Lease rate factors drop in latest round of SLB bidding

Fierce competition in the sale/leaseback (SLB) market from lessors looking to acquire new-technology aircraft has seen lease rate factor (LRF) bids drop to the low 0.6s in the latest round of bidding on some RFPs, sources tell Ishka.

Last month, Ishka reported on a number of deals that closed between Q4 2022 and Q1 2023 where LRFs on narrowbody SLBs with good credits were broadly in the mid-0.6s. However, lessors confide that strong competition and pressure from the JOLCO market has dropped bids on some RFPs to the low-0.6s. Some RFPs that are currently in the latter stages of the bidding process include:

IAG is rumoured to be in the market with an RFP that includes two Airbus A350-1000s and two Boeing 787-10s (all for British Airways), as well as five Airbus A320neos and an A321neo (for Iberia and Aer Lingus), all delivering in H2 2023. Ishka understands IAG has advised purchase prices of $177 million for the A350-1000, $51 million for the A320neo, and $57 million for the A321neo. Sources indicate that from the second round of bidding, lease rate factors for the A350-1000 could end in the high 0.6s, with the narrowbody pricing in the mid-0.5s. However, sources note that IAG has packaged the widebodies and narrowbodies together as opposed to single aircraft deals which has impacted lease rate factor bids.

Wizz Air is said to have an RFP in the market for 15 Airbus A321neos with advised purchase prices in the $63 million – $64 million range and a requested lease term of nine years. Ishka understands the airline is looking at multiple financing options for the aircraft delivering in H1 2024. Sources advise that LRFs on some of the aircraft could have a floor as low as around 0.61 based on the second round of bids, as Wizz Air looks at JOLCOs for some of the aircraft.

TUI is rumoured to be marketing an RFP consisting of seven Boeing 737 MAX 8s with advised purchase prices of around $49 million. Ishka understands TUI is also looking at multiple financing options, including JOLCOs, for the aircraft delivering in Q4 2023, Q1 2024, and Q2 2024. Sources note the first round of bidding closed at the end of March and indicate the second round has seen bids drop to the low-0.6s, with speculation that the deal could be agreed at a LRF of around 0.6.

IAG, Wizz Air, and TUI did not respond to Ishka’s request for comment.

Ishka understands that since the first quarter of the year, multiple other carriers have also issued RFPs in the SLB market. This includes Air France, airBaltic, and Croatia Airlines for Airbus A220-300 aircraft, and Air India, United Airlines, American Airlines, Ethiopian Airlines, and Akasa Air for Boeing 737 MAXs. For more detail on RFPs issued and closed over the last six months, refer to Ishka’s latest sale/leaseback data sheet.

Note: Ishka understands that some of the RFPs listed may be in the process of closing at the time of publishing.

 

The Ishka View

 

Rising interest rates pushed lease rate factors up on new-tech narrowbody sale/leaseback RFPs broadly from the 0.5s in 2021 and the first half of 2022 to the 0.6s over the last 10 months – with the majority of good credit deals agreed around the mid-0.6 mark between Q4 2022 and Q1 2023. However, sources tell Ishka high competition for SLBs has been the main driver that has caused bids drop to the low-0.6s. In the case of TUI and Wizz, Ishka understands both carriers have been looking at the JOLCO market to finance some of their upcoming deliveries, and sources note their ability to obtain cheaper rates by doing JOLCOs has put pressure on operating lease bidders to drop their bids. Interest rates stabilising have also had a slight impact on helping lessors feel more comfortable in dropping their bids, according to sources. It remains to be seen how far LRFs could fall, with one lessor speculating whether they could drop back into the 0.5s due to the aggression of some bidders in the market.

However, it is important to note the difficulty in looking solely at lease rate factors without understanding the full terms and economics of the deal. Prices and lease lengths are big influences on LRFs, but other factors including interest rate assumptions, fixed or floating rates, and the value of security deposits also have a significant impact. Airline-lessor relationships, multiple aircraft packaged deals (such as in IAG’s case), or lease extensions/placements related to other aircraft also come into play in some of these deals as potential components that could influence the final lease rate factor.

 

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