Aircraft lessor fleet falls disproportionately; lease rates plummet
Analysis of the CAPA Fleet Database shows that the COVID-19 crisis has had a proportionately bigger impact on numbers of leased aircraft in service than on the total fleet in service. Moreover, it is likely that aircraft monthly lease rates are down even more than aircraft values since the start of the crisis.
The CAPA Masterclass on 15-Jul-2020 will consider the current state of the aircraft finance sector in the COVID-19 crisis and its prospects in the recovery.
It will feature Steven Udvar-Házy , Executive Chairman of Air Lease Corporation, and a leading figure in aviation for more than 40 years; Bertrand Grabowski, independent advisor and former board member of DVB, where he was responsible for the bank's aviation activities and rail financing; and Peter Harbison, Chairman Emeritus of CAPA - Centre for Aviation.
Topics will include the aircraft supply/demand balance, the outlook for values and lease rates, the relative importance to lessors of the aircraft versus the airlines, and lessors' access to funding.
Consideration of the aircraft finance sector's prospects necessarily includes all the factors affecting the aviation industry. The Masterclass will be vital viewing for anyone interested in the outlook for aviation.
Summary
- Lessors' share of (the reduced number of) aircraft in service has dropped. Of all aircraft, 46% are now in service, but only 43% of leased aircraft.
- Monthly aircraft deliveries are starting to recover, but remain low. Deliveries of leased aircraft are particularly low.
- Aircraft values have dropped during the crisis. Lease rates have fallen further.
For full details of the online CAPA Masterclass on 15-Jul-2020, including free registration, please click here.
Lessors' share of (the reduced number of) aircraft in service has dropped
There were approximately 31,000 commercial aircraft in service around the world on 31 Jan-2020. Just over 16,800 of these - almost 50% - were leased.
(Note that these totals include all aircraft operating in the roles of passenger, freighter, combi or converted passenger/freighter aircraft.)
By the end of Apr-2020 the total number had fallen by 55%, to just under 14,000, whereas the leased number had slumped by 62%, to approximately 5,800.
Numbers have picked up a little since then, but are still far below their pre-crisis levels.
As of 13-Jul-2020, the CAPA Fleet Database records a little more than 16,500 aircraft in service in total, a 47% reduction on the end-Jan-2020 figure; and just under 7,100 leased aircraft in service, still 54% below the Jan-2020 number.
Lessors' share of total aircraft in service fell from 50% at the end of Jan-2020 to below 42% at the end of May-2020. It has recovered only slightly, to sit at just under 43% at 13-Jul-2020.
Lessors' share of narrowbodies and regional jets in service at 13-Jul-2020 is 50%. Their share of widebodies in service is 38%, and their share of turboprops in service is 29%.
Number of aircraft in service: leased versus total, Jan-2020 to Jul-2020
Of all aircraft, 46% are now in service, but 43% of leased aircraft
Looking at the data a different way, the total number of aircraft in service as a proportion of the entire global fleet, including those inactive, was 86.4% at the end of Jan-2020.
This fell to 38.8% at the end of Apr-2020 and has risen a little to 46.0% at 13-Jul-2020 (broadly in line with global seat capacity for the week commencing 13-Jul-2020, which is at 44% of 2019 levels, according to OAG/CAPA data).
A higher proportion of turboprops (including small turboprops), 62.0%, is in service, while only 37.7% of regional jets are active. For narrowbodies, the proportion is 43.7% and it is 42.1% for widebodies.
For the leased fleet, the proportion in service started the year at a higher level, but has fallen more heavily: 91.7% were in service at 31-Jan-2020 and this fell to 34.9% at 30-Apr-2020.
At 13-Jul-2020, 42.5% of leased aircraft are in service.
Share of fleets in service: leased aircraft versus all aircraft, Jan-2020 to Jul-2020
Monthly aircraft deliveries are starting to recover, but remain low…
The number of aircraft in service is showing signs of recovery, but remains at very depressed levels.
There are also signs of a recovery in the number of new aircraft deliveries, after a heavy drop.
Total deliveries were already falling year-on-year in Jan-2020 (by 29%) and Feb-2020 (by 12%), before the impact of COVID-19 was fully felt on most of the world beyond China. This reflected the ongoing grounding of Boeing's 737 MAX and a slowing of economic activity and traffic growth.
However, the number of deliveries took a more significant downward step in Mar-2020, when it fell by 58%. Total 1Q2020 deliveries dropped by 37% year-on-year, to 185, according to the CAPA Fleet Database.
The fall in 2Q2020 was a massive 74%, to just 89 aircraft (vs 375 in 2Q2019).
However, numbers have grown with each successive month of the quarter, hitting a low of 20 deliveries in Apr-2020 (down by 83% year-on-year), before rising to 26 in May-2020 and 52 in Jun-2020.
Although the number doubled from May-2020 to Jun-2020, it was still down by 60% year-on-year.
Aircraft deliveries worldwide, Jan-2020 to Jul-2020
…with deliveries of leased aircraft particularly low
The number of deliveries to lessors has been even more heavily hit, dropping by 88% in 2Q2020.
In Jun-2019 there were just 12 deliveries of leased aircraft. Although this was more than double the five deliveries of May-2020, it was still an 82% year-on-year fall (from 66 in Jun-2019).
Aircraft values have dropped during the crisis
With demand still depressed, although starting to build, the fleet surplus is having a negative impact on aircraft values.
Aircraft valuation is not an exact science, and there is no single source of data on changes in value over time.
There are different views from different appraisers, and valuation is particularly challenging in a crisis when the number of transactions drops significantly. Moreover, the impact varies by aircraft type, role, generation and age.
In the past, average market values have dropped in the 12-24 months after a crisis hit by anything from low single digit percentages to mid double digit percentages.
Some analysts currently estimate that new narrowbody values have dropped by somewhere in the region of 20% to 25%, while new widebodies have lost more like 25% to 30% of their value since the start of the year (source: Aviation Strategy, May/Jun 2020 issue).
For used widebodies, such as the Boeing 747-8 and the A380, market values have probably slumped by 50% or more.
Lease rates have fallen further
Monthly lease rates have dropped even further than market values since the start of the year. A significant proportion of leased aircraft are operated by smaller airlines, with smaller balance sheets, who may be struggling more in the current crisis.
In addition, as even the bigger and stronger airlines seek to cut capacity and costs, non-renewal and even cancellation of leases has been a means to achieving these aims.
As noted earlier, the significant pool of parked aircraft provides a good deal of flexibility for airlines to return to growth after terminating leases.
The resultant drop in demand for leased aircraft means that both narrowbody and widebody lease rates are probably down by close to 30%, or even more for new aircraft, and by at least 50% for 747-800s and A380s (source: Aviation Strategy, May/Jun 2020 issue).
Aircraft financing faces a challenging outlook
This analysis indicates that, as global demand for air travel starts its tentative recovery, there is plenty of scope for parked aircraft to take up the slack before new aircraft.
This is likely to continue to weigh on aircraft market values and lease rates.
Moreover, the normal role played by lessors in acting as a buffer between manufacturers and operators as demand ebbs and flows appears to be diminished currently. Instead, the fleet of inactive aircraft is now fulfilling this function.
Just as it is for the rest of the aviation industry, the outlook for aircraft finance is a challenging one.
For full details of the online CAPA Masterclass on 15-Jul-2020, including free registration, please click here.