Q4 2020: Public lessors talk about new SLBs and aircraft impairments

Three listed lessors – AerCap, Air Lease Corporation (ALC), and Fly Leasing (Fly) – faced scrutiny by analysts around aircraft impairments during their Q4 2020 earnings calls. AerCap and Fly together registered $142 million in asset impairments during the quarter, with the majority of the charges ($106 million) related to two of Fly’s A330s.

ALC was the only lessor among the three to avoid impairment charges in 2020, which CEO John Plueger attributed to having a “four-year-old fleet”.

Ishka summarises other key talking points in lessors’ Q4 earnings calls, including the issue of transatlantic tariffs on aircraft, the rent deferrals incurred, and new sale-leaseback opportunities.

In total, Fly registered $115 million in impairments related to nine aircraft, including the $106 million charges from two seven-year-old A330-300s whose lessee (Philippine Airlines, as Ishka understands) is likely to return early in 2021. (see Insight: ‘Fly Leasing posts Q4 loss after $106mn impairment for two A330s’).

The size of Fly’s A330 impairment drew attention from analysts during AerCap’s earnings call, which in Q3 took a $915 million impairment “primarily” related to A330s and 777s. Quizzed on Fly’s impairment, AerCap’s CEO Aengus Kelly reiterated his pessimism (see Insight: ‘ISTAT Lessor CEOs: ‘Sun is setting’ on end of line widebodies’) around end-of-line widebody investments saying they should be “at all costs avoided”.

“They're very tempting because they give you a big lease rental for a short period of time but, if you have been buying A330s or 777s in the last five or six years, you're going to get what's coming to you […] once they come off lease reality bites”, Kelly added.

 

Deferral repayments pick up

 

The three lessors also agreed on significant rent deferrals with their lessees during 2020. AerCap’s deferral balance as of 31^st December 2020 was $490 million, ALC agreed to $240.4 million in deferred rent whilst Fly’s balance was $54 million. Although airlines continued requesting support from lessors, AerCap’s CEO was “encouraged” to see new requests slowdown in Q4 while AerCap’s CFO Pete Juhas expects the deferral balance to “gradually” come down “over the course of the year”.

In a similar vein, Fly’s CFO Julie Ruehl said repayment of rent deferrals is “scheduled to increase substantially in 2021” with about half of the deferrals due to be repaid by the end of the year. ALC’s CFO Greg Willis said new deferral accommodations in Q4 were “well below the accommodations granted during the first half of 2020” and mentioned a recent “improvement” in cash basis lessees for airlines mostly in restructuring.

 

Searching for SLB opportunities

 

The three listed lessors were not particularly active in the sale/leaseback (SLB) market throughout 2020 but have begun to do a few deals. ALC purchased 14 aircraft “from the secondary market” in Q4 while AerCap’s CEO said the lessor has also “begun to deploy a small amount of capital into SLBs, the first time we’ve done so since 2013”.

Plueger said ALC plans to continue exploring further SLB “opportunities” in 2021 as he expected the firm’s CapEx for direct order aircraft to decrease due to Airbus and Boeing’s delivery delays. Kelly stated that opportunities in the SLB market remained “reasonably limited” due to the manufacturing and delivery delays but pointed out that, after the current crisis, airlines will shift to “a greater reliance on lessor orderbooks and on the sale-leaseback channel”.

Fly’s CEO said the company could acquire new freighters via SLBs as it has done in the past, although he warned that the freighter market remained “hot” at the moment”. “But look, if we can get a good freighter aircraft on a good lease and finances, well, then we will look at it in the future as we’ve done in the past”.

 

Lessors discuss aircraft export tariffs

 

The EU and US agreed on 5^th March to suspend all disciplinary tariffs on exports resulting from the Airbus and Boeing dispute for a four-month period following a conversation between US President Joe Biden and European Commission President Ursula von der Leyen. Ahead of this announcement, AerCap and ALC discussed the impact of tariffs on their operations during their earnings calls.

ALC’s Steve Hazy said tariffs have been the “biggest impediment” for delivering Boeing aircraft into Europe, with Plueger giving the example of a 787 due for LOT Polish Airlines since last year which has not yet been delivered. “I'm actually more concerned from the tariff situation than I am from a customer receptivity or ability to take [aircraft]”, Plueger commented. AerCap’s Kelly criticised the tariffs saying, “it’s just degrees of loss” for everyone involved.

ALC and AerCap also blamed the OEM’s manufacturing issues for ongoing delays on new aircraft deliveries. ALC anticipates reduced sales activity in 2021 due to major delays and they “remain in discussions” with Boeing and Airbus to determine the extent of those postponements. Plueger criticised Boeing’s manufacturing delays and said the OEM should “get its house in order”. AerCap’s Kelly said Boeing was not “really delivering any airplanes at the moment” while Airbus was still struggling “to deliver to their targets for this year as well”.

 

The Ishka View

 

AerCap, Air Lease Corporation, and Fly Leasing offered an optimistic outlook after a tough 2020. All three lessors expect a significant portion of 2020 deferred revenues to be recovered this year following a decline in requests for new deferrals in Q4. The next quarterly results will be an acid test for these assumptions, as a combination of new travel restrictions in some regions and the traditionally low winter demand will continue to challenge airlines.

The four-month tariff suspension provides an incentive for some stalled new aircraft deliveries to resume this quarter. Another aspect of their business that will continue to be tested is their susceptibility to impairments. Fly’s CFO Julie Ruehl pointed out that future early termination of leases is likely to be the driver of future impairments. Many airlines in restructuring processes are looking to reduce their fleets in 2021, and it will be interesting to see whether ALC and AerCap may need to take further impairments later this year.

But perhaps the biggest question is whether Fly and AerCap will continue to be the same platforms they are today over the next few quarters. Fly Leasing was reported in January to be considering a sale, which CEO Colm Barrington dismissed as “rumours” while AerCap confirmed, on the 9^th March it had agreed a deal to buy GECAS from General Electric, substantially transforming the platform. (see Insight: ‘AerCap buys a discounted GECAS to build a ‘super lessor’’).

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