Credit Crunch Could Actually Lift Rentals

Lease rentals of most aircraft appear to be holding firm despite the uncertainty that it is sweeping across the industry. Without the financial crisis that is now impacting some sectors of the world economy and undermining consumer confidence, there was an expectation that lease rates would start to fall as...

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Lease rentals of most aircraft appear to be holding firm despite the uncertainty that it is sweeping across the industry.

Without the financial crisis that is now impacting some sectors of the world economy and undermining consumer confidence, there was an expectation that lease rates would start to fall as of November 2007, not least because of the decline in interest rates. While orders were then still at record levels as was the backlog, the fragility of the financial markets has taken greater prominence. The significant daily gains and losses recorded on the worlds markets is indicative of vulnerability to the confidence levels of mainly U.S. rather than worldwide, investors.

The net result of the credit crunch has been rising concern over asset values and the cost of borrowing, should such credit even be available. While the aviation market remains buoyant outside the U.S., values for a wide range of assets have come under scrutiny not least because of private equity attempts to cash in investments made during the previous recession. This lack of confidence is beginning to encroach on the aviation sector which can see share prices being traded for considerably less than a few months ago and even at prices that are lower than the aircraft that they own. Values and prices of aircraft are beginning to exhibit a weakness, not expected at least until next year.

However, lease rental behavior, at least for more modern aircraft, may be displaying an opposite reaction. The demand for aircraft remains strong with recent fleet contractions focusing more on older types. Interest rates may have been reduced by interbank lending rates continue to rise as lenders seek to hold on to cash. With the rise in the cost of borrowing lessors are having to seek higher rentals. Due to sustained demand for capacity outside of the U.S. and the weaker dollar, lease rentals are managing to either remain unchanged or may be actually rising.

This contradictory behavior between lease rentals and values is not uncommon. During the last recession, lease rentals also continued to rise before values experienced a recovery. Lease rentals tend to change direction before values as a means of illustrating the short to medium term trend, but in this instance, the change in values are more representative of market conditions.

The competition between lessors continues to be strong which is helping to contain the rise in lease rentals. Though availability may be low, lessees can still be choosy in lessors choice. Many transactions continue to be made on the basis of relationship rather than pure monthly rentals.

Sale and leaseback transactions continue in abundance. Airlines as customers are particularly anxious to enter into sale and leasebacks as a means of securing high single unit prices for aircraft previously bought at a discount due to the quantities involved. Sale and leaseback transactions can see high lease rentals and values though financial engineering requirements can see considerable variation.

Rentals are provided by The Aircraft Value Analysis Company http://www.aircraftvalues.net. Rates are quoted in thousands of US dollars per month and exclude maintenance reserves. They assume a medium credit, average return conditions and an average lease term. Lease rentals for actual transactions may differ. European specification, weaker credits and short lease terms may warrant a higher rental. A long-term rental to a strong credit will justify a lower rate.

