Asset managers survey: Expected returns tighten for mid-life widebodies

Asset managers surveyed by Ishka state expected unlevered returns have tightened for both mid-life and new-tech aircraft since Ishka’s last survey, conducted in October 2023 (see Insight: ‘Returns drop for current and new-tech widebodies, but investors insist on higher ‘floor’ for narrowbodies’).

Projected returns tend to reduce in relation to demand as sellers are able to demand higher prices for aircraft, but can increase if lease rates and residual values rise. In this case, Ishka believes the tightening of returns is due to more competition from potential buyers, despite lease rates, and assumed residual values, having risen  for many current-gen aircraft assets. 

Unlevered returns for mid-life (eight to 12-year-old) widebodies (A330-300s and 777-300ERs) saw a 127-basis-point contraction, the largest in Ishka’s latest survey, as increased demand for aircraft, and more interest from buyers, was changing lessor pricing expectations.

Expected returns for mid-life narrowbodies also tightened by 67 basis points over the same period driven by mid-life A320ceos and A321ceos in particular. However, mid-life 737NGs, which were already relatively scarce have not seen returns tighten.

 Returns for young-current gen narrowbodies (A320ceo, A321ceo, and 737NGs) also saw a sizeable contraction of roughly 72 basis points over the same period.

One trader, speaking to Ishka, confirmed there had been more competition and interest among buyers for current-gen assets “which are pretty much the only thing trading these days,” given return hurdles for most buyers. The trader confirmed there had a been a slight tightening for most young and mid-life aircraft assets highlighting that more airlines were looking to acquire aircraft in some cases directly from lessors. 

Ishka notes there has been a slight widening of return expectations on end-of-life assets for both narrowbodies and widebodies (15-year plus). Ishka attributes this to various factors, including a smaller pool of potential buyers, the variance of maintenance conditions of older assets, and the array of credits.

The Ishka View

A lot has happened in the last six months. Ishka’s asset managers’ survey shows a slight tightening across the board regarding buyer’s unlevered return expectations for aircraft assets since the last survey conducted in September and October 2023, which occurred when traders were finally starting to have some success in executing trades. 

Since the end of last year Ishka notes that the cost of debt has tightened for many lessors, but the sheer demand for assets has driven competition for more mid-life aircraft assets among airline buyers. This appears to have particularly affected some of the estimated returns for mid-life widebodies which saw the largest contractions in the latest survey. Arguably, mid-life widebodies were some of the last aircraft assets to recover from pandemic lows. Lessor pricing models appear to have adjusted to the reality of more demand for these aircraft types. 

Want to be included in the next returns survey? Please email Dickon Harris (dickon@ishkaglobal.com).

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