12/10/2020

Lessors worry airlines will impose ‘abusive’ PBH contracts

Lessors worry airlines will impose ‘abusive’ PBH contracts

Several carriers have asked lessors in the last few weeks to take power-by-the-hour leasing agreements (PBH) as a means to reduce costs in preparation for a tough winter for passenger traffic.

Aircraft leasing sources tell Ishka that Lion Air, Malaysian Airlines (MAS) and Azul are all in negotiations with their respective lessors to change their current leasing agreements to PBH contracts.

Indonesia’s Lion Air Group has asked lessors to move its current leases to PBH for two years and has threatened not to pay leases for those lessors that do not comply, confirm several Irish leasing sources. The company has over 300 aircraft across different subsidiaries and has actively used lessors via sale/leasebacks to fund aircraft deliveries. Lion Air Group – which includes subsidiaries Thai Lion Air, Malindo Air, Wings Air and Batik Air – has 102 inactive leased aircraft as of 1st October 2020, according to CAPA Fleets. (see Insight: On Watch: Lion Air demands PBH contracts, Garuda hit by lessor lawsuits).

Lion Air is reported to have applied for a new air operator certificate (AOC) from the Indonesian transport ministry, according to Bloomberg. This is a worrying signal, confide lessors. One restructuring method other airlines have used in the past to reduce their fleets or restructure their leased fleets is to create a new airline company to transfer leases and leave unwanted aircraft in the old company, which is then allowed to go bankrupt. There is no clear indication that Lion Air might actually choose to do this but the mere fact that the airline is applying for an AOC has made some lessors nervous. Lion Air did not respond to Ishka’s queries on this topic.

A number of airlines that are already undergoing forms of restructuring have also asked lessors to accept PBH schemes. Aeroméxico, Avianca and Norwegian Air Shuttle (NAS) have all asked their lessors to impose some form of PBH on their current leases (see Insight: ‘On Watch: Aeromexico pushes 75% of fleet onto power-by-the-hour contracts’).

But aircraft lessors state that more airlines – many of which do not necessarily expect to immediately restructure their leases or current financing – are approaching them with PBH requests. MAS is rumoured to have approached lessors to substitute their existing leasing contracts to a PBH agreement which will pay out a maximum of 40% or 60% of the original leasing payments. Ishka understands that these discounts will then be permanently applied to the remaining lease term after the PBH period expires. Similarly, Azul is also rumoured to have approached lessors to ask for some form of PBH on its current leasing contracts. Lion Air, MAS and Azul either did not respond or chose not to comment when contacted by Ishka. 

Lessors speaking with Ishka state there have been more requests coming in. One adds that bilateral PBH agreements like this are open to “abuse”, as agreements can vary so widely between lessors. PBH deals agreed under Chapter 11 or formal restructurings processes more generally achieve a fleet-wide average or fleet-wide utilisation rate, say lessors.

“But you can have the situation where two leased aircraft are under PBH but if one aircraft has a higher PBH lease rate, then it may not see any flight hours,” one source said. “There is a lot of worry from the lessors about abuse on this. It is early days; there is little precedent for this. Some people are agreeing to it where there is absolutely no alternative. But, going forward, I can’t see most lessors agreeing to long-term PBH, just because of the value destruction and the potential for abuse.”

 

The switch from rent holidays to PBH contracts
 

At the start of the crisis, a large number of airlines (nearly 80% or 90% of many lessors’ books) asked for a rental deferrals from their lessors in order to reduce costs. Most lessors obliged, with many offering some form of rental forbearance either in the shape of three- or six-month rental reductions. These rental holidays typically offered a discounted leases for a limited period which could range from anywhere between 0% to 60%, according to lessors surveyed by Ishka. Some lessors even offered 100% rental holidays, but these were less common. Lessors confide that the size of the discount often depended on the bank financing behind the lease, with lessors often insisting on enough rent to ensure they could keep current with interest payments on their underlying bank loans.

But lessor sources and lawyers indicate that, after a disappointing summer of passenger travel, airlines are contemplating more permanent solutions for their fleet. One aviation lawyer confides that airlines are starting to believe that simply getting a further three-month rental holiday may not necessarily be enough, as they seek to minimise costs further or consider fleet reductions. Because of the current lack of a secondary market for leased aircraft, airlines have unusually strong bargaining power to extract concessions from their lessors. “No one wants their aircraft back,” confirms one banker. “Neither banks nor lessors.” As a result, some carriers have approached lessors for potential PBH contracts – and they might get them too, believes one Irish leasing executive, especially for twin-aisle aircraft.  

Lessors will choose which airlines they want to support based on their relationships and their portfolios. But even ignoring credit quality, one lessor argues, certain assets are already “in pain.” “Everything is hurting right now, but certain assets are going to be hurting more. If you work on the basis that regionals, then narrowbodies, and then widebodies are likely to come back in that order,  then the aircraft that are likely to hurt the most are widebodies that are likely to be retired because people will move to better quality equipment if they can – unless they can get a deal which is particularly interesting.”

Owners of A330s that are coming off lease or have been returned are facing “really difficult decisions,” adds the lessor. Airlines forecasting a slow recovery are assessing how to reduce their twin-aisle aircraft. If an airline has several widebodies with leases expiring, lessors could find they are in competition with other lessors to ensure their aircraft remains with the airline. The result is a race between lessors as to who can get a signature first and offer the most competitive solution. 

“Even if it just covers their cost, the alternative is $20,000 a month to park the thing and do nothing plus reconfiguration costs. You are kicking the can down the road, but hopefully down the road far enough when the secondary market recovers. I think new gen widebodies will do better but no widebody will be immune from this unless they are with a credit that is strong and they have leases which stretch out for a decent tenor,” adds the lessor.

 

The Ishka View
 

Like IATA, airlines are becoming more bearish in their view of how quickly this crisis will subside and are therefore placing pressure on lessors to come up with cost-saving solutions to help them survive. Several airlines are now coming to the end of six-month rent deferral periods. The current conversation has appeared to have moved beyond simply rental deferrals to more permanent fleet restructuring solutions. The result is more enquiries about power by the hour contracts (PBH) and not just from airlines facing an immediate bankruptcy risk. So many Latin carriers are pushing for PBH through restructuring processes that it is not surprising that other carriers in the region, like Azul, are also contemplating how to obtain a similar PBH deal, or else risk facing a competitive disadvantage.

What is interesting is how PBH contracts are becoming more prevalent among certain asset types. There were weaknesses in the twin-aisle sector before the pandemic struck. Ishka heard of at least one A330 that was rumoured to have been put on a PBH agreement prior to Covid-19. However, Covid-19 has impacted all aircraft assets which partly obscures the severity on certain assets. Ultimately, lessors will do their best to resist power by the hour agreements with airlines. The switch to a PBH contract could cost lessors millions in lost revenues, but with a no secondary market to place aircraft, their bargaining power is limited. 



 

 

Comments:

Sign in to post a comment. If you don't have an account register here.