COVID-19: Aircraft Leasing Risks

What do you see as the biggest risk with lessors renegotiating rates or deferring rates and then, potentially, airlines going bust and the lessors having to reallocate those planes, in this market?

The unknown is the hardest part. Any time with restructuring, it’s only as good as what’s being told to you, in terms of what the rebuilding plan is. Hopefully, you’re seeing additional equity coming in or something that’s quantifiable. But that’s not always the case. It might be that they’re having a tough time or something is happening where we need to lower rents or liquidating their cashflow situation. We’ve had to restructure many deals, over the years. Normally, it’s a combination that’s equitable to both sides. Reducing the rent for a short term and then it goes up, during the higher season or extending the term. So, at the end of the day, net/net you’re pretty much the same; that’s always the goal.

But sometimes, their recovery plan doesn’t work and that’s the biggest concern; is that really going to save them?

In your opinion, the biggest risk is that the lessors are deferring the lease rates for airlines, pushing it down the road, but you still don’t know the demand in 12 months’ time?

Yes; particularly in this case, with Covid-19. We don’t know when traffic is going to be back up. A survey in Australia, yesterday, said that by the end of the year, it will only be back to 15% of international traffic; that’s scary. You can live with six months, maybe nine months, if you know it’s happening. Deferral or paying part interest, just to cover the financiers interest payments. But to go for an unknown amount of time, which is what we’re looking at right now, to see where we’re at, is very difficult. Some of the big three airlines in the States are saying that they don’t think they’ll be up to 70% before 18 months. Those are pretty scary numbers.

What do you think the second-order effect of that situation is? Let’s say that you don’t get back to 60% to 70% in 18 months’ time, what are the biggest impacts that you’d be looking at, on residual values and rates?

First of all, I think there’s going to be several airlines that don’t make it. That’s inevitable. I think I heard a quote of about 800 airlines around the world, 400 of those were less than 10 aircraft. There’s going to be a lot that don’t make it. The fact is, residual values will drop, temporarily, during this time, particularly if the MAX comes back online at some time during this period, then you’ll have more seats available. Prior to this, the values were very high, because there wasn’t enough left, because of the MAX situation. There were also engine situations, on a number of aircraft. It was a tight market, to get aircraft.

Now, obviously, there’s so many sitting around, a lot of them aren’t going to survive. So there will be a dip in the revenues, I think, until whatever happens, whether it’s a vaccine or something else, when people start to get comfortable being elbow to elbow with somebody again. That’s really when things are going to start to come back in full force. But there will be people wanting to place airplanes, even for the period of the next 24 months. Particularly, with a lower residual value or lease price, if you will, and low fuel prices, it might be a decent time for new entrants to come in. For some of those people that have been cash strapped and will probably go bankrupt, there will probably people coming in, to fill their shoes.