inefficiencies, but IMO, it is a trend we are seeing across the industry for almost all types. Give it a few years and we will see 787s, younger A330s (probably sooner rather than later), 777-300ERs and A350s suffer the same fate.
 
mcg
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Re: Inching towards a collapse of the leasing industry

Sun Jul 19, 2020 4:02 pm

Noshow wrote:
Just looking at big quads, many new ones like A380s are retired now after only one lease period. Technically they would be good for at least another 12 years and more. The leasing companies might have covered their own investment with the first term but the leasing companies investors didn't make their expected ROI. So nobody will give his money the next time.

After this experience for example Emirates was unable to lease new A380s at their old leasing conditions. This is what killed A380 demand and production. Even the spare parts lost their value with demand so low and an abundance of parked planes available.


No lessor will will 'cover their own investment' in an A380 during the initial lease term. I don't have any inside info, but let's assume rough numbers are an A380 was a $200 million asset and lessors typically took a 25% residual position on a 12 year lease. That means each A380 has a $50 million unrecovered investment when it comes off lease. Multiply that by 200 leased A380's and you've got a very large number.
 
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aemoreira1981
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Re: Inching towards a collapse of the leasing industry

Sun Jul 19, 2020 4:03 pm

VSMUT wrote:
Noshow wrote:
Just looking at big quads, many new ones like A380s are retired now after only one lease period. Technically they would be good for at least another 12 years and more. The leasing companies might have covered their own investment with the first term but the leasing companies investors didn't make their expected ROI. So nobody will give his money the next time.

After this experience for example Emirates was unable to lease new A380s at their old leasing conditions. This is what killed A380 demand and production. Even the spare parts lost their value with demand so low and an abundance of parked planes available.


You are right, but singling out the quads is a bit off if you ask me. Over the past decade, we've increasingly been seeing younger and younger aircraft getting scrapped. A318 and A319, E-jets, 737-600s and -700s and 777s. Many of the Singapore Airlines 777s only saw 15-16 years of service before getting parted out, not too different from the A380s. Quads definitely suffer more due to their inefficiencies, but IMO, it is a trend we are seeing across the industry for almost all types. Give it a few years and we will see 787s, younger A330s (probably sooner rather than later), 777-300ERs and A350s suffer the same fate.


A handful of 73Hs have been scrapped, mostly after the collapse of 9W and UN (including one that had been fitted with winglets). However, the further scrapping of 73Hs is unlikely because of the presence of a freight conversion program, headed up primarily by GECAS, which is converting planes returned from lessors, or sold to it by other airlines, to freighters, especially for Amazon, the major leasing customer for GECAS.) The 73G is basically kept alive by the presence of hot-and-high environments and WN, and one could say the same for the A319, but the A20N, which has the same hot-and-high performance that the A319 has, will cause the A319's value to drop; one can thank UA for the market for the A319 not completely collapsing. The A333 below 233t (for non-owned examples) is also going to suffer, although many older A330s have been running up on hours. At CX and GA, for instance, I would be surprised if there isn't a retirement soon for their low MTOW A333s.

Now, as for the A380, Dr. Peters' Group, whose portfolio was more of the A380 than any other model, is likely to be affected than anyone else.

The saving grace for the B77W is likely the presence of a freighter conversion program spearheaded by GECAS.

I actually see the Boeing 787 and Airbus A350 benefiting from this. The Boeing 787 in particular benefits from being relatively light. The A359/A35K should also benefit.
 
eurotrader85
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Re: Inching towards a collapse of the leasing industry

Sun Jul 19, 2020 4:47 pm

A lot of these Lessor companies are owned by the banks, so the capital washout is not going to be limited to a few hedge funds going under with an auction of next to nothing received on the assets. This was debated on another thread with the topic author even posting a clip from the Big Short film, and that is the reality. On a.net we are naturally anchored to the effects to the aviation industry but this is just one element in the larger world. Lessor companies will fall/or take chunks out of their balance sheets, that's capitalism, but for the banks, this is going to be one clip in a wider world of bad debts that are looming. Being long in life is fine when the merry go round is turning, but the music is stopping. If the write down on assets or write off on debts is too much, we have seen what will happen just over a decade ago.
 
VSMUT
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Re: Inching towards a collapse of the leasing industry

Sun Jul 19, 2020 5:03 pm

aemoreira1981 wrote:
A handful of 73Hs have been scrapped, mostly after the collapse of 9W and UN (including one that had been fitted with winglets). However, the further scrapping of 73Hs is unlikely because of the presence of a freight conversion program, headed up primarily by GECAS, which is converting planes returned from lessors, or sold to it by other airlines, to freighters, especially for Amazon, the major leasing customer for GECAS.) The 73G is basically kept alive by the presence of hot-and-high environments and WN, and one could say the same for the A319, but the A20N, which has the same hot-and-high performance that the A319 has, will cause the A319's value to drop; one can thank UA for the market for the A319 not completely collapsing. The A333 below 233t (for non-owned examples) is also going to suffer, although many older A330s have been running up on hours. At CX and GA, for instance, I would be surprised if there isn't a retirement soon for their low MTOW A333s.


