Lessor CEOs: Strengthening lease rate environment as aircraft scarcity continues

A lack of aircraft and inflation escalators is continuing to push up aircraft lease rates, and lease extensions, according to lessor CEOs during their recent Q3 earnings calls.

Large delays persist in the delivery of new aircraft to the market, including to lessors. Air Lease Corporation (ALC) CEO John Plueger was realistic about the length of what lies ahead for OEMs. “We continue to expect supply chain challenges to extend for the next couple of years,” Plueger told analysts, although pointed to sources of optimism on what he called “more timely” Airbus widebody deliveries and the recent resumption of Boeing 787 deliveries.

Even these improvements, though, may not be sufficient to keep pace with demand. AerCap CEO Aengus Kelly spoke of the lessor’s strong belief in widebody demand improvement (see Insight: AerCap Q3 2022: ‘Unique insights’ make lessor bullish on widebody market future), a view echoed by ALC’s Plueger later that day. The ALC CEO pointed to large, unfolding, campaigns by United Airlines and Air India for widebody aircraft as indicators of market appetite for the type – but warned that changes would have to come from the OEMs’ side to match that need.

“We expect both Boeing and Airbus to seek production rate increases, particularly in the 787 and the A350,” commented Plueger. On AerCap’s earnings call, Kelly pointed out that storage rates for 787s are actually lower than Airbus A320neos today, signalling an increased demand for twin-aisles.

Lessors also highlighted that airlines are still seeking lease extensions due to a shortage of current-tech narrowbodies. “As OEM delays persist, lessees continue to express the desire for lease extensions,” commented Aircastle CEO Mike Inglese. “We believe our current tech aircraft continue to comprise a substantial presence in the market, and that will be the case for the foreseeable future,” he added.

FTAI CEO and Chairman Joe Adams confirmed that the lessor was also seeing a large number of requests for lease extensions, driven by the delays. “We're seeing airlines come saying, show me anything you have that in the [737]NG and the [A320]ceo range where I could add capacity in meaningful numbers. So, it's a very, very strong environment,” commented Adams, adding that typically those leases are “five to six years in duration.”

AerCap’s Kelly indicated that the gap had closed between Airbus and Boeing's rival new-tech narrowbodies. “We see parity now on lease rates between the MAX 8 and the 320neo, something of course we hadn't seen up until last few months,” Kelly told the earnings call.

Plueger told ALC’s earnings call that lease rates were reaching, or even exceeding, pre-pandemic levels – with narrowbodies performing the strongest but widebodies “coming up much better." ALC Executive Chairman Steve Hazy, though, pointed out that lease rates on deliveries this year are not necessarily indicative of current rates for new lease negotiations. “Keep in mind that a lot of our widebody and even single-aisle deliveries in 2022 were contracts that we actually entered into prior to the pandemic,” commented Hazy.

 

Engine scarcity

 

Engine delays have been highlighted as being a key factor in low aircraft production rates – though Aengus Kelly pointed out that engine OEMs are prioritising MRO shops over airframe manufacturers to receive what engines there are. Asked whether he agreed with this statement, ALC’s Plueger responded “The short answer is yes, yes, yes.”

“In today's world, everything seems to take a little bit longer than expected. It's either a delay on a part or a delay on a maintenance shop,” commented FTAI's Joe Adams. “Now ultimately, these supply chain disruptions are good for us because we have available equipment and engines other people don’t,” he added, referencing the lessor’s spare engine portfolio.

 

Russian insurance claims drag on

 

The question of Russian leased assets came up in all four earnings calls. Nearly nine months on from the Russian invasion of Ukraine, all CEOs believed aircraft assets in Russia would never be recovered. Aircastle confirmed that it had written off the remaining Russian assets on its books, while ALC and AerCap logged their impairments earlier in the year. “We believe none of our Russian or Russian affiliated aircraft will be returned and this effectively concludes any Russian exposure on our books,” Aircastle CEO Mike Inglese said of the write-off.

ALC, remarkably, had one Boeing 737-8 MAX returned from Russia in early October, which had been in storage since the MAX grounding in 2019. CEO Plueger was keen to point out that this was a one-off occurrence, and was unlikely to be replicated. “I want to be clear that this is a highly idiosyncratic event that resulted in the return of this aircraft and we do not anticipate the return of any of our other aircraft detained in Russia,” Plueger told analysts.

Attention now turns mostly to the problem of insurance pay-outs, something which the sector has been grappling with since the invasion occurred. “It's frustrating for the whole industry in that the insurance companies just refuse to engage,” lamented Joe Adams.

 

The Ishka View

 

Scarcity of aircraft often makes headlines when it comes to improving lease rates, but in many calls analysts asked questions on escalation clauses in lease agreements – something which the CEOs emphasised that they had as standard. Inglese pointed out that increasing leases in line with inflation was not a frictionless process. “There are headwinds that will create tension with the airlines as all their other costs are rising as well in the context of inflation and fuel, etcetera,” commented Inglese, also noting that there was typically a “lag” associated with bringing leases in line with financing costs. “In time, we think those lease rates will reflect the funding costs of the airlines, the banks, and the lessors in a way that will make sense across the value chain,” he added.

In AerCap’s earnings call, Kelly noted that new technology engines were coming off-wing sooner than expected, something he attributed to “teething problems.” Any increase in the need for shop visits will naturally increase the pressure on MRO providers, something which is likely to be passed on to engine OEMs. As Joe Adams pointed out in FTAI’s earnings call, manufacturers are typically on the hook for the “first 10 to 12 years” under maintenance agreements (referencing CFM56 engines specifically). Kelly also noted that “GTFs are coming off a bit faster than the CFMs at the moment,” although emphasised that both engines were facing issues. One airline source speaking to Ishka recently confirmed that GTF engines on their A321neos were experiencing higher than expected maintenance requirements.

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