It is the aircraft industry's equivalent of trickle-down economics: when and orderbooks swell, purveyors of used aircraft and lessors benefit by satisfying demand the aircraft builders cannot. But theory and practice have begun to diverge.
An unusual split has emerged between the market development for new and used aircraft. Airbus and Boeing booked more than 1,500 combined narrowbody orders last year and are set to reach a similar number in 2012—available near-term production slots are selling out, yet the demand for older aircraft is not recovering.
For instance,, which in the past has been able to sell relatively young -800s at good prices, has not seen any market interest in its current offering. “The secondhand market is dead,” says Ryanair CEO Michael O'Leary.
The view is similar at rival. The low-fare airline was looking to dispose of some of its narrowbodies, but it took them off the market due to a lack of interest, says an industry official involved in the process. The airline could have found others to lease the assets but decided such a move would undermine the focus on its low-fare business model.
The reason for the disconnect is financial. “There has been a split in new and used aircraft financing and that has gotten worse,” says an aircraft broker. Obtaining financing for aircraft that are more than a few years old “is really difficult,” says a second industry observer.
Further complicating the used aircraft dynamics are high fuel prices, which make some young but relatively high-fuel-burn aircraft unattractive even at low prices. That explains why some of the Boeing 737-600s that were operated by Malev Hungarian Airlines are now being parted out rather than remarketed for lease or sold.
Another issue could be that Airbus and Boeing may not be as sold-out as they suggest. On occasion, the manufacturers still call leasing companies to sell near-term aircraft that become available, notes Gary S. Liebowitz, senior equity research analyst for aerospace and defense at Wells Fargo Securities. More slots may become available, he says, when weaker airlines withdraw orders. Liebowitz says Airbus's backlog is more vulnerable to such developments than Boeing's. Dutch lessor AerCap signaled recently that it could take on more aircraft commitments this year if the prices were right.
Leasing companies are facing their own headaches. International Lease Finance Corp., for instance, has been hit by insolvencies of airlines such as Malev and Spanair. And more customer defaults are likely this year, says Aengus Kelly, CEO of AerCap, which has also withdrawn aircraft from struggling Kingfisher Airlines.
Moreover, lease rates, far off their peak, are not necessarily trending in the right direction, in part reflecting the general low-interest-rate environment.
Adding to lessors' woes is the boosting of Airbus's and Boeing's production rates. Over the long term, the aircraft makers suggest 40% of their deliveries are to replace existing equipment, with 60% for growth. “However, this year the balance is reversed,” Liebowitz says. The flood of new aircraft could stymie the recovery in lease rates.
Leasing companies' concern about Airbus and Boeing flooding the market is not new. Going into the downturn in 2008, they urged the aircraft makers to curtail capacity or risk overproduction. Both did cut output, but not to the degree desired by lessors. In the end, Airbus and Boeing, rather than the lessors, judged the rate of demand recovery more accurately. However, industry analysts suggest just because the airframers were right in the last downturn does not mean the glut of aircraft being produced will not become a problem down the road.
Furthermore, the high replacement rate and degree to which aircraft are being parted out at relatively young ages could have wider ramifications for lessors if the trend is not reversed. If companies, especially those with older aircraft portfolios, have to depreciate their assets faster, it would directly hit their bottom lines.
|Source: Aviation Week Intelligence Network|