Cargo conversions will only make a small dent into the fate of these aircraft. The cargo market, even with no passenger aircraft operating, is relatively tiny. You will see thousands of 737-800s turned into scrap, regardless of it's success as a freighter. Ditto for the A321.


aemoreira1981 wrote:
The saving grace for the B77W is likely the presence of a freighter conversion program spearheaded by GECAS.


People write too much into the 777-300ER conversion program. It will be a success, but lets face it, it will be for a market of something in the order of less than 200 aircraft. Boeing built over 800 of that type. The majority will be scrapped. It is also several years away from entering service.

Just to get a sense of how big the cargo conversion market (and capacity) is, the much lauded 767 has had conversion programs running since 1998 for the 767-200 and 2008 for the 767-300. In that time, a grand total of just over 200 have been converted.

Conversions will improve the situation, not save it.
 
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Re: Inching towards a collapse of the leasing industry

Sun Jul 19, 2020 5:28 pm

fsnuffer wrote:
MIflyer12 wrote:
I mean, so what if a few leasing companies fail? Leasing companies are generally owned by large, should-be sophisticated investors. This is like crying, 'Oh, poor hedge fund managers! They're each down to their last $5 Billion in personal wealth.'


Unfortunately a lot of ordinary people own shares in these leasing companies via their managed retirement accounts. So it is not only the poor hedge fund managers who get hurt.

Leasing companies thrive by risking other people's money.

The big companies will make money off sale leaseback at better terms, borrowing at lower rates and thus increasing the interest spread.

They will lose billions on returned aircraft, but mostly for those investors in the low traunche bonds.
. Leasing companies mostly work on a transaction fee model. Taking little risk and a cut of the upside.

There are leasing companies in trouble. For example, AirCastle has exposure to many hurting second tier airlines. They sold themselves and should continue.

Let us look at the largest lease companies:
https://www.mototok.com/blog/top-10-air ... -companies

AerCap, is fine
DAE is over-leveraged in my opinion
GECAS us fine, but will shrink (lose market share)
ALC seems fine. Udvar-Hazy has the connections
Avolon, I have some concern, but at worst a merger
Nordic seems to be doing fire sales (E1 jets), anyone know their cash position? Possible merger.
SMBC is going to be hurt, but should survive. Possible merger.
ICBC will be given money to grow. Probable buyer.


Lightsaber
ps (late edit)
The small Leasing companies are in trouble. Some won't make it, some will.
Flu+Covid19 is bad. Consider a flu vaccine, if not for yourself, to protect someone you care about.
 
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aemoreira1981
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Re: Inching towards a collapse of the leasing industry

Sun Jul 19, 2020 6:06 pm

lightsaber wrote:
fsnuffer wrote:
MIflyer12 wrote:
I mean, so what if a few leasing companies fail? Leasing companies are generally owned by large, should-be sophisticated investors. This is like crying, 'Oh, poor hedge fund managers! They're each down to their last $5 Billion in personal wealth.'


Unfortunately a lot of ordinary people own shares in these leasing companies via their managed retirement accounts. So it is not only the poor hedge fund managers who get hurt.

Leasing companies thrive by risking other people's money.

The big companies will make money off sale leaseback at better terms, borrowing at lower rates and thus increasing the interest spread.

They will lose billions on returned aircraft, but mostly for those investors in the low traunche bonds.
. Leasing companies mostly work on a transaction fee model. Taking little risk and a cut of the upside.

There are leasing companies in trouble. For example, AirCastle has exposure to many hurting second tier airlines. They sold themselves and should continue.

Let us look at the largest lease companies:
https://www.mototok.com/blog/top-10-air ... -companies

AerCap, is fine
DAE is over-leveraged in my opinion
GECAS us fine, but will shrink (lose market share)
ALC seems fine. Udvar-Hazy has the connections
Avolon, I have some concern, but at worst a merger
Nordic seems to be doing fire sales (E1 jets), anyone know their cash position? Possible merger.
SMBC is going to be hurt, but should survive. Possible merger.
ICBC will be given money to grow. Probable buyer.


Lightsaber
ps (late edit)
The small Leasing companies are in trouble. Some won't make it, some will.


