Commercial aircraft : the leasing market must expect a difficult year, with consolidation on the horizon |
| Emilie Drab |
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30 JAN 2020 | 668 words
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© Le Journal de l'Aviation - All rights reserved |
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Although 40% of the worldwide fleet is covered by a leasing contract, the market isn't celebrating yet. On the contrary, 2020 is beginning with a host of challenges to be met. According to a study published by aviation consultancy agency IBA on 15th January, the macro-economic context will remain relatively stable, but the industry will be shaken by tremors that will have major consequences for the value of leasing contracts and the market's very structure.
There's no surprise that the biggest shock comes from the grounding of the 737 MAX. While Boeing is hoping to restart production later in the year, the consequences of this immobilisation should be felt for several years to come. For the leasing market, the initial effects have been beneficial since the single-aisle market lacked capacity, leading to contracts being extended and an increase in value for the A320 and 737NG families - up to 7% for the 737-700 or 8% for the A320neo - while leasing contracts have been maintained overall.
Values for leased narrow-body aircraft to drop in the second half of the year...
Currently nearly 800 737 MAX aircraft are grounded: 350 which were brought into service before March 2019 and the 400 which were produced up to the end of the year and never delivered. When they are brought back into service - which the American airlines aren't expecting to see before June in the best scenario - they will turn the market upside down, with a surge in capacity which will see leasing contract prices collapse.
This overcapacity should have another consequence: a major increase in the conversion of single-aisle aircraft into cargo planes from 2021, when the leasing contracts which were extended to cover the missing MAXes will expire within a much more relaxed market.
... and for wide-body aircraft too
In addition, the value of wide-body aircraft should continue to fall. For example, IBA expects the value of the A330ceo to decline by an average of 10% in 2020, taking the total drop to 40% since the start of 2019, with leasing rates following the same trend. More planes are actually on the market, following the disappearances of WOW Air, Jet Airways or XL Airways, but also the withdrawals of aircraft from Singapore Airlines (in 2015) then China Eastern, Cathay, Etihad or TAP. And yet, airlines are tending more to look towards lower-capacity aircraft for their long-haul operations, which will also have consequences for large aircraft, such as the 777-300ER. It could lose 10% of its value this year, while leasing rates have fallen by over 20% (depending on the age of the aircraft).
Note that all large capacity aircraft are seeing their values and leasing rates erode, except for the 787-9.
Towards consolidation in the leasing sector
IBA estimates that the growth seen in the leasing sector over the last few years is not sustainable and that the coming overall fall in tariffs and margins will cause the weakest companies to collapse. While 2020 looks like being a better year than 2019 in terms of airlines' financial health (capacity reduction measures have been taken), any collapses will stir up the rental market too by freeing up new capacities. The collapses we saw in 2019, of which there were not necessarily more than in previous years, affected particularly large fleets (Jet Airways, Avianca Brazil and Thomas Cook for example) and put 430 planes onto the market. In 2020, Hong Kong Airlines, South African Airways and Flybe are particularly in danger, and Norwegian should continue to reduce its capacities while its signs of weakness have boosted its trans-Atlantic competitors, such as Alitalia.
In addition, there are more and more companies in the leasing market, which are basing themselves in particular on the sale and lease back model, without waiting for a critical size which enable them to cope with the erosion in yields which is due to continue and which don't have a strong enough base to enable them to redeliver aircraft quickly if a customer goes bust.
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Emilie Drab
Assistant editor
Civil aerospace, Air transport
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