Air Lease Corporation's Udvar-Házy: can aviation be sustainable? – 'No'
When Air Lease Corporation's Executive Chairman Steven Udvar-Házy gives his views on the aviation industry - people listen.
Asked recently by CAPA whether it was possible for the aviation industry to be truly sustainable, his answer was "No". He explained that he was not pessimistic, but the "achievability of [aviation's carbon emissions] goals is going to be very challenging".
Mr Udvar-Házy has been a well respected voice in the aviation industry for more than 50 years, through his leadership of aircraft lessors ILFC and Air Lease Corporation (ALC).
His comments were part of a wide-ranging interview with CAPA TV at the IATA AGM in Istanbul in early Jun-2023. He also discussed the industry's recovery from the COVID-19 crisis and the role of lessors in helping airlines with their fleet strategies. He reflected on challenges such as geopolitics, rising interest rates and the "OEMs' inability to deliver aircraft on time".
- Air Lease Corporation's Executive Chairman, Steven Udvar-Házy, believes that achieving sustainability in the aviation industry will be very challenging.
- Udvar-Házy highlights that alternative propulsion technologies like electric and hydrogen are not financially viable for airlines at present.
- The high attendance at the IATA AGM in Istanbul is seen as a testament to the resilience of the airline industry.
- Air Lease Corporation (ALC) demonstrated greater financial resilience during the COVID-19 pandemic compared to airlines, with its aircraft portfolio and number of airline customers growing.
- ALC's large order book allows airlines to receive earlier deliveries, and demand for aircraft, especially widebodies and the Boeing 737MAX family and Airbus A321neos, remains strong.
- Challenges faced by the industry include geopolitical uncertainties, rising interest rates, and the OEMs' inability to deliver aircraft on time.
Summary
- "You can't just flip the switch and say we're carbon neutral. Electric and hydrogen are great long term solutions, but not applicable today."
- High attendance at this year's IATA AGM is "testimony to the resilience of the airline industry".
- ALC was more financially resilient than airlines during the COVID-19 pandemic, when its aircraft portfolio and number of airline customers grew.
- ALC's "big order book" means airlines can get earlier deliveries; demand is strong.
- Mr Udvar-Házy highlighted challenges, including geopolitics, rising interest rates and the "OEMs' inability to deliver aircraft on time".
'You can't just flip the switch and say we're carbon neutral'
Mr Udvar-Házy's negative response to the question "Is it really possible for the industry to be truly sustainable?" was striking, since most aviation leaders tend to answer this question with a "Yes".
Mr Udvar-Házy expanded on his initial "No" by noting the simple fact that all commercial aircraft burn carbon fuel.
While sustainable aviation fuel (SAF) can make "a tremendous step in the right direction", he added, "It's going to be very difficult to make that conversion in a short period of time economically."
This would be "a progressive, slow evolution."
He argued that it was necessary to consider alternative plans so that the current generation of aircraft could still perform for another couple of decades.
"You can't just flip the switch and say by 2050, you know, we're totally carbon neutral. It's not that easy."
'Electric and hydrogen are great long term solutions, but not applicable today'
Beyond SAF, Mr Udvar-Házy noted that none of the alternative propulsion technologies were "financially, economically workable for the airlines" at the moment.
He agreed that human ingenuity could solve the problem, "...but the time it takes to certify and develop a new airliner or a new category of airliners is not something that happens overnight".
"When we look at electric and hydrogen, those are all great long term solutions, but they're not applicable to today's operating environment", he said.
'IATA AGM is testimony to the resilience of the airline industry'
Turning more broadly to current conditions in aviation, Mr Udvar-Házy saluted the high attendance in Istanbul, which was the best ever for an IATA AGM.
"It's a demonstration of the recovery of the airline industry from the worst period that it went through in the history of commercial aviation", he said.
"So this is a wonderful testimony to the resilience of the airline industry and the desire of people to fly."
ALC was more financially resilient than airlines during the pandemic
A glance at ALC's earnings releases confirms that its financial performance was more resilient than that of airlines during the COVID-19 pandemic, during which its fleet also grew.