Avolon is part of the HNA Group. Some of the aircraft leased by Avolon are to other HNA Group airlines, for which leasing contracts had been signed with CIT Aerospace prior to CIT selling that division. I could see them collapsing, especially if China picks winners and losers...BOC Aviation and other Chinese banks (CMB, ICBC) are more likely to be winners.
 
smartplane
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Re: Inching towards a collapse of the leasing industry

Sun Jul 19, 2020 7:04 pm

SEPilot wrote:
Another thought about lessors. Whenever there is an extremely expensive item that is in demand, there are going to be those who need it that cannot afford conventional financing. The result is that people come up with creative ways to get it into their hands. And leasing is a common way to do it; look at automobiles. Many people lease cars that they otherwise could not afford. But these leases always carry risks, and auto leases usually have provisions to transfer as much of that risk to the lessee as possible. One of the primary risks is residual value. Auto leases pay close attention to this; they limit mileage, they insist any damage be properly repaired and that the car be properly maintained. And there are penalties attached to these provisions. But they start with an estimate that the residual value at the end of the lease for that model will be a certain percentage of the new value. What happens if the value of that model crashes? The lessor takes a bath. And the same thing happens to airliners. I am 100% sure that when the A380 entered service that not one of the lessors imagined in their wildest dreams that at the end of the initial leases the value of the planes would be scrap value. But it happened. But now we have something much worse; there is NO market for used airliners of any type, and in fact there is no market for new ones either. So lessors are caught in a nightmare situation that none of them could have ever expected. And this is likely to drastically affect how airliners are financed for years to come.

The aviation leasing industry learn't a few lessons from the car industry, where to manage new and used prices, OEM's have first right of refusal to re-purchase fleet lease vehicles at pre-determined prices based on age, condition and miles, and in some cases the OEM leases to the leasing company, who lease to the ultimate lessee for even greater tax effectiveness.

The aviation industry has attracted leasing participants, especially investors, who have neither the capacity or expertise to be involved. We have OEM's involved at the front end (marketing / selling leases), back end (buybacks to underpin residuals to encourage participants, and take out finance) and even directly (including packaging portfolios to spread risk).

Savvy lessors mitigate risk by bundling different aircraft types and customers into portfolios, which they ultimately market and sell, retaining the usually lucrative financial and aircraft management. Lessees in default trigger increased management fees, supposedly payable by the lessees, but often by other participants in the lease. Portfolios may include default and put options, where they revert back to the head lessor.

Issues in the leasing industry are usually more in the form of hiccups, with portfolios sold to other leasing companies and / or OEM's either directly, or to strategic partners, to preserve the integrity of the original leases.

This time is different. No knights in shining armour. No one has financial capacity, even if they have the will. On one hand, A&B want surplus aircraft permanently taken out of use asap, but on the other, they have exposure to used aircraft, directly and indirectly via lease and buyback deals. Boeing have all bases covered, with lease and other financial exposure to suppliers and sub-contractors, lessors and lessees, and customers.

Fortunately no-one wants to rock the boat (or shake the wings), so at present, lessees are enjoying discounted, deferred and forgiven lease payments, some added to the final balloon payment, some completely forgiven, and some added in the form of a lease term extension.
 
JayinKitsap
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Re: Inching towards a collapse of the leasing industry

Sun Jul 19, 2020 9:40 pm

How big is the problem? In the last 12 years there have been the following delivers and delivered value:
201 A380's at delivery price of $240m = $ 48,240m
370 A350 at delivery price of $200m = $ 74,000m
840 A330 & 340 at delivery price of $140m = $117,600m
5,279 A320 family at $60m = $316,740m
Total $ 556,580m probable current value after lease payments $ 340,000m

3,931 B737NG @ $55m $216,205
387 737MAX @ $60m $ 23,330
137 B747 @ $220m $ 30,140
196 B767 @ $ 110m =$ 21,560
801 B777 @ $200m = 160,200
975 B787 @ $130m = 126,750
Total Boeing over 10 year 578185 probable current value after lease payments $ 347,000m

So $867 billion is the outstanding owned and leased projected value of the last decade of planes. If adjusted to today's values of $ 430B there is a financial loss on the order of $ 400B. That is nearly 4 years of combined A & B production value lost.

This $ 400B loss is by all investors - equity in airlines, bond holders, hedge funds, private equity, etc. Lots lost by banks, pension funds, as well as countries.

For A.net, what this means is that financing of new airplanes has totally dried up as the airlines (owned planes) and the financiers have lost nearly 40% of their investment, with no new money coming in. A world of hurt coming around and a lot of grim trying to survive operations for 3 to 4 years now.
 
Kilopond
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Re: Inching towards a collapse of the leasing industry

Sun Jul 19, 2020 10:31 pm

SEPilot wrote:
The airline industry is one of the most capital intensive ones out there [...]


This urban myth is widely spread -- not just here on a.net -- but it is completely wrong. Establishing an air traffic network is just dirt-cheap compared to developing a functional road or even railway infrastructure. That is why there are so many fly-in-fly-out countries out there (and most of them are not located on islands).
 
BAorAB
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Re: Inching towards a collapse of the leasing industry

Sun Jul 19, 2020 11:13 pm

Its going to be tough going for sure, I'd go as far as saying most will collapse when widebodies start to be returned in the coming years. Just look at the simple math.

Airbus A380- Typical cost was $250M to most airlines and lessors/ holding companies
Lease rates were $1.7M per month = $20.4M per year = $204M for a 10 year lease.

