in Lessors & Asset managers , ESG & Regulation
Tuesday 1 November 2016
OEMs offer a helping hand
The major airframe manufacturers will always, if they can, lend a helping hand to their customers, when the need arises. They work hard and innovatively to fill holes and bridge gaps in delivery and production slots, to ensure financial and engineering processes are as efficient as possible, and that customers ‘stay with the programme’. Unsurprisingly these activities tend to increase when markets start to stress, and it may be no surprise that the tempo has stepped up a little. More often than not these creative solutions assist problems the OEMs may have with their own production gaps. In helping its customers, the OEM also helps its own business lines. Win-win is the order of the day.
United set the ball rolling in 2015 when it switched part of its 787-9 order for ten aircraft into 777-300ERs. Boeing needed 777 sales to support production rates, and there were enough customers ready to take over the 787 delivery slots. Added to this, it allows United to accelerate the retirement of its remaining 747-400s.
The first consistent indications that markets were beginning to stress came back in mid-2016, when Delta deferred some of its order backlog by up to two years, Southwest deferred 67 of its Boeing 737 MAX aircraft by up to six years, and American Airlines deferred its Airbus A350 deliveries by two years. Each event helped the airline reduce near term capital expenditure and manage incoming capacity. The OEMs were amenable to these deferrals from big, key customers, in some cases they were able to accelerate deliveries to other customers who were in a more positive growth mode.
In terms of innovation, October 2016 has been a case in point. A few recent transactions have demonstrated Boeing’s efforts to not only support its airline customers, but to also support its current production rates and product lines as it transitions to its ‘next generation’ aircraft. While not all were large in volume, they were significant in their intent.
Intrepid, Boeing and the Operator - a win win win
Lessor Intrepid Aviation has restructured an agreement it held with Boeing for six 777-300ERs. The first two aircraft are scheduled to deliver this month and in December 2016 to Philippine Airlines. Another two have been rescheduled for delivery from late 2017/early 2018 to the first half of 2019. The final two have been “cancelled”, and instead Intrepid will take two 747-8Fs from Boeing, delivering in 2017 to a current 747-8F operator on long leases.
In Intrepid’s case, the agreement reduces its near term exposure to 777s, with two being cancelled. The rescheduling of two other 777 deliveries to 2019 provides Intrepid with an extended lead-time to place them with operators. In return the deal introduces the lessor to a new aircraft type - the 747-8F. This presents its own challenges for Intrepid, but it comes with a very long ‘ready-made’ lease to a long standing Boeing customer, thus mitigating the asset risk and producing an early rental stream.
In Boeing’s case, the agreement resolves financing for two 747-8Fs and gives Boeing back some 777 slots that can help support other sales campaigns.
In the case of the operator, which is likely to be either Air Bridge Cargo or Nippon Cargo Airlines (both have deliveries scheduled in 2017, and some of Air Bridge Cargo’s previous 747-8Fs were financed by Boeing through Boeing Capital) the deal provides them with ‘ready made’ financing for the aircraft they have on order.
All three parties come out of this arrangement in a better position than they were in before.
Qatar double dips into 777 and 787
The announcement in October of a major order from Qatar also shows how solutions can be crafted. Qatar Airways has ordered 30 Boeing 787-9s and 10 777-300ERs; some of which are the firming of existing options. Sales of the current 777 model have been slow, pending the transition to its successor model the 777X, and Boeing has been looking for customers to maintain as strong a production rate as possible in the interim. It had been working towards increasing the 787 production rate from 12 to 14 per month, however, this is rather unlikely to happen.
For Boeing, the joint sale of 777s and 787s clearly helps both causes. Both lines needed new sales to support production rates; although intriguingly the actual delivery schedule wasn’t mentioned during the announcement. A single deal may not be able to prevent production rate cuts, but they will dampen the impact, leading to a soft, rather than hard, landing. For Qatar, one would anticipate a very good deal has been struck, with very attractive purchase terms offered to take both models. At current appraised market values (let’s say an approx value of $143 million for a 777-300ER and $135 million for a 787-9) the Qatar deal for firm orders would be valued at around $5.5 billion.
A third angle to this deal is the additional Letter of Intent from Qatar to order up to 60 737 MAX 8s. Qatar has been vocal in its frustration with the problems experienced by the A320neo it has ordered from Airbus, and has already cancelled (read refused to take delivery of) 3 of the 50 aircraft it has on order. The MAX 8 may only be an insurance policy against further issues with the A320neo, whose problems now appear to be resolved. However it does make it clear to Airbus that Qatar is expecting better results, and that Boeing is waiting in the wings.
A helping hand for Monarch
The UK-based carrier finally announced in October that it had received a significant financial injection from its majority shareholder Greybull Capital.
The airline’s recent financial predicament had called into question its 2014 order for 30 737 MAX 8s (approx. value of $1.55 billion), plus a further 15 options, the first of which was scheduled for delivery in 2018. This uncertainty will have created difficulties in arranging financing. Although not specifically stated, it appears that Boeing has played a role in supporting the arrangement of sale and leasebacks of the order positions with a third party, as the carrier notes it “had Boeing’s cooperation around restructuring certain aspects of our purchase agreement.”
In Monarch’s case, Ishka anticipates the refinancing eases the near term financial pressures on the airline. While the aircraft may well have become subject to sale-leasebacks on delivery (as is typical these days), this early adoption is likely to provide more immediate financial support.
In Boeing’s case, Monarch’s MAX 8 order was strategically important, not just in terms of volume, and also because it is a hard won order that is destined to replace, what is today, an all-Airbus A320/A321 fleet at Monarch.
The Ishka View
The above transactions clearly indicate that OEMs (we can assume that Airbus is as attentive as Boeing in this regard) are ready to innovate and work with their client base to keep the production lines on track. But it also shows that the market is becoming stressed, and another cautionary ‘market signal’ box has been ticked on the checklist as we monitor all the aviation cycles. Ishka anticipates the OEMs are only just starting to ramp up their innovation levels.
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