Narrowbody Lease Rates (Dry) US$ '000s pm - April 2008
Aircraft	Age	Rental	Trend Analysis
A318-100	2003-08	185-250	The use of the A318 for British Airways new business only service from London City is one bright spot for the aircraft in an otherwise still lack luster history. However, with orders for the Elite version enabling higher margins to be achieved than for commercial examples and in view of the demand for the A319/A320 Airbus is not unduly concerned. Due to the relative recent service entry availability is still not an issue though with 54 delivered out of a total orderbook of 91, there are a reasonable number in service. Frontier has sold some examples which indicates that there is a market for the aircraft. Lease rentals for the oldest examples are considered to have eased slightly. With the development of new types, not least the CSeries, there exists the potential for further pressure on rentals.
A319-100	1996-98 1999-08	210-330 330-385	The level of availability is at negligible levels - a single example is being advertised. With over 1000 now in service this represents less than 0.1 percent. The order backlog amounts to some 550 and therefore remains healthy. As the A319 has now been in service for more than a decade, it must be expected that lease rentals of the older examples will be facing some pressure, hence the slight reduction at the lower end of the range. Demand nonetheless remains strong and due to the credit crunch lease rentals remain unchanged until such time as the fall in values takes its toll.
A320-200	1988-92 1993-97 1998-08	145-250 230-355 335-405	The backlog of A320s is now more than those that have been delivered representing a formidable feat in view of the product life cycle of 20 years. The type has begun to show wear and tear and lease rentals for older types have been below $200,000 for some time. While the A320 remains vulnerable to market weakness due to age, the level of availability continues to be just over one percent, which is far below the level considered necessary to see a marked reduction in lease rentals. The rising specification of the A320 continues to be an issue and rates in excess of $350,000 can be expected to be increasingly difficult to achieve. The absence of alternatives continues to allow lease rentals to largely remain at current levels. Sale and leasebacks can see high rentals but these are achieved on the basis of higher prices being paid for aircraft and over longer terms. The need for airframe and engine manufacturers to design a formidable improvement to the existing products to combat the effects of global warming will lead to a delay in the service entry of a replacement.
A321-100L	1994-97 1998-02	200-250 20-320	The A321-100 continues to fail to impress due to lesser capability. However, such is the shortage of equipment that the type still has a role to play, at least until something better comes along. The failure of Air France/KLM to persuade Alitalias unions of the advantages could yet leave the Alitalia fleet exposed.
A321-200H	1999-08	270-350 340-450	A very capable of aircraft even when compared to the B737-900ER. Orders continue to impress with over 700 now placed and a backlog in excess of 250. Availability is not an issue and like most aircraft in production remains at extremely low levels. Again, as operators seek to reduce unit costs, one of the easiest methods is to increase the number of seats rather than units. Lease rentals are considered to be holding steady, at least for the time being. The commonality with the A320 is an important consideration. Again lease rentals have remained static.
B717-200	1999-04	140-185	The rentals of the B717 are remaining unchanged which for such a marginalized product is relatively promising. There are no examples of the B717 currently being advertised for sale or lease but such aircraft tend to be marketed directly by lessors rather than placed onto the open market. The efficiency of the type is such that it remains a viable product for existing operators. The arrival of new products is however not to be underestimated.
B737-600	1998-03	130-205	The B737-600 is no longer in production and remains marginalized even though it is part of one of the most successful families of aircraft ever built. Lease rentals are considered to have declined slightly.
B737-700	1997-01 2002-08	225-365 355-395	Lease rentals remain virtually unchanged such is the popularity of the aircraft, preferably with winglets. The type continues to offer the type of performance that is sorely needed by the majority of operators. Availability now amounts to only two units indicating that there is no availability. Lessors continue to have to turn away lessees hence the rationale for placing further orders. Lease rentals for -700s with a reasonable specification are considered to be marginally higher than those for the A319.
B737-800	1998-02 2003-08	270-390 395-460	The -800 continues to be sought after. With ten years of service, the B737-800 will be unlikely to be able to enjoy the same level of demand as in the last recession. In common with the A320 there are as many -800s yet to be delivered as have already been delivered, some 1,300. The lease rentals for the time being are considered to be stable with no immediate sign of a decline. Other aircraft will likely be disposed off before the B737-800.
B737-900	2000-04	225-290	The -900 continues to remain at a disadvantage but lease rentals are holding steady, not least because they are already low.
B737-900ER	2006-08	395-470	The lack of an expansive operator based is still considered a negative but perceived lease rentals are considered to be strong even though the leasing community has yet to embrace it.
B757-200	1982-88 1989-95 1996-02	120-210 195-240 230-310	Hardly an aircraft that is in production any longer but such is the demand for the type it feels as though it is. The type remains in demand even from those carriers, such as Delta, who are contracting other parts of their fleet.
B757-200ER	1987-95 1996-02	150-265 245-320	Lease rates of the -200ER remain stable but the type cannot necessarily attract the premium that it once did. Lease rates are expected to remain at current levels.
B757-300	1998-03	245-340	The market for the -300 is limited but as operators encounter a brick wall in terms of adding frequency, even with the benefit of the open skies agreements, then the larger capacity of the -300 may be viewed with more enthusiasm.
Commentary reflects change from the last update to Narrowbody Rentals of November 2007.