Now most lessors bank on a minimum 3 year extension to break even or make a small profit on their investment. Takes return to $256M. Then at 13 years maybe resell the aircraft for $40M to make a profit for their investors. Takes return to $295M. so approx 20% return over 13 years. That's not a great return for any business usually, but getting the usually strong security around Aircraft leases and size and simplicity of this type of investment people will still invest with leasing companies usually.

Issue and reality now is:

1. Zero possibility of A380 lease extension or re-lease to new operator
2. Scrap value is deemed to be less than $5M per frame.

So reality becomes $210M return on $250M investment.!! The industry will have issues trying to get investment in the future. The A380 fiasco and oversupply of 777's last decade has ruined the returns which were once guaranteed in this segment. large part thanks to the ME3.

Let's even take the example of deals struck 13 years ago. The first A380's for Singapore were purchased for $218M by Dr Peters investment group. They leased to SIA for $1.6M per month = $19.2M per year = $192M for the lease. They were banking on lease extension (didn't happen) or new lessor (no chance) or worst case scrap value of at least $25M to break even. In reality the scrap value ended up being less than $5M so they took a loss of over $20M to fund the aircraft for 10 years.

777's won't be as bad but used 777W lease rates are very depressed now (and about to get worse) as low as $300K per month when investment strategy expected $600K for new lessors at 10 year old frames.

787's and A350's only time will tell how those investments turn out for the people that funded them.

But make NO mistake, Leasing companies will struggle for investment for decades after so many investors will getting burned this decade.

Is the Industry inching towards collapse?....I'd say more like sprinting!
 
MohawkWeekend
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Re: Inching towards a collapse of the leasing industry

Sun Jul 19, 2020 11:18 pm

Some very thoughtful comments by posters. No wonder AA can't finance airplanes. Who is going to pay for any of AB or B's deliveries?
    300 319 320 321 707 717 720 727 72S 737 73S 734 735 73G 738 739 747 757 762 ARJ B11 C212 CRJ CR2 CR7 CR9 CV5 D8S DC9 D9S D94 D95 D10 DH8 DTO EMB EM2 E135 E145 E190 FH7 F28 F100 FTRIMTR HRN L10 L15 M80 M90 SF3 SWM YS11
     
    MIflyer12
    Posts: 8068
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    Re: Inching towards a collapse of the leasing industry

    Sun Jul 19, 2020 11:36 pm

    BAorAB wrote:
    But make NO mistake, Leasing companies will struggle for investment for decades after so many investors will getting burned this decade.


    No, they won't. They may need to borrow money at higher interest rates but there will be funding. Even serial bankruptcies by carriers (US, CO, Sun Country) and countries (Argentina!) find investors lining up to lend more. See Deutsche Bank, Donald Trump. The lure of higher returns is powerful. Within the last two months U.S. carriers have still been borrowing through market means. Rank the interest paid on new unsecured debt (if they can get it unsecured). It runs something like this, lowest to highest:

    Southwest
    Alaska
    Delta
    JetBlue
    United
    American

    There's a big difference between what WN and AA are paying but who wouldn't want to double yields? AA has borrowed $ Billions in new debt.
     
    BAorAB
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    Re: Inching towards a collapse of the leasing industry

    Mon Jul 20, 2020 2:22 am

    i think the airline leasing game will change to a more traditional frame financing game with higher interest rates and carriers holding onto frames for longer until they are paid off at least with more traditional banks carrying the paper. Low returns and high risk is what the aircraft leasing business has become in the last decade from what was traditionally low risk. I also believe you wont see 10 year leases at very attractive rates, they will structure so airlines have incentives to keep frames for 15 years.
     
    smartplane
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    Re: Inching towards a collapse of the leasing industry

    Mon Jul 20, 2020 4:56 am

    MIflyer12 wrote:
    BAorAB wrote:
    But make NO mistake, Leasing companies will struggle for investment for decades after so many investors will getting burned this decade.


    No, they won't. They may need to borrow money at higher interest rates but there will be funding. Even serial bankruptcies by carriers (US, CO, Sun Country) and countries (Argentina!) find investors lining up to lend more. See Deutsche Bank, Donald Trump. The lure of higher returns is powerful. Within the last two months U.S. carriers have still been borrowing through market means. Rank the interest paid on new unsecured debt (if they can get it unsecured). It runs something like this, lowest to highest:

    Southwest
    Alaska
    Delta
    JetBlue
    United
    American

    There's a big difference between what WN and AA are paying but who wouldn't want to double yields? AA has borrowed $ Billions in new debt.

    The difference between previous downturns and the current situation, is this time it's universally bad, globally, affecting all airlines, OEM's and financiers. However prudent the lender, there is no way this time to mitigate negative exposure by country, operator, or aircraft.

    As a barometer, lets see how WN and AA top up again in August / September, and at what rates.
     
