European lessors warn up to 80% of lessees demanding rent holidays

Many European lessors are seeing up to 80% of their airline clients ask for rental holidays, according to leasing sources, as scores of carriers seek to preserve cash.

“80% is the figure other lessors keep telling us,” explains one lessor. “We are roughly at about 75% ourselves but it is probably increasing. We have heard higher from other lessors.”

As Ishka goes to press, Kroll placed approximately $1.4 billion of ABS notes, mostly C series notes, on Watch Downgrade and warned that delinquencies have started to “spike” to nearly 50% in some transactions. The rating agency notes that many ABS portfolios have received requests for rental holidays accounting for “approximately 80% of lease revenue in some transactions”.

The new numbers shared by lessors appear to be an increase from just two weeks ago, when lessors speaking to Ishka reported that between 30% to 40% of their lessees were requesting rental holiday.

Ishka understands that the requests for lease payment deferrals vary from three to six months with at least one airline asking for a year-long rental holiday. Ishka understands that both Wizz Air and Alitalia have asked for lessors to switch their existing leases to new power-by-the-hour (PBH) leasing contracts. Neither airline was available to comment as Ishka went to press.

Lessors are keen to stress that while arrears are building up, as some airlines are not paying their leases, the high number of rental requests does not reflect the actual present cashflow of many lessors, as many airlines continue to pay rent for the time being.

 

Supporting the neediest airlines
 

Lessors speaking with Ishka say they are likely to consider rental holiday requests for three months with some stretching to four. A small minority of lessors have confided that they have granted six-month holidays, and Ishka has heard indirectly that at least one nine-month rental holiday has been granted.

No lessor has admitted to Ishka yet that it is even entertaining the idea of a 12-month rental holiday. One lessor described the year-long request as “completely unreasonable” and a “purely opportunistic” demand, in the words of one Dublin-based marketer.

However, the number of requests is forcing lessors to debate which airlines they can afford to help. “Right now, we are just trying to put a tourniquet on it, it’s just crazy,” adds one lessor. “Who we will help and who we won’t is being discussed by HQ and the marketing guys are all fighting for their airlines.”

Most lessors believe that it is airlines with weaker business models or insufficient cash reserves to see them through the crisis that are more likely to receive rental holidays.

Ishka understands that among European lessors relatively few rent deferrals have actually been agreed yet. Most lessors are asking for lease extensions from their airlines in exchange for rental holidays often for at least a year, and more likely two, but lessors complain that airlines are reluctant to discuss extensions.

“Airlines are just focused on short-term liquidity and cash. They don’t want to talk extensions because they don’t want present further liabilities to their board,” explains one lessor. Others state granting rental holidays also relies on negotiating terms with banks, as many lessors have secured financing specifically linked to the leases, which can slow down the decision-making process.
 

The Ishka View

It is likely that many rent deferral requests could translate into arrears very quickly, as cash-strapped airlines will be tempted or forced not to pay rents. Rent holidays make more sense if lessors can secure extensions but many airlines loathe to discuss even these right now. Some lessors with more funding in place are more capable of granting rental holidays, while others may need to seek the permission of banks to grant them. All the lessors are watching to see what state support, if any, will be granted to their airline clients, a factor which will likely determine who really needs rent deferrals.

Lessors are desperately trying to avoid having to repossess any aircraft, and Ishka suspects that lessors will be most keen to support widebody operators, and even agree reduced rents, rather than try to repossess aircraft in the current market environment. If the wave of rental holiday requests does crystallise into arrears, then airlines and lessors will be discussing payment restructurings with banks. Many lessors may have to work together to help the weaker airlines survive. The only hope is that the crisis abates quickly enough to allow airlines to generate some revenue by the end of the summer before some of the smaller lessors begin to worry about their own funding needs.

 

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