15/11/2019

Used Embraer E190/E195 E1 lease rates to come under pressure

Used Embraer E190/E195 E1 lease rates to come under pressure

The secondary Embraer E-Jet E1 market has been bustling with activity, with the OEM recording around 240 operator transitions over the past five years – around 15% of all E-Jets produced to date. In the last three years alone Ishka estimates that 131 used E1s moved to new commercial operators (excluding aircraft transferred between airline subsidiaries).

But with major E1 E-Jet operators preparing to phase out the type in bigger numbers, many lessors worry lease rates could come under pressure as early as next year. In this Insight, Ishka examines recent trends in the secondary E1 market and what may lay ahead for lessors investing in the Brazilian regional jet.

 

Lease rates to date

 

Ishka understands that monthly lease rates for mid-life E190/E195 E1s (10 to 12 years) have hovered between $120,000 and $140,000 in recent months, with one lessor reporting a lower ballpark of $110,000 and two others suggesting lease rates can sometimes go as high as $160,000. One lessor says the slightly bigger E195 leases out “for much higher” than E190s. For smaller E170/E175 variants of similar age, Ishka understands that monthly lease rates range between $90,000 and $110,000.

One market observer pointed out that lease rates for E190/E195 can sometimes “fluctuate a lot” depending on market availability, with some eight-year-old aircraft sometimes being priced “the same as a 12-year-old.” Another lessor confirmed that maintenance condition, not age, is “what really drives” differences in lease rates and values. “The real issue that you have got to focus on with used E170/E175s or E190/E195s is the life-limited parts (LLPs) remaining in the engines,” the lessor specified.

In terms of regional marketability, AerFin regional sales manager Michael Brain tells Ishka that separating the smaller E190 family and the E170 family is “quite important.” “The E170 [family] outside the United States isn’t seeing a huge amount of demand anymore,” Brain points out, underlining that pilot scope clause limitations and the economics of feeder routes mean the E170/E175 is “very well suited for the US market.”

Outside the US, Brain sees demand for E170/E175s increasing in Africa and Asia-Pacific in the coming years: “Particularly Africa, we are going to start seeing some demand for the E170/E175 there, there is a lot of ageing SAAB and BAe 146 aircraft in these developing markets.”

 

Transitions ‘buzzing’, but pricey

 

Embraer’s vice president of global leasing and strategy, Maximo Gainza, described the secondary E1 market as “buzzing” during a panel at the ISTAT EMEA conference in Berlin last September. Gainza said lessor penetration for the E190/E195 is similar than for Airbus and Boeing narrowbodies, “so you just have a natural flow of lease expiries every year.” He estimated that close to 300 transitions of E1 E-Jets have taken place, including 80% (or around 240) in the last five years.

At the end of 2018 Embraer opened an MRO facility in Macon, Georgia dedicated to re-deliveries and transitions of Embraer aircraft. The facility is designed to help reduce lead times in operator transitions. “This was largely at the request of lessors,” Gainza explained. The facility has Safran personnel on-site and can handle six aircraft for transitioning at present with plans to go up to nine.

But one lessor says cost, not time, is the main concern for lessors transitioning E-Jets. “How do you justify $5 million overhauls for 110 passengers? You can probably reconfigure an A320 cheaper than an E190,” one lessor remarks. Short maintenance intervals for the CF34 engine of “around 11,000 hours” compared to around “17,000 or 18,000 hours” for the A320’s CFM56s add to the cost, the lessor stated.

The same lessor points out that Embraer is “locked-in” with supplier agreements that limit the choice of interior parts. “I mean, God help you if you have got to find eight business class seats or reconfigure a galley or lavatory.”

But not all lessors agree. Nordic Aviation Capital (NAC) chief commercial officer Jim Murphy concedes that while NAC shared this perspective when it entered the E-Jet market in 2016, the lessor has since developed a supplemental type certificate (STC) allowing it to slash transition costs. “But the STC is our STC, it's not anyone else's,” he remarks.

To address CF34 engine costs, NAC and GE Aviation finalised a TrueChoiceTM Flight Hour agreement at this year’s Paris Air Show. “But even if you have no [engine maintenance] programme, the package that GE offers has vastly improved,” he adds.

 

Floodgates opening for E190/E195s

 

Several lessors speaking with Ishka believe lease rates for the E190s/E195s could come under pressure from next year as several major carriers, including Azul and JetBlue, begin a mass phase-out.

“There’s an absolute abundance of them hitting the market over the next few years […] the lease rates will drop and lessors are going to have to consider lease rate reductions in order to place them with new, second-tier operators,” points out AerFin’s Michael Brain. The AerFin executive believes that the reason many airlines in Europe are leasing used E1s is that lease rates “are going to be so attractive for them.”

Another lessor is also pessimistic. “Next year you're going to see lease rates well below $100,000 [for E190s/E195s].” “There’s 60 of them [in JetBlue], where are you going to put 60?” the lessor asks. JetBlue, Azul, Copa Airlines and American Airlines alone will phase out 151 E190s/E195s by 2025, with most leaving the airlines over the next three years.

This is a bigger number than the 131 E1s moving to new operators (excluding transfers between airlines subsidiaries) over the past three years, [Source Data].

The largest E1 lessor, however, is optimistic. “I definitely see the glass half full,” Murphy tells Ishka. “The aircraft are being absorbed into the market whether it is by extensions, placements with new operators or going for teardown, which has been a pretty critical part of the story: the engines are really driving that market,” he says.

Murphy says NAC has extended or is negotiating the extension of 20 to 25 E-Jets, including some long-term extensions until 2023 and 2024. “Our availability [of E-Jets] for the next couple of years is reduced because of that.”

 

The Ishka View

 

The looming influx of E1 E-Jets from several major operators are likely to drive down lease rates, but a few mitigators may cushion the decline. Azul announced on 7th November that the carrier has signed an MoU with an airline “for the sub-lease of up to 32 E1s over the next few years,” including 10 in 2020 alone. One lessor suggested to Ishka that this airline is, in fact, a new venture by Azul and JetBlue founder David Neeleman. If confirmed, besides taking pressure off the market, the new airline (separate from Neeleman's latest start-up airline Moxy) would allow Azul to sidestep price concessions for many of the E1s it owns. Another mitigator is that American Airlines could send their 20 E190s for tear down – one lessor claimed to be “99.9% certain” about this possibility.

The flip side of this situation is that lessors on the hunt for attractive mid-life E1 deals are likely to find compelling opportunities in the next few years. One lessor also pointed out that small airlines looking for small jets to fly them “less than 3,500 hours a year” would be “crazy” to consider a brand-new aircraft like an A220, and would see in used E1s more sensible investments. Ultimately, the economics of leasing used E1s appear to hinge on lessor scale with overhaul and transition costs playing a significant role.

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