    Noshow
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    Re: Inching towards a collapse of the leasing industry

    Mon Jul 20, 2020 5:46 am

    Some sub-topic but relevant: How is the aircraft engine leasing industry doing these days?
     
    32andBelow
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    Re: Inching towards a collapse of the leasing industry

    Mon Jul 20, 2020 6:38 am

    Noshow wrote:
    Some sub-topic but relevant: How is the aircraft engine leasing industry doing these days?

    I doubt anyone needs engines now when they can just take one from a parked plane.
     
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    vhtje
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    Re: Inching towards a collapse of the leasing industry

    Mon Jul 20, 2020 6:41 am

    Kilopond wrote:
    SEPilot wrote:
    The airline industry is one of the most capital intensive ones out there [...]


    This urban myth is widely spread -- not just here on a.net -- but it is completely wrong. Establishing an air traffic network is just dirt-cheap compared to developing a functional road or even railway infrastructure. That is why there are so many fly-in-fly-out countries out there (and most of them are not located on islands).


    I see what you're trying to do there, but it's a furphy.

    The airline industry - that is, running an airline - is very capital intensive for the operator. Aircraft are not cheap to obtain or to operate; add on top of that staff costs, fuel, landing fees, exhaustive maintenance on those complex aircraft... then there's back office operations like ticketing etc - it adds up to huge figures.

    What you are talking about is infrastructure, which is typically a Government responsibility. And yes, building a road from point A to point B will be infinitely more expensive than the cost of a flight between the same two points. So, we do see in remote areas Governments subsidise air travel between two points in favour of building expensive infrastructure.

    But its a furphy to look at the cost of a subsidised fly-in-fly out operation from an established carrier, and then extrapolate that because it is cheaper than providing infrastructure, operating an airline is cheap. Less expensive than infrastructure the air operation may be, but that still does not mean running an air operation is cheap.
    I only turn left when boarding aircraft. Well, mostly. All right, sometimes. OH OKAY - rarely.
     
    Waterbomber2
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    Re: Inching towards a collapse of the leasing industry

    Mon Jul 20, 2020 8:51 am

    MIflyer12 wrote:
    BAorAB wrote:
    But make NO mistake, Leasing companies will struggle for investment for decades after so many investors will getting burned this decade.


    No, they won't. They may need to borrow money at higher interest rates but there will be funding. Even serial bankruptcies by carriers (US, CO, Sun Country) and countries (Argentina!) find investors lining up to lend more. See Deutsche Bank, Donald Trump. The lure of higher returns is powerful. Within the last two months U.S. carriers have still been borrowing through market means. Rank the interest paid on new unsecured debt (if they can get it unsecured). It runs something like this, lowest to highest:

    Southwest
    Alaska
    Delta
    JetBlue
    United
    American

    There's a big difference between what WN and AA are paying but who wouldn't want to double yields? AA has borrowed $ Billions in new debt.


    With the FED already buying junk bonds and acting as lender of last resort, they are only delaying the inevitable.
    Lending does not solve the problems of heavily loss-making operations, whether airlines or lessors. On the balance sheet, losses translate into assets reducing faster than the debt.
    When equity turns negative, no amount of lending can save you from bankruptcy.
    When companies enter bankruptcy, lenders big and small can kiss their yields goodbye.

    What the Central Banks are doing is actually quite dangerous. They are spreading a false sense of safety and making companies less proactive in reducing the bleeding.
    In fact, instead of putting companies in hibernation, they are trying to operate forcefully through the crisis, making the crisis much worse and longer lasting than it needs to be, while companies are bleeding faster then if they just hibernate.

    I think that there is an option to get out of this crisis with minimal impact on investors.
    Equity will need to be converted into debt and the impacted companies would have to enter a new type of bankruptcy, a hibernating bankruptcy. Everything stops: paychecks, debt repayments, payments to suppliers, everything. The light stays off until the storm has passed. A proper hibernation.
    This way, shareholders become debt holders, the equity is reduced to zero (and thus bankruptcy), but assets are preserved until the environment allows to operate with sufficient margin as to service debt, and then a part of the debt is reconverted into equity and capitalism goes on.
     
    Ertro
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    Re: Inching towards a collapse of the leasing industry

    Mon Jul 20, 2020 10:04 am

    Waterbomber2 wrote:
    I think that there is an option to get out of this crisis with minimal impact on investors.
    Equity will need to be converted into debt and the impacted companies would have to enter a new type of bankruptcy, a hibernating bankruptcy. Everything stops: paychecks, debt repayments, payments to suppliers, everything. The light stays off until the storm has passed. A proper hibernation.
    This way, shareholders become debt holders, the equity is reduced to zero (and thus bankruptcy), but assets are preserved until the environment allows to operate with sufficient margin as to service debt, and then a part of the debt is reconverted into equity and capitalism goes on.


    For any real functioning and producing company this would be tough as after paychecks stop employees leave and since the company has no shareholders and no employees who are the people who start the company again? A company with enormous debt bag and no operations and no customers since they also disappear. A few dusty machines, in a barn and enormous debt.

