COVID-19 Impact on Airbus & Boeing

What’s your view on the disruption to Airbus and Boeing?

It’s obviously going to be very difficult, in the short term, to deliver aircraft. First of all, people probably can’t even travel to places like Toulouse and Seattle, to take delivery of their aircraft. At the moment, I’m assuming that there are almost no deliveries. Once travel restrictions are eased, and it’s theoretically possible to take delivery, I guess there will be some airlines that will still be reluctant, because they are not flying or they’re not flying all their fleet and they just don’t need additional equipment.

But a new aircraft, that’s ready for delivery, is not just a financial burden for the manufacturer, it’s also a financial burden for the customer that’s ordered that aircraft, because they would have paid pre-delivery payments and the economic risk has, in a large part, been transferred to the airline or the leasing company or the financial backers of the transaction. Some aircraft will be delivered, even if airlines don’t really need them right now, otherwise they are going to lose money.

It’s going to be tough, going forward. The rest of this year is going to be tough, even once travel restrictions are lifted and the airlines begin to fly again. We’ve seen, already, that Airbus has reduced its production rates by about 30%, I think, and others are saying that they expect that Boeing, in the end, will have to reduce its production rates by as much as 50%. The manufacturers will go through a tough time too, because it’s going to be difficult to deliver planes, if not impossible, in the short term. Once things do begin to improve, a lot will depend on the financial health of the airlines and whether they’re capable of taking delivery of planes that have been put into storage.

Of course, it’s even more complex in the case of Boeing, with the MAX, which has been grounded now, for over a year, so there’s already a large number of parked aircraft awaiting delivery. It’s going to be a really tough time.

Can you just elaborate on that economic risk that shifts from the airframer to the airline, as they make pre-payments? If I’m buying an A320, for example, and I’m an airline or a lessor, how much do I pay upfront, versus one of the pre-payments. How does that economic risk shift, throughout the lifetime of the manufacturing?

Each transaction, of course, is different. But typically, there would be pre-delivery payments due at certain fixed periods of time, before the scheduled delivery. For example, 24 months before, 18 months before, 12 months before and so on. By the time you get to delivery, you may find that, for example, that the manufacturer is already holding 25% of the price of the aircraft, in pre-delivery payments and that there is 75% due on delivery.

If you just refuse to take delivery and walk away, you are also going to walk away from that 25% of pre-delivery payments that have already been paid. The higher the amount of pre-delivery payments that are being held, the more you’ve shifted the economic risk from the manufacturer to the customer.