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Planes for rent

As demand for aircraft leasing continues to grow, Keith Mwanalushi looks more closely at the market and at how lease rates and values are shaping up
 

Several reports have recently indicated that aircraft lessors are bullish about the global demand for aircraft and the relative health of airlines around the world. Despite some airline bankruptcies, mainly in Europe and other challenged areas in some parts of the world, the airline industry remains profitable and passenger demand continues to rise.


This trend mirrors the International Air Transport Association’s (IATA) global passenger traffic results for 2017 showing that demand (revenue passenger kilometres or RPKs) for the year rose 7.6% compared to 2016. This was well above the 10-year average annual growth rate of 5.5%.


As evidenced by aviation consultancy IBA, the market has witnessed an unprecedented surge in aircraft leasing over the past few years triggered by low interest rates, an above average rise in passenger traffic, low oil pricing and attractive returns. New arrivals have since entered the space in large numbers, mostly from China, and the demand for deals has reached an all-time high.


Looking at the general trends in the narrowbody lease market in 2018, Mike Yeomans, Head Analyst – Commercial Aircraft and Leasing at IBA signals that lease rates remain under pressure, particularly looking at new or young aircraft.


“This is true throughout the narrowbody space,” says Yeomans. “Competition remains fierce in the sale leaseback market and lease rate factors remain weak as a result.

 

In January GECAS for instance announced it had arranged a sale-leaseback along with pre-delivery payment financing for Viva Air Group in a transaction for ten A320ceo aircraft to be delivered in 2018 and 2019.


New market entrants with low capital costs have driven down rents according to Yeomans and IBA has yet to see a reversal in this trend in 2018. “This is true for current, outgoing and new generation types. That said, with funding costs set to rise through this year we could see some pressure on the new entrants.”


With competition for deals fiercer than ever and with investors and lessors hunting further afield for yield, IBA highlights a need for effective mapping and management of risk, and advocates robust intelligence gathering and analysis.


But some deals are still attractive, even if they are risky.  According to IBA, if there is a trend here it is that lower reserves are being paid and that less monitoring is being done. It believes that lessors will be caught short as a result.


Key indicators that IBA has kept under watch since the beginning of last year concern the A320-200 and 737-800s lease ends and a potential collision of factors on the supply side that could impact on values and rentals. In a report IBA published in September 2017, it predicted a concentration of lease ends between the years 2019-22, with a peak towards 2022.


“There are a few things to consider over the next three to four years,” notes Yeomans.  He says IBA’s iQ database expects around 230 lease ends over the remainder of 2018 for the Boeing 737-800 and around 280 for the Airbus A320-200. Approximately 300 lease ends on average are forecast each year to 2022. >>


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