    If you think about a leasing company which produces nothing and is just a parking spot for assets then you could think that there is some possibility but I think this opens up new avenues to defraud this leasing company from everything they have. You could think that there is some way for the planes keep on flying when leasing company is hibernating. I am sure there is some way for the plane operator to guarantee that the leasing company never gets out from the hibernation and the airline can keep flying planes that are free or pass them on to some other company that can fly them. No leasing costs, nothing. Buy the shares for pennies just before the leasing company goes to hibernation or something else. Normal banckruptcy does not offer so lucrative prospects for gaming the process.
     
    Exeiowa
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    Re: Inching towards a collapse of the leasing industry

    Mon Jul 20, 2020 1:25 pm

    This is a point I have been bringing up in other threads that has not been taken up. The reason that airlines have received support is so they can continue to make payments to the finance companies (lenders and lessors) otherwise they could have laid people off and the government pay unemployment directly. But if they did that they would then not be able to funnel money to these payments. Above someone mentioned "sophisticated bundling" Sounds a lot like the mortgages that were bundled. I have seen the mention of credit default swaps on airline bonds a term which should fill us with apprehension.

    The fact is airlines send money to lessors who send it on to the entity that they borrowed the money from to purchase. If that chain gets interrupted then the dominoes start to fall. All this is constructed on leverage. If it goes down expect it to be very rapid. If the finnancing of airplanes get crippled then the manufacturers get hurt too. I do not care how smart someone is no one is smart enough if the amount of money you owe is suddenly greater than what you can access.
     
    sxf24
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    Re: Inching towards a collapse of the leasing industry

    Mon Jul 20, 2020 1:26 pm

    There are many misconceptions in this thread about leasing. The large lessors, e.g. AerCap, ALC, GECAS, have very diverse portfolios and strong liquidity to support their operations for years without any rent. There are definitely going to be bumps in the road as wide body aircraft are returned in a bankruptcy. But ultimately, this is how the industry gets funded as most banks and investors don’t want to lend directly to airlines and prefer to have an experienced asset manager, aka a leasing company, looking after the airplanes.
     
    Exeiowa
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    Re: Inching towards a collapse of the leasing industry

    Mon Jul 20, 2020 1:35 pm

    sxf24 wrote:
    There are many misconceptions in this thread about leasing. The large lessors, e.g. AerCap, ALC, GECAS, have very diverse portfolios and strong liquidity to support their operations for years without any rent. There are definitely going to be bumps in the road as wide body aircraft are returned in a bankruptcy. But ultimately, this is how the industry gets funded as most banks and investors don’t want to lend directly to airlines and prefer to have an experienced asset manager, aka a leasing company, looking after the airplanes.


    Anyone sitting around with "large pots of money" is doing it wrong in the capital markets I am repeatably told.
     
    airhansa
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    Re: Inching towards a collapse of the leasing industry

    Mon Jul 20, 2020 1:46 pm

    Exeiowa wrote:
    sxf24 wrote:
    There are many misconceptions in this thread about leasing. The large lessors, e.g. AerCap, ALC, GECAS, have very diverse portfolios and strong liquidity to support their operations for years without any rent. There are definitely going to be bumps in the road as wide body aircraft are returned in a bankruptcy. But ultimately, this is how the industry gets funded as most banks and investors don’t want to lend directly to airlines and prefer to have an experienced asset manager, aka a leasing company, looking after the airplanes.


    Anyone sitting around with "large pots of money" is doing it wrong in the capital markets I am repeatably told.


    From my experience in the railway industry, these lessors are ultimately owned by banks who obviously sit on top of large amount so money.
     
    davidjohnson6
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    Re: Inching towards a collapse of the leasing industry

    Mon Jul 20, 2020 1:56 pm

    If any leasing company expected the good times of 2018 to last forever, they deserve to go bust. Any half competent leasing company will want to build up reserves for the times when the aviation industry takes a major hit - eg 2009
    Banks are likely to see large numbers of defaults in the coming months from small businesses, but will probably be ok having been forced to increase the amount of capital they hold since 2008. I don't see many people panicking about a collapse of the financial system so far
     
    frmrCapCadet
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    Re: Inching towards a collapse of the leasing industry

    Mon Jul 20, 2020 2:58 pm

    An over-riding joker(card) in all of this is that not only the rich, but also the comfortably off middle class have money to burn, and interest rates are effectively at zero or a little lower. They have to invest just to preserve value. If a business can offer likely assured 4-5% return there will be investors.
    Buffet: the airline business...has eaten up capital...like..no other (business)
     
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    Re: Inching towards a collapse of the leasing industry

    Mon Jul 20, 2020 3:36 pm

    BAorAB wrote:
    787's and A350's only time will tell how those investments turn out for the people that funded them.