Whereas airlines collectively reported heavy losses in each of 2020, 2021 and 2022, ALC suffered only one year of red ink in the period 2020-2022. Even that was not due to the COVID-19 pandemic.
ALC reported a net loss of USD138.7 million for 2022, but this would have been a positive result without a USD771.5 million write-off of aircraft leased to Russian airlines that were expropriated.
Air Lease Corporation: revenue and return on equity (last 12 months), 2019 to 2022 and 1Q2022 and 1Q2023
ALC's aircraft portfolio grew throughout the period…
At the end of 1Q2023 ALC's fleet consisted of 437 owned aircraft and a further 86 leased aircraft that were managed by the company on behalf of other owners.
ALC's total of 523 owned/managed aircraft for 1Q2023 compares favourably with its fleet size reported with 1Q results over each of the past four years.
At the end of 1Q2019 it owned 280 aircraft and managed a further 65, for a total of 345, a figure that increased to 382 at the end of 1Q2020, 425 in 1Q2021, and 457 in 1Q2022.
Air Lease Corporation: numbers of aircraft owned/managed and airline customers, 1Q2019 to 1Q2023*
…as did its number of airline customers
Moreover, as illustrated in the chart above, ALC's airline customer base also grew steadily: from 95 at the end of 1Q2019 to 118 at the end of 1Q2023.
Mr Udvar-Házy said that "the balance sheets of airlines were damaged pretty hard by the pandemic", which meant that "they're [airlines are] more and more reliant on aircraft leasing".
ALC's 'big order book' means airlines can get earlier deliveries; demand is strong
ALC's "big order book" allows it "to supply aircraft to our customers earlier than they could buy them and get them directly from Airbus and Boeing".
The lessor's firm order numbers at the end of 1Q2023 stood at 376 aircraft. This number has increased from 361 at the end of 1Q2019, but it also had 35 options at that time.
ALC's order book has fluctuated over the past four years, with numbers now lower than its current fleet size, having been higher than the fleet four years ago. This reflects the delivery of aircraft into the fleet and, perhaps, a less aggressive stance by ALC on placing new orders at the moment.
Nevertheless, Mr Udvar-Házy told CAPA that ALC is "seeing strong demand, even on widebodies".
"And then across the [Boeing] 737MAX family and [Airbus] A321neos", he added, "it's a positive environment".
Air Lease Corporation: aircraft order numbers, 1Q2019 to 1Q2023*
Challenges include geopolitics, rising interest rates…
Nevertheless, the veteran of more than 50 years in aviation acknowledged some of the challenges that are facing the industry currently.
"There's a lot of geopolitical uncertainties, regulatory issues", he said, adding, "We have potential problems in the world that airlines are affected by: the inability to fly over Russia, for example, from Europe to Asia is still a very high cost to the airlines".
Moreover, rising interest rates have meant that lessors had to "pass on our higher financing costs and it's something that airlines are not happy about, but even if they go and buy an airplane, they have to finance it".
"Their cost of financing will be even higher than ours", he added. "So it's a slow process but I think airlines are starting to understand these are economic realities."
…and the OEMs' 'inability to deliver aircraft on time'
Turning to the aviation supply chain, Mr Udvar-Házy identified the OEMs' constrained production as a major challenge facing both airlines and lessors currently.
"The inability of the OEMs (original equipment manufacturers) to deliver aircraft on time, that's a serious issue", he said.
"For example, the XLR, A321, is about a year and a half behind schedule. So that really has a negative impact on our customers and our own capital allocation."
ALC 'optimistic' about the future of the industry
In spite of his caution on the near term issues facing the industry and the longer term challenge posed by the net zero carbon goal, Mr Udvar-Házy concluded the interview positively.
"We're optimistic about the industry", he said.
The full CAPA TV interview with Mr Udvar-Házy can be viewed here:
CAPA TV interview with Air Lease Corporation's Executive Chairman Steven Udvar-Házy at IATA AGM 2023
Sustainability and the environment - executive insights
CAPA TV discussed the hot topics of the environment and sustainability with industry executives during the Jun-2023 International Air Transport Association (IATA) AGM in Istanbul, Türkiye.
The environment and sustainability - executive insights from the IATA 2023 AGM