Naked and stub-leased aircraft in demand as investors navigate ‘extensions boom’

After several years of reduced aircraft trading, lessors and asset managers confirm more aircraft trades have been happening in the last three months – helped by the recovery in aircraft values as airlines look for more aircraft capacity.

Lessors have experienced an ‘extensions boom’ in 2023– a dramatic rise in lease extension requests from airlines due to the reduced number of new aircraft being delivered and the limited supply of serviceable current-tech aircraft available. 

Asset managers state that the demand for aircraft has helped reduce the bid/ ask gap between lessors seeking to trade aircraft. However, other lessors state that while the demand from airlines has helped aircraft sale prices, high-interest rates are still hampering aircraft trades. “I think the volume of secondary market trading has decreased. Demand is up, but…the interest rate environment means that buyers are not necessarily able to price to the seller's expectations,” explains Lisa Lyons, SVP trading at DAE Capital, at the ISTAT conference in London last week.

Multiple lessors have confided they are being more selective when it comes to bidding on assets which is influencing how sellers divide portfolios. “I'm also seeing average portfolio allocation slide a little bit down. Pre-COVID some of the large lessors would bring a 20-aircraft portfolio to market and they say, okay, all or nothing. Now I think it's far more commonplace to have one or twosies portfolio allocations. So, I think that's a marked change from before and I think it goes to the fact that we are all being more disciplined”, reflects Lyons.

 

The appeal of stub-leases and naked aircraft
 

There has been a general improvement in aircraft prices and lease rates in the last 12 months, driven by recovering air traffic combined with a scarcity of aircraft supply. This has been particularly true for current-tech narrowbodies as several airlines have been forced to ground new-tech single-aisle aircraft due to engine performance issues (see Insight: 'Lessors believe GTF issues extend to A220s and E2 Jets').

As a result, there has been more interest from buyers for stub-lease and naked aircraft (i.e. off-lease aircraft). Acquiring an aircraft that can be placed either immediately, or in the near-term is appealing to investors when airlines are desperate to find capacity. This trend has also been driven by investors’ interest in acquiring spare engines, which are also seeing premiums as airlines and lessors face lengthy MRO wait times. Lessors also report that more airlines are looking to buy their aircraft, which is reducing the supply of aircraft into the secondary market.

Simon Goodson, AerFin's CEO, explains that the availability of off-lease is “drying up” quickly as airlines look to extend leases. “That necessarily puts a premium on looking for more innovative ways to get hold of the feedstock. And the logical way for a trader to do that [...] is to start acquiring, assets on stub leases and we're certainly seeing that being a much more competitive space," adds Goodson.

Several lenders appeared more bullish about financing opportunities based on what they can perceive as a pipeline of deals stemming from increased trading activity. Other lenders are much more cautious. They argue that stubbornly high interest rates, which have not declined as some had expected, have left a severe challenge for traders. "There's a lot of aircraft in the market but how many of these are actually trading," muses one lender.

One lawyer states aircraft trades are happening but adds that buyers are seeking to obtain an LOI they can take to financiers and, in some cases, arranging financing at a later date. These factors, as well as general novation fatigue among airlines, appear to be delaying deals. “Yes, there is a pipeline but I am not sure it is all going to close this year. I think a lot of deals may stray into the first quarter of next year,” reflects the lawyer. 

 

The Ishka View

 

The need for aircraft has led to a “parabolic” shift in the ease of remarketing for a surprisingly wide range of aircraft, explains one senior Dublin-based lessor. Lessors confirm they have seen increased demand from airlines from widebodies down to turboprops. “If we had any spare ATRs they would be out the door,” confided one regional aircraft lessor. 

One complaint asset managers had was that despite there being a large number of aircraft supposedly available to buy, very little was actually trading. But one leasing chief reflects that after a "pretty tough" six months things are starting "to pick up" in the secondary market with more immediate opportunities to buy aircraft. More capital appears to be coming into the sector which bodes well for aircraft sellers, and there are rumours of new leasing platforms being created. 

The general recovery in lease rates also appears to have given investors confidence to target a wider range of asset types and vintages. As a result, Ishka spots an increasing stratification among buyers – with different return and asset expectations in what has become quite a fast-changing market. Operators are also negotiating with lessors over how long extensions need to be. The current market conditions are strengthening lessors’ hands when it comes to deciding the length of extensions.

The big challenge facing many airlines is also how to plan for the issues around the GTF engine inspections. Reflecting on the GTF crisis, Cian Dooley, Founding Partner at Airborne Capital, commented on the ISTAT panel: “There isn't a uniform view as to how the next 12 to 24 months are going to roll out. So, it's dynamic, it's going to be interesting and very challenging for operators.”

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