    It will be interesting indeed. These machines are mostly CFRP so the usual thing that kills airframes, metal fatigue, is much less of an issue for them. The things that will kill them off could very well be issues such as software/avionics obsolescence, non-compliance with future emissions standards, and eventual uneconomic fuel burn. It almost makes one wonder if the more expensive CFRP approach was the correct one given this trend to see aircraft be scrapped after one lease period. We saw C-Series/A220 reverse course with CFRP for the fuselage, and we see 777x coming with metal fuse and CFRP wings. The late kinda lamented NMA never really said how it was to be constructed. I bet it's going to be hard to justify CFRP fuse on new aircraft.
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    ILNFlyer
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    Re: Inching towards a collapse of the leasing industry

    Mon Jul 20, 2020 3:43 pm

    On the cargo side, our leasing business is doing just fine. It would appear to be the bright spot....for the time being.
     
    peterinlisbon
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    Re: Inching towards a collapse of the leasing industry

    Mon Jul 20, 2020 3:43 pm

    Noshow wrote:
    Just looking at big quads, many new ones like A380s are retired now after only one lease period. Technically they would be good for at least another 12 years and more. The leasing companies might have covered their own investment with the first term but the leasing companies investors didn't make their expected ROI. So nobody will give his money the next time.

    After this experience for example Emirates was unable to lease new A380s at their old leasing conditions. This is what killed A380 demand and production. Even the spare parts lost their value with demand so low and an abundance of parked planes available.


    If Emirates wanted to keep flying the A380, why couldn't they just renew the lease on the planes they already had?
     
    32andBelow
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    Re: Inching towards a collapse of the leasing industry

    Mon Jul 20, 2020 4:08 pm

    peterinlisbon wrote:
    Noshow wrote:
    Just looking at big quads, many new ones like A380s are retired now after only one lease period. Technically they would be good for at least another 12 years and more. The leasing companies might have covered their own investment with the first term but the leasing companies investors didn't make their expected ROI. So nobody will give his money the next time.

    After this experience for example Emirates was unable to lease new A380s at their old leasing conditions. This is what killed A380 demand and production. Even the spare parts lost their value with demand so low and an abundance of parked planes available.


    If Emirates wanted to keep flying the A380, why couldn't they just renew the lease on the planes they already had?

    They could probably get a discount too since no one wants them
     
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    lightsaber
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    Re: Inching towards a collapse of the leasing industry

    Mon Jul 20, 2020 4:47 pm

    32andBelow wrote:
    peterinlisbon wrote:
    Noshow wrote:
    Just looking at big quads, many new ones like A380s are retired now after only one lease period. Technically they would be good for at least another 12 years and more. The leasing companies might have covered their own investment with the first term but the leasing companies investors didn't make their expected ROI. So nobody will give his money the next time.

    After this experience for example Emirates was unable to lease new A380s at their old leasing conditions. This is what killed A380 demand and production. Even the spare parts lost their value with demand so low and an abundance of parked planes available.



    If Emirates wanted to keep flying the A380, why couldn't they just renew the lease on the planes they already had?

    They could probably get a discount too since no one wants them

    To remain viable, they require a cabin refit.

    The A380 no longer has the lowest cost per passenger. The A35K beat it. The 779 has the tech to be even better.

    The A380 never had the lowest fuel burn per passenger, that went to the 77W and PiP'd A333 even prior to the A359.

    The leasing companies that financed the A380s won't do that well. Filling up those planes will be a challenge for 3 to 5 years.

    These isn't a one plane market. Leasing companies have 77W, A333, and there is an impressive backlog of A350s and soon 779s incoming.

    EK needs to slim down. Renewing large gauge aircraft has no business case. By the time the market improves, too many A350, 787, and 779 will be flying.

    The A380s will join the 744 at the quad senior center.

    Lightsaber
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    Re: Inching towards a collapse of the leasing industry

    Tue Jul 21, 2020 12:12 am

    Kilopond wrote:
    SEPilot wrote:
    The airline industry is one of the most capital intensive ones out there [...]


    This urban myth is widely spread -- not just here on a.net -- but it is completely wrong. Establishing an air traffic network is just dirt-cheap compared to developing a functional road or even railway infrastructure. That is why there are so many fly-in-fly-out countries out there (and most of them are not located on islands).

    If you want to establish a trucking company, or a bus or taxi service you don’t have to build roads, you just have to pay taxes and fees to use them as they already exist. You also don’t have to pay on the order of $100,000,000 for a single piece of equipment.
    The problem with making things foolproof is that fools are so doggone ingenious...Dan Keebler
     
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    Re: Inching towards a collapse of the leasing industry

    Tue Jul 21, 2020 12:35 am

    SEPilot wrote:
    Kilopond wrote:
    SEPilot wrote:
    The airline industry is one of the most capital intensive ones out there [...]


    This urban myth is widely spread -- not just here on a.net -- but it is completely wrong. Establishing an air traffic network is just dirt-cheap compared to developing a functional road or even railway infrastructure. That is why there are so many fly-in-fly-out countries out there (and most of them are not located on islands).

