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Airlines

The leasing paradigm

High oil prices saw demand for new fuel efficient aircraft reach record highs, but cheap oil is set to be around for a while. Keith Mwanalushi uncovers the impact this has on the leasing industry
 

The global market for commercial aircraft leasing is projected to reach $314.8 billion by 2020, according to a report by Global Industry Analysts. The global growth in air traffic, an increase in the number of LCCs in developing regions, and a rise in demand for new aircraft among new and existing airline operators are all factors that are driving growth in the market.

 

Looking closer at the industry though, it may appear that there is a shift in trends. High oil prices were a big draw for more fuel efficient aircraft, as such airlines were inclined to buy or lease new aircraft types to combat high fuel bills. However, the lessors were not prepared for the drastic collapse in oil prices and the current economic slowdown in emerging markets (the main buyers of new aircraft). So how significant is this trend?

 

ICF International holds the opinion that the low fuel price environment has benefitted the market for mid-life aircraft. “This has meant that some aircraft which were heading for tear down have remained in service and even had lease extensions,” comments Angus Mackay, a Principal with ICF International.

 

Mackay observes that many airlines, including flag carriers, are keeping these aircraft in service longer than anticipated, which is all upside for lessors. “At current fuel prices, 10 to 15-year-old used narrowbodies are increasingly more cost-effective to operate than new current-generation aircraft, and will be accordingly cheaper to own and operate than next-generation aircraft like the Airbus A320neo or Boeing 737 MAX,” he continues.

 

Tadas Goberis, Chief Executive Officer at AviaAM Leasing, points to the three main airline groups: A group – operators of new aircraft only; B group – second lease period airlines which operate eight years or older aircraft; and C group – operators that use aircraft that are 16 or more years old.

 

“If we talk about new aircraft operators, we didn’t notice any substantial shifts in their preferences. Aircraft are a long-term investment, and while airlines consider all factors, the final decision whether to buy a new aircraft or not is based on factors that play a vital role in the long run, such as residual values, but not temporal ones like fuel price fluctuations.

 

“In other words, operators that prefer new aircraft didn’t change their mind on buying those new aircraft due to lower fuel prices. Moreover, some are actually interested in selling their current aircraft to make additional room in the fleet for upcoming models,” Goberis explains.

 

Mackay analyses that most of the new aircraft on order are intended for growth, not replacement. “It is unlikely that the used aircraft market could supply the more than 1,000 new single-aisle types now being delivered each year, particularly if the airlines are at the same time retaining the older types they have.”

 

He feels the new aircraft leasing market is likely to be sustained, given the circa 50% penetration rate the industry has achieved.

 

“Before a significant part of the airline industry gives up on new aircraft orders and leasing, it would have to be convinced that fuel is likely to stay low for 10 years or so. The fear of being on the wrong side of the fuel price trends, when significantly better products are available, is a risk most airlines would probably wish to avoid. Airlines enter into new aircraft leases for more reasons than fuel price alone,” he explains.

 

Some airlines argue that with the current cheaper oil prices, the cost savings from new aircraft have disappeared. Goberis responds saying cheaper fuel did actually allow C group airlines to compete with B, and in some cases even A, group airlines.  >>


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