Consolidation ultimately seen in aircraft finance sector. A320 neo vs B737: ISTAT conference wrap 1

While there will be new fragmentation in the leasing industry wrought by the rise of Asian leasing companies, the industry will ultimately consolidate into a handful of very strong companies, according to leasing experts attending the International Society of Transport Aircraft Traders (ISTAT) here.

A panel - made up of CIT Transportation Finance President Jeff Knittel, Air Lease Corp CEO Steven Udvar-Hazy, GECAS CEO Norman Liu and BOC Aviation Managing Director Steven Townend - provided an interesting dialogue on financing trends, the development of new versus re-engined aircraft, the success of the CSeries and new entrants from China and Russia, as well as the value of used aircraft.

See related report: Revolutionary changes will drive next aircraft decisions, betting is on all-new Boeing

Asian capital and global consolidation

The panel noted leasing capital will be coming out of Asia, with Mr Townend saying it was his job to connect this growing capital market there with the rest of the industry. However, Mr Udvar-Hazy suggested Asian companies, especially out of China, will largely focus on home markets before expanding into Southeast Asia and the rest of the world in several years.

Mr Townend noted that few of these new entrants were doing operating leases, while GECAS’s Liu suggested the industry will ultimately consolidate into a few large USD10 billion-plus players.

Mr Udvar-Hazy set the stage for the discussion by quantifying the market. “In the next five years manufacturers and forecasters see the production of 5,000 new jets from 100 seats up,” he said, adding at least 40% will be placed through operating leases. “That is an appetite for at least USD100 billion in financing from operating lessors. Seven or eight lessors will have to do heavy lifting with half the market destined for growth and the other half for replacements. That is what we are facing as top-tier lessors and that is a tremendous opportunity and a great challenge in terms of the management resources and accessing capital markets.”

NEO won’t affect narrow-body values

The panel agreed the Airbus NEO will have little effect on Boeing and Airbus narrowbodies because they will not be replacing the aircraft delivered in the last decade, according to Mr Townend, who noted the replacement need for 20-year-old 737s and A320 as well as MD80s and 757s. Indeed, an informal poll indicated only a small group attending the ISTAT panel discussion thought the NEO will affect their portfolios.

Mr Lui suggested the industry was experiencing a model shift that was unlike the consumer electronics market for the iPad and iPad 2 and suggesting from just looking at the installed base for narrowbodies, it would be 2027, perhaps, when the NEO might reach the parity point and impact residuals. “But that can be managed,” he told delegates.

Mr Udvar-Hazy cautioned appraisers not to over react to the NEO. “It’s not going to be in service for five years, during which, more 737NGs and A320s will be delivered and make up a higher proportion of the current fleet,” he said. “Then it will take three to four years to get to about 10% of the fleet so the impact will be very slow and progressive. The NEO will also be about growth, not replacement. Maybe one in three will be for replacement but the majority will go for growth.”

Oil prices, he continued, were the single largest variable over the next five-to-seven-year horizon. “If oil stays at USD80 per barrel then the current generation aircraft will do fine,” he said. “If it jumps to USD150-200 per barrel, the effect of the NEO will be magnified.”

Airframer philosophies differ

The group pointed out the differing philosophies of Boeing and Airbus, but agreed neither had the wherewithal to produce a new program at this time. Mr Knittel suggested that Boeing is waiting in order to deliver a suite of technologies to the market, not just a new engine.

Airbus has to absorb the A400, A350WXB and the A380, which will be taxing their resources for the next five years.

“In my view,” said Mr Udvar-Hazy, “they are doing the only intelligent thing they can by taking advantage of the engine technology now, when it is the engine manufacturers that are making the investment. The Boeing 737-800 already has a small economic advantage over the A320 with more seats for slightly lower unit costs. All Boeing needs to do is tweak it more with a Sky Interior and perhaps CFM will come up with more fuel efficiency. Boeing is taking micro steps that will buy them time until the next era. They’ll get to a new family of aircraft once the 787 dust settle.”

Mr Knittel said it is unlikely Airbus would change its mind on the NEO, not only because of the resource limitations but also because the NEO is selling successfully, albeit to Airbus’s current customer base.

Boeing has fine tuned the 737 dozens of times,” said Mr Udvar-Hazy, noting the fuselage was originally designed for the 707. “So it is natural for them to do a new aircraft family to address the industry 20 or 30 years from now. They want another multi-decade work horse so they are spending a lot of time thinking about what the industry will look like then.”

Mr Udvar Hazy who has been pushing a twin-aisle narrow body, indicated it would maximise utilisation.

"All I can tell you is our recommendation to Boeing,” he said, noting his record of having bought over 800 Boeing jets, “that is to build an aircraft family rather than a single-sized model and that family hopefully will encompass, at the upper end, an airplane that could replace the 757. In all of the studies that we have done and in talking to airlines, you can turn a twin-aisle aircraft faster if you have good passenger access. So the whole idea of a short- to medium-haul aircraft is maximising utilisation and if you can get ten minutes a turn and you do six segments a day you can get an hour more flight utilisation. My feeling is that to be a really an effective airplane above 200 seats and a great competitor and have the cargo capacity, also an important element in the revenue generation of airplanes, a small twin-aisle has a lot of advantages once you get north of 200 seats."

Mr Udvar-Hazy suggested Boeing could gain 7-8% efficiency through a new airframe optimized to the next-generation engine which would give it an advantage over the NEO. Airframe efficiencies would be coupled with new engine efficiencies.

Earlier panelists suggested the A321 and 737-900ER would be the perfect replacement to the 757 because they address 98% of the missions.

“There is a lot of recognition that there is never going to be a 757 replacement,” said Mr Townend. He also suggested the industry will return to historical norms over the next 10-15 years when 60% of the market will be direct purchases from airframers with the balance being sale-leasebacks.

Next time: The CSeries and regional aircraft

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