    If you want to establish a trucking company, or a bus or taxi service you don’t have to build roads, you just have to pay taxes and fees to use them as they already exist. You also don’t have to pay on the order of $100,000,000 for a single piece of equipment.



    I believe Power Plants are likely one of the most capital intensive industries out there... and likely higher than airlines.

    Also, the cost of electrical distribution is capital intensive as well.... and is done by private companies.

    Have a great day,
     
    LCDFlight
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    Re: Inching towards a collapse of the leasing industry

    Tue Jul 21, 2020 1:36 am

    A well-informed asset manager or business person knows that airlines are highly cyclical.

    It is only sensible to own a fleet of airliners if it is profitable, AFTER taking into account that events like 9/11 or COVID, or a gigantic oil crisis, will occur about every 10-12 years or so. The returns you get in good years are not free. There is massive risk built into an airline lessor's business.

    There is no excuse for people who are heavily involved not to know this.
     
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    Re: Inching towards a collapse of the leasing industry

    Tue Jul 21, 2020 5:43 am

    LCDFlight wrote:
    A well-informed asset manager or business person knows that airlines are highly cyclical.

    It is only sensible to own a fleet of airliners if it is profitable, AFTER taking into account that events like 9/11 or COVID, or a gigantic oil crisis, will occur about every 10-12 years or so. The returns you get in good years are not free. There is massive risk built into an airline lessor's business.

    There is no excuse for people who are heavily involved not to know this.

    In the ideal world, yes. In the real world, there always seems to be plenty of examples of companies/individuals that grab for the quick buck with either no understanding of the risks or a willful disregard of the risks because they plan to make lots of money quick and be gone before the spam hits the fan.

    Plenty examples of that in the lead up to the GFC of 2008.
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    BrianDromey
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    Re: Inching towards a collapse of the leasing industry

    Tue Jul 21, 2020 8:46 am

    lightsaber wrote:
    The A380s will join the 744 at the quad senior center.

    Lightsaber


    The A380 is something of a microcosim for the larger industry. On one had airlines cannot/will not pay the leasing costs of their current fleet. On the other hand there is little benefit to repossessing the aircraft, there is no onward market right now. Better for the leasing companies to leave them with the current operators who will have to store and maintain them. Airlines might not be willing to do this, of course. Particularly for fleets like the A380, 747, even 777s. The A350 and 787 seem to be the future WB's, I think the 77X might be a bit too large for now. The return of the MAX will put similar pressure on the narrow-body market, which has been very tight on supply up to now.
     
    enplaned
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    Re: Inching towards a collapse of the leasing industry

    Tue Jul 21, 2020 10:33 am

    SEPilot wrote:
    Kilopond wrote:
    SEPilot wrote:
    The airline industry is one of the most capital intensive ones out there [...]


    This urban myth is widely spread -- not just here on a.net -- but it is completely wrong. Establishing an air traffic network is just dirt-cheap compared to developing a functional road or even railway infrastructure. That is why there are so many fly-in-fly-out countries out there (and most of them are not located on islands).

    If you want to establish a trucking company, or a bus or taxi service you don’t have to build roads, you just have to pay taxes and fees to use them as they already exist. You also don’t have to pay on the order of $100,000,000 for a single piece of equipment.


    I think Kilopond's point is that you're presupposing the existence of a road network. If the road network doesn't exist, then, yes, it's extremely expensive to establish a viable trucking network because you first have to build that road.

    In developed countries we take the existence of infrastructure, like roads, etc for granted.
     
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    Re: Inching towards a collapse of the leasing industry

    Tue Jul 21, 2020 2:24 pm

    BrianDromey wrote:
    lightsaber wrote:
    The A380s will join the 744 at the quad senior center.

    Lightsaber


    The A380 is something of a microcosim for the larger industry. On one had airlines cannot/will not pay the leasing costs of their current fleet. On the other hand there is little benefit to repossessing the aircraft, there is no onward market right now. Better for the leasing companies to leave them with the current operators who will have to store and maintain them. Airlines might not be willing to do this, of course. Particularly for fleets like the A380, 747, even 777s. The A350 and 787 seem to be the future WB's, I think the 77X might be a bit too large for now. The return of the MAX will put similar pressure on the narrow-body market, which has been very tight on supply up to now.

    It is a game of chicken with widebody leases. In particular the largest widebodies. I agree 777s will be returned.

    Due to age, the 787 2nd hand market will be tested. There are a number becoming available of the 788s: https://leehamnews.com/2020/07/10/hotr/

    The 789/A359 are the safe bets for leasing companies. The 787-10 and A35K, not so much (not liquid markets).
    Lightsaber
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    Special Paint Schemes Aircraft painted in beautiful and original liveries

    Airport Overviews Airport overviews from the air or ground

    Tails and Winglets Tail and Winglet closeups with beautiful airline logos