Public lessors Q3: Airline rent deferral demands dip but could return as winter approaches

Three publicly traded lessors, Air Lease Corporation (ALC), AerCap and Fly Leasing (Fly) granted $45 million in rent deferrals in total to their lessees in Q3, just 10% of the amount booked in Q1 2020, as the pace of airline rental forbearance requests slowed down since the start of the year. However, ALC's Steven Udvar-Házy warned that this trend could reverse as airlines might require further support from their lessors through the winter.

ALC, AerCap and Fly initially booked $500 million in deferrals in Q1 2020. This rose by $200 million in Q2 and, finally, by just a quarter of Q2’s level – $45 million – in Q3 (ALC: $201.6 million; AerCap: $485 million; Fly: $60 million) (see Insights: ‘Public lessors Q1: Rent deferrals top $500 million’ and ‘Public lessors Q2: Delayed rents top $700m but requests have ‘peaked’’). In total the three lessors have reported $745 million in rental deferral for 2020 so far.

This quarter also saw two of the listed lessors report losses, with AerCap posting a record $850 million net loss and Fly taking its first net loss at $8.3 million in three years. All three lessors also moved lessees onto cash accounting basis as the capacity of some airlines to meet their lease obligations was called into question. This resulted in a $25 million impact on revenues for ALC on 6.6% of its fleet; a $100 million impact on 15% on lessees for AerCap; and $22.8 million for Fly Leasing – a total of $147.8 million.

Ishka summarises the key talking points in lessors’ Q3 earnings calls, including how Covid-19 has shaped the aircraft leasing space, aircraft values cuts and MAX cancellations.

 

OEMs: MAX cancellations and ‘fictional’ backlogs

 

Public lessors, with their airline customers, have worked to delay OEM deliveries and cut related payments as a result. Correspondingly, leasing chiefs welcomed production cuts from both Boeing and Airbus that will limit the pool of available aircraft going forward. For Boeing, the reduced demand for new aircraft as passenger traffic largely disappeared due to Covid-19 travel restrictions has been a major blow following the woes of its 737 MAX programme. The FAA recertified Boeing’s 737 MAX last week after two fatal crashes saw the aircraft grounded for 20 months. This did not come soon enough for many customers, however, with AerCap and ALC announcing 43 MAX cancellations between them in Q2 and Q3 2020.

 

Steven Udvar-Házy, ALC, Chairman. “For the last two years we felt production rates were way too optimistic and overblown. And we felt that a certain part of the backlogs at both Boeing and Airbus were fictional rather than realistic. And I think it took the pandemic to come to that realization that the backlog had some weaknesses, and that has resulted in cancellations and deferments. But I think that with the cutbacks and deliveries and production rates across the whole spectrum […] we are creeping back towards equilibrium, but at a very slow pace. And we at Air Lease hope that by the spring and midyear [20]22, we're going to be back close to equilibrium.”

Peter Juhas, AerCap, CFO. “Working with the OEMs, we've reduced our capex for 2020 and 2021 by almost $6 billion, which is a 65% reduction from where we started the year […] We've rescheduled deliveries of over 90 aircraft from 2020 and 2021 into later years, generally two to three years later than the original delivery date.”

John Plueger, ALC, CEO, ALC “We learned today that the EU will, in fact, move forward on imposing a 15% tariff on imports of all Boeing aircraft to begin tomorrow. This reciprocal tariff imposed by the EU on the importation of Boeing aircraft is a threat to MAX deployment into Europe, a key MAX and 787 marketplace.”

John Plueger, ALC, CEO. “Each [MAX cancellation] has been considered on a case-by-case basis, and that will continue because we do have additional MAXs that will go beyond their 12-month point of past the original delivery date and therefore we have the ability to cancel, so it's hard to say how much will be further cancelled.”

 

Opposite fates: Widebodies and freighters

 

The Covid-19 pandemic has accelerated the distress of current generation widebody aircraft such as the A330 and 777. In Q3, AerCap took a $915 million impairment charge “primarily” related to these current generation widebodies based on new expectations of long-term cash flows (see Insight: ‘AerCap Q3: Record loss as lessor takes $915m widebody impairment’). Elsewhere, ALC singled out 787-9s and A350-900s as the top performing widebodies aircraft, while lessors agreed that freighter aircraft remained a short-term boost during the pandemic. This did not, however, encourage them make long-term decisions that would pivot their fleets more towards cargo aircraft.

