AerCap & Aircraft Leasing | In Practise

AerCap & Aircraft Leasing

Former VP, Marketing and Sales at AerCap

Why is this interview interesting?

  • Outlook on the potential oversupply in narrowbody and widebody markets
  • Potential impact on residual values and aircraft lease rates
  • How airlines will be looking at managing fleets post-COVID
  • Relative attractiveness of AerCap versus Air Lease's fleet
  • Potential long-run impact on the economics of aircraft leasing

Executive Bio

Atanu Baruah

Former VP, Marketing and Sales at AerCap

Atanu has over 30 years experience in aerospace and 20 years in the aircraft leasing business. He joined AerCap in 2007 as the VP of Marketing and Sales in Asia where he was responsible for placing aircraft from the portfolio in Asia and the Middle East. Atanu left AerCap in 2015 to join Veling, a leading European aircraft leasing company, and he also spent over a year as Head of Fleet Strategy at Etihad Airways in 2016. Atanu spent 17 years at BAE systems and 6 years as a Sales Director at Airbus before entering aircraft leasing. Read more

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Interview Transcript

It’s a pleasure to have you with us today. I think a good place to start would be comparing the challenge that lessors have today, versus 2008 or 9/11, for example. How would you compare the different crises?

Let’s start with 9/11 and then we can go onto 2008. 9/11 was a shock, but it was a sudden shock that nobody anticipated. 9/11 came out of the blue; there is no relative measure. It didn’t affect everybody; it affected a few people. It affected the States quite badly. It affected the Middle East, to a certain extent. But if you compare it to what’s happening now, this is more worldwide. Everybody is affected. There is no relative comparison, because 9/11 happened, it was a shock, somebody trying to do nasty stuff. Whereas here, what we have is a more general issue for everybody. From what I’ve read and seen, it can affect anybody and everybody.

The financial crisis was slightly different, in 2008, because it was purely to do with money. Money had run out. It wasn’t to do with people being affected, personally. It’s difficult to compare the 2008 to the crisis now, because the crisis now is that it’s everybody that is affected, in a very, very bad way. The 2008 financial crisis affected, mostly, the money-bearers. So the hedge funds and the banks were affected and it didn’t carry on to individuals. Whereas now, the situation that we’re in currently, has been going on for too long and it’s affecting every single business. This is much more widespread than either of the two previous crises.

What impact does that have on the lessors, specifically, around their book value and also, the future allocation of aircraft, in the industry?

I looked at five share prices, this morning, of different lessors, because I have a slight interest in them. They are taking a huge hit, simply because they can’t take delivery of aircraft or place aircraft. Nobody wants the aircraft, because they can’t use them. If you went to British Airways today and said, look, can you take delivery of the latest financed aircraft, they would say, no. They would say no, because they can’t take delivery and they can’t make use of the aircraft. That applies to every single operator. There are no takers for these aircraft and everybody is defending themselves by saying, we can’t take delivery. So the lessor’s aircraft that should have been placed have not been placed, at the moment. They are having to park them elsewhere and find an alternative solution. Hopefully, by the end of the year or next year, they will find a solution for those aircraft, whether it’s with the current operators or with a different one. Fundamentally, the lessor aircraft are not being placed.

How do you think about residual value for aircraft today, when there is such little demand?

They’ve fallen quite significantly. If we’re trying to do a trade of an aircraft, of the most popular spec, whether it’s a 321 – we have to forget the MAX, because there are no trades, as such, at the moment, for the MAX – but for the 800s, there is still a market. They are still trading but the values and the lease rates have dropped quite significantly. I could go ahead today and sign a lease rate for what should have been $380,000 to $400,000, for a new 737 or 320, 321 and we’re down at the $250,000 rates. There are people who will sign up for that sort of value. The values have gone down, quite significantly. Whether it’s the asset value or the current lease rate, everybody is thinking short term.

These are new tech aircraft? The A320s, A321s, that have dropped that much?

Yes. The new aircraft, I would say, have dropped by up to 30% in their value, for the lease rates. The second-hand market is very similar. You can pick up a 10-year-old 320 or 73-800 now, for a lease rate that’s closer, with the numbers starting at two something, simply because there are no takers for these aircraft, at the moment.

What about the older tech? Are they going to scrap?

Basically, yes. If you look at something like a A380 or a B747, the closest home for them is not about placement in the market, anymore, at any lease rate. They are going to Spain, where they are being parked up, because people don’t know anything different. You’d value the aircraft on the engine at this stage in life. If you had a half-life engine, you’d probably value the aircraft at a value, which is much more than what you would get in a normal market, if you didn’t have an engine that’s run out. But even if you have a half-life engine left in your aircraft, right now, there isn’t the demand for it. There are no takers for them. I can give you an example. Emirates are giving aircraft back to their lessors, with brand-new refurbished engines, because they have the capability to do so.

Let’s take the A321 example, with lease rates down 30%. What’s your view on how the lease rate can evolve, over the next 18 to 24 months, given how tight the narrow-body market is and the outlook on demand?

We talked about 2008 earlier and we mentioned 9/11. I think there will be a comeback. There is a huge order backlog for Airbus. They’ve got 5,000 aircraft still on order. The majority are single-aisle aircraft. Even if you paid today, you couldn’t get one till next year, anyway. It’s bound to rebound; it’s going to come back again. But it’s going to take a while; just a big longer than you would normally expect. It’s not a three-month blip. It will be this time next year, maybe in the summer of next year, that we will actually get back to when the numbers were more realistic, as opposed to the numbers that we talk about right now.

A lot of leasing companies are holding back, rather than doing anything at all, because they can’t afford to just have a fireside sale and lease the aircraft out. That’s not what they’re doing, anymore. They’re holding back and waiting to see how the market improves and, I suspect, it’s going to be this time next year. 12 months from now, we can look at aircraft and the single-aisle aircraft will recover and you will get the same sort of revenue that you used to get, at the beginning of the crisis.

Looking, more specifically, at the lease rate and that negotiation between the airline and the lessor, AerCap have recently come out and said that they are going to defer and give the airlines rent breaks. Why would the lease rate bounce back so quickly, in even 12 months’ time?

The majority of the lessors that I’m having a discussion with, they’ve deferred their rentals for between three and six months. The ones that have done it for three months, will do it for another three months after the next period. When we get to the middle of the summer, they’re going to have to do the same thing again. So we’re looking at an average of six months. What they want to do is, they want to preserve the leases, which is more important for them. If it’s a bit of short-term suffering, it gets them to the next stage and it’s a question of preserving that, so the lease is preserved. Whether it’s delivery from Airbus or Boeing or whether it’s a lease from an aircraft lessor, what’s more important is that they preserve the leases. If it means a little bit of short-term pain, that short-term pain is anything between three and six months. That’s the general guidance that you have, from the lessors.

Would they recoup the rent that is being deferred, over the lifetime of the lease?

What some of them have done – and I wouldn’t say everybody – is that they’ve said, look, we’ll extend the lease. What we need is lease extensions. Can you keep the aircraft for a bit beyond what their current lease term was meant to be? The general guidance is, yes, we don’t like doing it, but we can defer the rental for between three and six months, but what we need in return is, if things return to normal by next year, then what we would appreciate is that you keep the aircraft for a bit longer.

Some of the others, what they are doing is, some of the older aircraft, they are putting into a maintenance program and they are looking at how they can put the engines through the shop, put the landing gear, the APUs, through the shops, so that they get some benefit out of it, instead of nothing.

In what scenario do you see a large write-down, to the books of the lessors, the book value of the aircraft?

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AerCap & Aircraft Leasing

May 14, 2020

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