gloom
Topic Author
Posts: 396
Joined: Thu Jun 30, 2016 4:24 pm

Leasing companies in post-corona world

Mon Mar 23, 2020 2:00 pm

Hello there,

I think the topic I specified above is wider than corona topic, and it will get washed among other topics.

So, the question is: will leasing stay in the market? To what extent? What are their mid term perspactives, and short term seem to be disastrous?

I have a feeling there are many trends there, I'll try to talk them one by one. In both ends - acquiring new, and getting back post-lease.

1. New planes. Since it seems we've had already symptoms of too many planes on the market (see 787 or 330 drops in delivery rates), it seems that the drop this year (and subsequent bancrupties that we all see ahead) will slow down orders significantly (in fact, I think "zero" mentioned from the start of the year on first months might stay for quite long). Since prices of oil also dropped down quite significantly, I see this trend to continue for next 2-3 years. I must admit I don't see any new orders from lessors to be done the next 3-4 years. There will be no market at all. This will be also undelined by all frames coming off the lease. And the costs for orders/cancellations are still ahead...
2. Frames coming off the lease. There will be plenty, both from global slow-down of economies (less people) and problems within airlines themselves (planes from bancrupcies and fleet adjustments). Will we see leasing prices down at zero? Not really, I think, but they will be as low as possible. I guess we'll see lots of deals aimed at reducing cost, rather than making a profit. I still see a market, lots of conversions coming soon for cargo, since passenger traffic will go down (and underbelly space as well).

So, I believe we see a hard times ahead for the leasors. I guess some of them will go out of business, and I see some overtaking as well (buy cheap). Will they survive? Well, I think as a market - yes, it's (and will be) cheaper to acquire a frame on leasing, especially when you start new airline, new destinations, new market segment, whatever (and market growth will come one day, may it be in two, three, or five years). Only a couple of strong players will stay, though.

I also expect this trend will kill large frames (777X anyone? will 350 become too large? some questions ahead, but let's stay on leasing for today) for leasing. 777 value will be zero soon (any 777, including Xs). Many will come to scraps as soon as they're off the leasing.

What are your visions, thoughts on the subject?

Cheers,
Adam
 
kaitak744
Posts: 2212
Joined: Fri Jul 22, 2005 1:32 pm

Re: Leasing companies in post-corona world

Mon Mar 23, 2020 4:25 pm

"777 value will be zero soon" ...... really? Do you know how economics works? Nothing has zero value. Even a 50 year old Boeing 707 can still have some value.

There is no sense in retiring aircraft early. What we may see is large aircraft (777-300ERs, A380s, 747-8s) retired when they come to their next heavy maintenance check.

Taking some of the big U.S. airlines for example:
AA - retire all 767s and 757s. Slow delivery of A321NEOs. Retire older A320s and 737-800s. Retire 777-200ERs that are up for a heavy check.
UA - retire all 757s. Retire older A320s and A319s. They just invested large sums of money refitting their 777-200ERs and 767-300ERs, so I don't think they will go anywhere.
DL - faster retirement of 757s and 767s, MD-80/90s. Retire older A320s and A319s. Retire A330-200s.

^That right there is a large capacity decrease.
 
LDRA
Posts: 323
Joined: Fri Jan 15, 2016 3:01 am

Re: Leasing companies in post-corona world

Mon Mar 23, 2020 10:00 pm

Full freighter conversion costs too much

Interested to see options for upper deck "adaption kit" to utilize volumn in upper deck . Remove seat, anchor cargo pellets to seat anchor points in floor
 
smartplane
Posts: 1299
Joined: Fri Aug 03, 2018 9:23 pm

Re: Leasing companies in post-corona world

Mon Mar 23, 2020 10:39 pm

gloom wrote:
Hello there,

I think the topic I specified above is wider than corona topic, and it will get washed among other topics.

So, the question is: will leasing stay in the market? To what extent? What are their mid term perspactives, and short term seem to be disastrous?

I have a feeling there are many trends there, I'll try to talk them one by one. In both ends - acquiring new, and getting back post-lease.