 

John Plueger, ALC, CEO. “The freighter market has really helped pull a lot of airlines through, particularly the larger airlines that do drive a big part of their revenue from freight. Longer term, the freighter market, though, has been much more volatile and has been dedicated primarily to older used aircraft […] That still today is a market for older aircraft, both single-aisle and twin aisle.”

Colm Barrington, Fly Leasing, CEO. “Will that [freighter] trend last for good? I don't know. But we will certainly look at opportunities. But I don't think you will see Fly taking on a significant portion of its portfolio in freighter aircraft in the future.”

Peter Juhas, AerCap, CFO. “[Covid-19] results in lower lease rents today and for most aircraft types – almost all – you see a recovery in the future. For those A330s and 777s, we believe that there's a permanent reduction there.”

 

A bright future for leasing?

 

The three leasing chiefs concurred that the Covid-19 crisis has strengthened the business case for lessors as airlines, loaded with fresh debt and newly encumbered fleets, shy away from taking further aircraft onto their balance sheets. Some, however, cautioned that this would only be the case for established leasing platforms, with some of the new aircraft investors that entered the market in recent years now backing away.

 

Colm Barrington, Fly Leasing, CEO. “[Airline] balance sheets will be a bit bloated with debt, so I do think there will be prospects again in the medium-to-long term for airlines taking on more leased aircraft rather than going back to the financial markets […] Medium to long term I can't see any reason why airlines should move away from the sort of [current] 40-odd-percent of their aircraft of their feet that are leased and particularly as we’ve seen quite a lot of retirements, particularly of the bigger aircraft, A380s and the 747s and so on.”

Steven Udvar-Házy, ALC, Chairman. “The top aircraft lessors have significantly stronger liquidity profile and higher credit ratings than even the airlines with the best credit ratings. Air Lease's cost of funding is approximately 3%, with the healthiest airlines cost of funding significantly higher, and in many cases, more than double than ours. And in working with governments and banks to obtain financing, airlines have mortgaged their most valuable assets, which has resulted in many depleting their borrowing capacity in the future.”

Aengus Kelly, AerCap, CEO. “The focus of airlines […] will be to delever the balance sheet and, in particular, unwind themselves from government debt. Also, I believe there will be fewer competitors for us. I think the tourist capital that came into the sector […] that believe it was a spread business, they are leaving the sector […] I think it's fair to say that those people who have come into the sector looking for yield over the last five years or six years and thought […] they didn't need a full-scale operating platform to run the business have found that that is not a valid assumption.”

Aengus Kelly, AerCap, CEO. “How quickly [will we] get to 50% [of the global fleet leased]? [We] will see it in the next three years. I'll say the next 36 months we'll see that because airlines also realize the massive value that leasing produces in terms of optionality for an airline fleet management strategy.”

 

The Ishka View

 

Public lessors exalted the long-term benefits of Covid-19 to the aircraft leasing business while racking in record losses: both AerCap and Fly Leasing dipped into losses in Q3. But the public lessors have been active in engaging with banks and investors to raise record levels of liquidity which will help them weather what continues to be a highly volatile time for commercial aviation. AerCap reported $11 billion in total sources of liquidity as of 30^th September, while rival ALC has raised $7.2 billion. The Q3 results also demonstrated the knock-on effect of floundering airlines on some lessors‘ revenue streams. Lessors have helped shoulder some of the immediate costs for airlines by offering deferred rent, but it will be interesting to see how much support airline may need, or demand, during what is expected to be a largely disappointing winter for air passenger traffic.

Analysts on the call were particularly interested in Norwegian Air Shuttle (see Insight: ‘Aircraft lessors end up with a majority stake in Norwegian’), which last week entered examinership with the Irish courts (see Insight: ‘On Watch: Norwegian enters examinership, Korean to buy Asiana stake’) and is likely to leave lessors with a significant remarketing challenge. Ishka expects more airline restructurings and bankruptcies in the next three months as passenger traffic is likely to continue to be tepid. Ishka expects lessors are bracing themselves for what looks set to be a tough winter season.

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