New Avolon CEO: Orderbook narrowbody lease rates up 15%-20% from Covid lows

New Avolon CEO: Orderbook narrowbody lease rates up 15%-20% from Covid lows

Avolon’s new CEO, Andy Cronin, says lease rates for lessor orderbook Airbus A320neos and Boeing 737 MAXs have climbed 15% to 20% since their “trough” in the first half of 2021 to reach parity with pre-Covid rates.

“I think we're consistent with the appraiser data, which is showing us a 15% to 20% increase in lease rates from the trough in narrowbodies which was the first half 2021 and, [as for] widebodies a little bit after that,” explains Cronin. The lessor chief confirms that A320neos are “on par” with pre-Covid rates while MAXs are “definitely higher”.

Separately, the lessor chief states that new-tech widebodies placed from speculative orders, including Airbus A350s and Airbus A330neos, are now within 10% of pre-Covid rates although, he admits, widebody lease rates were already pretty weak entering the Covid crisis. “On the placement side the widebody market was actually pretty distressed before Covid. Production rates from manufacturers were higher and there were a lot more unsold slots in the skyline and lessors with unplaced widebodies.”

Cronin explains that lease rates have been helped by orderbook consolidation from lessors and a more “prudent” approach from OEMs with regards to lessor sales. “There are fewer orderbook players in the 2024, 2025, 2026 timeframe. The manufacturers are being more prudent about how much they're selling into that spec order channel. We've seen the impact of 2012, and 2013 sales when lots of leasing companies were competing to place the aircraft.”

The continuity candidate

Cronin, formerly Avolon’s CFO and a co-founder of the firm, was confirmed as Avolon’s CEO this week after the lessor’s founding CEO, Dómhnal Slattery, fully left the firm in early October. Cronin’s appointment comes arguably at a period of change for Avolon. Slattery was responsible for setting up Royal Bank of Scotland’s (RBS) aircraft leasing division before leaving and setting up Avolon in 2010 with $750 million in equity from Cinven, CVC, and Oak Hill Capital.

Several former RBS senior executives who joined Slattery at Avolon also left the firm in the last 18 months. These include Avolon’s former president and CCO, John Higgins, and Tom Ashe, the lessor’s previous COO. Avolon’s former Head of Risk and Strategy, Dick Forsberg, left in 2019.

Addressing the departures, Cronin highlights that several of the former RBS team are still with Avolon including Paul Geaney, who was appointed CCO in July 2021 and was promoted to President & CCO in July when Avolon announced its leadership transition. Avolon’s head of Asia-Pacific, Simon Hanson, and Avolon’s general counsel, Ed Riley, are also still at the firm. “There's a list of probably 15 or 20 who joined [Avolon] back in the heady days of Summer 2010, or even Spring 2010, that are still with the business today. If you look at the broader management team, it's actually largely made up of people who've been there since almost the start,” points out Cronin.


Strategy: A nimble but steady ship

Cronin acknowledges the aircraft leasing industry is currently experiencing several headwinds including the fears of a possible recession in 2023 and the impact of costlier financing on trading. He argues that higher interest rates are forcing a “period of adjustment” for many buyers, each of whom “are dealing with that in their own way,” but adds that many buyers are taking a more “strategic view of the market for medium and long-term assets”.

Avolon sold two aircraft in Q2 2022 and agreed binding sale agreements for 30 aircraft. The lessor also extended the maturity of its bank revolver, which is now $745 million, from 2024 to 2027.

Cronin insists that Avolon’s strategy continues to be based around the core principles of simply “leasing aircraft and doing it to an exceptionally high standard”.  Avolon’s current fleet stood at 539 aircraft as of June 2022 (its most recent public results) with a further 260 aircraft on order, the bulk of which are A320neo family aircraft (200).

The CEO highlights that a strength of Avolon has been its ability to react to the market, pointing at its opportunistic acquisition of CIT Group and its move into freighter conversions in the second half of 2021. He adds that a core objective moving forward is to retain that “nimbleness”.

"Are there going to be fundamental shifts in strategy? These businesses are like oil tankers. They take a long time to change direction. The great thing about them is that they're so stable. But, in some cases, the downside is they're so stable that it takes time to change them. So, whenever you see leasing companies talk about a different strategy, it tends to be a bite-size, bit-by-bit, multi-year journey. One aspect of our strategy is that we will continue to focus on owning the vast majority of the aircraft that we manage, and that will continue to be a strategic objective,” reflects Cronin.

One area where Avolon has made a splash is the lessor’s move into electric vertical take-off and landing (e-VTOL) Aircraft. In June 2021, the lessor ordered up to 500 VX4 e-VTOLs from Vertical Aerospace, a firm now chaired by Slattery. All 500 units have now been placed and their orderbook is now oversubscribed, with Cronin adding that airline senior-level engagement and interest has been “phenomenal”. “No one's questioning ‘can they fly’. People are questioning how big does the business model get? How do you make money at it? Who's going to be first?”

Cronin believes the order was a strategic win for Avolon. “Really, what we got is first-mover advantage into that electrification of aerospace chain. And that's access to a network and part of the conversations around how that gets scaled into larger aspects of the transportation chain,” Cronin explains. He argues that airlines are the right channel to “commercialise” e-VTOLs given their experience working with regulators in a regulated environment.

Avolon also made waves this summer when it agreed a deal for 20 A330-900neo aircraft with Malaysia Aviation Group (MAG), the parent company of Malaysian Airlines. The transaction comprises 10 A330neos from Avolon’s orderbook and 10 to be acquired from MAG via sale/leaseback. The aircraft will deliver from 2024 onwards and leaves Avolon with just two unplaced A330neos in its orderbook. “What Malaysian wanted was a re-fleeting solution that came with financing,” explains Cronin. He says that it helped that Avolon previously had very little Malaysian exposure and, despite the size of the deal, Malaysian will still only represent 6% or 7% of Avolon’s portfolio.

The Ishka View

The fact that Avolon feels old at 12 years is a reminder of how relatively young many leasing companies are. The lessor has been through a lot in that time, from its IPO in 2014 to its subsequent acquisition by Bohai Leasing in 2015, and Avolon’s subsequent purchase of US lessor CIT.

One key development was rival lessor Orix’s acquisition of a 30% stake in Avolon in 2018. This helped pave the way for Avolon's investment-grade rating immediately before the Covid crisis (see Insight: 'Orix bosses explains Avolon stake acquisition’). Avolon is also interesting because its portfolio composition ranges from new single-aisle aircraft and new orderbook widebodies to e-VTOLS and now freighter conversions.

Avolon’s strategy appears to be focused on leveraging its orderbook for growth and keeping the focus on maintaining its IG rating ensuring cheaper access to financing. Cronin states its present credit revolver facility has mitigated its recent need to access the USD capital markets, which remain in turmoil following a series of rapid successive interest rate hikes.

Avolon's existing orderbook and financing means the business is on a stable footing during a moment of transition for the aviation industry generally as airlines assess the pace of the recovery. It will be interesting to see what Avolon decides to do next. Will it choose to order more widebodies now that it has placed most of its speculative orders? Or boost the number of 737 MAXs on order? Other lessors will also be watching Avolon closely to see how its e-VTOL business plan develops – a new and very different asset type for the aircraft leasing sector.



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