1. New planes. Since it seems we've had already symptoms of too many planes on the market (see 787 or 330 drops in delivery rates), it seems that the drop this year (and subsequent bancrupties that we all see ahead) will slow down orders significantly (in fact, I think "zero" mentioned from the start of the year on first months might stay for quite long). Since prices of oil also dropped down quite significantly, I see this trend to continue for next 2-3 years. I must admit I don't see any new orders from lessors to be done the next 3-4 years. There will be no market at all. This will be also undelined by all frames coming off the lease. And the costs for orders/cancellations are still ahead...
2. Frames coming off the lease. There will be plenty, both from global slow-down of economies (less people) and problems within airlines themselves (planes from bancrupcies and fleet adjustments). Will we see leasing prices down at zero? Not really, I think, but they will be as low as possible. I guess we'll see lots of deals aimed at reducing cost, rather than making a profit. I still see a market, lots of conversions coming soon for cargo, since passenger traffic will go down (and underbelly space as well).

So, I believe we see a hard times ahead for the leasors. I guess some of them will go out of business, and I see some overtaking as well (buy cheap). Will they survive? Well, I think as a market - yes, it's (and will be) cheaper to acquire a frame on leasing, especially when you start new airline, new destinations, new market segment, whatever (and market growth will come one day, may it be in two, three, or five years). Only a couple of strong players will stay, though.

I also expect this trend will kill large frames (777X anyone? will 350 become too large? some questions ahead, but let's stay on leasing for today) for leasing. 777 value will be zero soon (any 777, including Xs). Many will come to scraps as soon as they're off the leasing.

What are your visions, thoughts on the subject?

Cheers,
Adam

Commercial aviation lessors are experts in financing aircraft, and will always have a role, though the names and structures may be different.

Having worked in the industry for decades, if in instead of specialist leasing companies we had the OEM's directly standing in the market, or non-specialist bankers, every transaction would be soooooooooooooooo protracted, as they looked backwards multiple times, threw salt over their shoulder, and performed a happy dance for each aircraft delivered.

Now, NB deliveries are a non-event, like a rental or leasing company taking delivery of 1,000 cars. An every day occurrence.

WB contracts are where the pulse races. Recent events will widen margins between WB and NB, making it even harder for new models to gain traction.

Before Boeing's MAX debacle, they were heading down a path of more involvement in the used market, taking the Airbus model of buybacks, used operators and leasing through strategic 'friends' to the next level, much as they have done, none too successfully in hindsight, with suppliers and parts, and with 787 and X software management (unfortunately in the interim stage where intermediaries are still important, as now, they see as a negative).

But for the OEM's direction to work you can't have too much customer power. And that's precisely what has been happening with mergers / acquisitions, one to one alliances and strategic alliances incorporating buying groups, purchase templates, etc.

You have IAG and EK negotiating retrospective credits across their brands, and OEM models, something B & A were previously able to resist.

You have large customers negotiating engine contracts directly with OEM's, using engine choices to extract cradle to grave fixed pricing (which most OEM's currently regret) including financing.

Lessors bring together what is increasingly fragmented (start-ups through to established legacies) customers, but sharing information and buying power.

Air frame senior management are almost, and sales teams definitely too young, to remember the days when customers were fighting over delivery queue positions, no-one dared mess the OEM's around with protracted acceptance (agreed defects were generally fixed in service), and you fronted with the balance due (how you financed after delivery was the customer's issue).

Now the air framers want to manage (collect fees) at every step, on every product and service, including engines, training, parts, new, used, refurbish, finance and insurance, except where we are at this precise moment.

Lessors are a vital part of the commercial aviation industry. They will be more important in a decade, but how many, and who their ultimate owners will be, is another matter.
 
User avatar
aemoreira1981
Posts: 3197
Joined: Mon Jan 09, 2017 12:17 am

Re: Leasing companies in post-corona world

Mon Mar 23, 2020 11:16 pm

kaitak744 wrote:
"777 value will be zero soon" ...... really? Do you know how economics works? Nothing has zero value. Even a 50 year old Boeing 707 can still have some value.

There is no sense in retiring aircraft early. What we may see is large aircraft (777-300ERs, A380s, 747-8s) retired when they come to their next heavy maintenance check.

Taking some of the big U.S. airlines for example:
AA - retire all 767s and 757s. Slow delivery of A321NEOs. Retire older A320s and 737-800s. Retire 777-200ERs that are up for a heavy check.
UA - retire all 757s. Retire older A320s and A319s. They just invested large sums of money refitting their 777-200ERs and 767-300ERs, so I don't think they will go anywhere.
DL - faster retirement of 757s and 767s, MD-80/90s. Retire older A320s and A319s. Retire A330-200s.

^That right there is a large capacity decrease.


