AerCap and Residual Values

If we just take AerCap’s fleet, for example. I think they’ve got 37 billion of assets, they claim that, roughly, it’s 70% narrow-body, 30% wide-body and I think the CEO recently said, roughly 70% are US or China flagship carriers, of the fleet. They’ve got 12% current wide-body tech. Looking at wide-body, long-haul travel is challenged, wide-body massively oversupplied, current tech out of favor. How do you look at the residual value of this type of aircraft, today?

You’ve got the financial residual value and you’ve got the practical residual value. A lot of times, you have to take it right down, because things aren’t moving. It’s an accounting mandate. There are times when the companies do have to revalue their fleets and, perhaps, take book value down. We’re hopeful that this isn’t going to be that long of a downturn that that’s going to be necessary. But if you have planes sitting on the ground for a year, that’s quite considerable. We were fortunate, in my time with GECAS, we had very few AOGs, and that was something that we were proud of. Out of a nearly $40 billion fleet, we would only have one or two planes on the ground at any time, not signed up to somebody and that was quite an achievement.

It’s going to be a balance of the bankruptcies versus what aircraft you can try to place on contracts, with either new people or other airlines that had plans and hope to get back to those plans, sooner rather than later. The residual values, if you’re in a situation where you have to part out the aircraft, if there’s no potential home for it, that’s when you really face the residual value effect. You’ve made the decision that it’s not going to fly anymore, you can’t put it on lease anymore, so you’re going to have to sell it or scrap it out, then you really come face to face with the reality of residual value. At that point, you can’t hope that it’s going to come back again.

Clearly, there’s probably no market for these planes right now, in terms of the secondary market, but if you were to part that out, or even sell these current wide-body tech today, what would you estimate it at?

It’s hard to put a number on it, obviously. 380s, for example, there’s no home for them. Lufthansa is going to try to convert one to a freighter; that’s interesting news. Freighter traffic, luckily, is up. It’s the first time it’s been up in decades, to this degree, anyway. Once belly cargo starts flying again then, unfortunately, it might not be that long-lived. There are aircraft like that, where the people that are holding the title to them are probably wishing they didn’t. They might have had a good run on lease, for however many years, but they’re still stuck with a pretty expensive asset that probably doesn’t have a home.

But it still has some value, right, in terms of part value? But it might be 30% or 40% of the book value, potentially?

That’s probably a fair estimate, I’m guessing. Unfortunately, for the 380, in particularly, it doesn’t have a lot of common parts with any other aircraft. The 330 and 340 had a lot of commonality, so you could extract some value out of those airframes, but the 380 doesn’t have a lot of commonality with anything else. The engines are different; the airframes are different. There’s not that much you can get out of it.

How do you even look at residual values when there’s zero demand?