The value of the 777-200ER might soon reach zero on the resale market, and the A380 is already there. The 757 is still valuable to operators that have them, until the A321LR or A321XLR becomes more widespread, and so while the secondhand value is not much, especially with FX not buying any more secondhand frames, the issue is that these aren't liquid assets, much like the Boeing 737-900ER, which are mostly with airlines expecting to fly them for 25-30 years.

As for the A330, anything below 233t is likely near zero as well.

The Boeing 767 has little value as a passenger frame (except for United), but (especially the -300ER with GE engines) it is still valuable as a freighter, and as such, I expect the AA frames to be converted to freighters. (DL frames will be worthless as DL will fly them to almost expiration on hours.)

A real interesting example is the Boeing 747-400. Nose-loading examples still have value, but I doubt conversions will still happen, especially with the B77W "Big Twin" freighter due soon (and a possibly A359 freighter with the A35K landing gear). However, the Boeing 747 as a freighter can carry oversized and nonstandard cargo.

Mainline T-tails, except for the Boeing 717, are basically dead.
 
ltbewr
Posts: 14675
Joined: Thu Jan 29, 2004 1:24 pm

Re: Leasing companies in post-corona world

Mon Mar 23, 2020 11:36 pm

Leasing companies still have advantages to their favor and to airlines. Leasing companies can be domiciled in countries and territories where very low taxes and ability to hide corporate information. Leasing companies can have very sophisticated accounting structures to make money even in volatile markets. For airlines, it means the ability to reduce capital and interest costs. Leasing companies, especially for smaller airlines, can mean better leverage and thus lower costs for aircraft than if bought on their own.
There is no doubt that leasing companies will take a major hit over the next year or so as aircraft are WFU or airlines go bankrupt so can't or don't make lease payments, but they are no fools and most will survive.
 
fly2moon
Posts: 21
Joined: Fri Sep 23, 2016 4:21 pm

Re: Leasing companies in post-corona world

Wed Mar 25, 2020 10:24 pm

Speaking of airlines not making lease payments, are typical (dry) leasing terms and conditions allowing airlines to stop lease payments during conditions like current COVID19? For example, if government orders airspace or airports in the country closed where the airline is based, airline would have no legal means to fly the aircraft. Can airlines in affected countries use goverment imposed lockdowns to stop lease payments of grounded aircraft to leasing companies?
 
skyhigh972
Posts: 2
Joined: Mon Jun 18, 2012 6:54 pm

Re: Leasing companies in post-corona world

Fri Mar 27, 2020 1:16 pm

fly2moon wrote:
Speaking of airlines not making lease payments, are typical (dry) leasing terms and conditions allowing airlines to stop lease payments during conditions like current COVID19? For example, if government orders airspace or airports in the country closed where the airline is based, airline would have no legal means to fly the aircraft. Can airlines in affected countries use goverment imposed lockdowns to stop lease payments of grounded aircraft to leasing companies?


No Fly2moon, most lease agreements (at least those structured under english law) contain a Hell or high water clause that excludes any kind of force majeure event as a condition to stop paying or even delaying rent payments.
Once the lease agreement is signed off and an aircraft is accepted upon delivery, the operator figuratively kisses the total amount of rents good bye and will hopefully turn a profit from operating the aircraft to cover the lease cost.
Under other jurisdictions, force majeure events may be agreed upon. Maybe a seasonned pro like Smartplane can confirm.
 
fly2moon
Posts: 21
Joined: Fri Sep 23, 2016 4:21 pm

Re: Leasing companies in post-corona world

Sat Mar 28, 2020 3:19 pm

That kind of firm language might make sense in a regular world but not much in this crisis. If current environment lasts longer than a couple of months leasing companies will help push many airlines into oblivion. Lessors will get their planes back from bankrupt airlines, and then what? They will be stuck with dozens or hundreds of planes no one wants any more. In the end some leasing companies will go down as a result.
 
skyhigh972
Posts: 2
Joined: Mon Jun 18, 2012 6:54 pm

Re: Leasing companies in post-corona world

Sun Mar 29, 2020 5:12 pm

Just stating typical lease terms as you asked.
Leaving a non-performing asset with a lessee having liquidity issues doesn't fit usual lessors' risk profile.
Now, situation may require lessors to add some flexibility and some are already at it.
However, most lessors will not only repossess their aircraft but they'll also file lawsuits to recover the full remaining lease outstanding balance(doesn't sound fair, I know). Lease structures allows them to do so even if airline in question is undergoing liquidation. These leasing firms are financers who rarely care about aviation as much as us. Capitalism at its best.

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