The intercontinental arena is gradually moving toward a more relaxed environment, which increases the potential for remarketing larger widebodies and therefore would aid both residuals and lease rentals. The relaxation of regional bilateral agreements has greatly aided the expansion of airlines both in terms...
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The intercontinental arena is gradually moving toward a more relaxed environment, which increases the potential for remarketing larger widebodies and therefore would aid both residuals and lease rentals.
The relaxation of regional bilateral agreements has greatly aided the expansion of airlines both in terms of size and number. The rapid spread of the low-cost carrier could not have occurred without the ability to serve regional routes. The system of intercontinental bilaterals that still dictate the number of flights allowed between countries and the designation of carriers is gradually being relaxed. This liberalization is stimulating demand from carriers wishing to serve long-haul routes on a scheduled rather than charter basis.
Jet Airways is planning to sub-lease three Airbus A340-300s from South African Airways after being awarded seven new frequencies between India and the UK. The carrier is also seeking additional widebodies. Air Sahara has also won rights to fly to the UK and is expected to lease three A310s from Singapore Airlines.
A cornerstone in widebody residual calculation, particularly with respect to their limited long-term appeal, is the limited operator base when compared to the narrowbody market. With perhaps only two to three carriers designated to operate between two countries, the number of operators capable of supporting larger widebodies are relatively few. Remarketing can therefore take time and considerable resources. Most such "flag" carriers tend to buy new aircraft at substantive discounts, adding to the perception that widebody values should feature an aggressive depreciation curve.
The cost of developing a new international route has diminished with the greater use of Internet booking. New market entrants to intercontinental operations are also likely to enjoy lower flight-crew-related costs where pilot seniority is less of an expense and there is a greater willingness to fly more hours per month. Previously, a figure of $20 million may have been needed before a new route achieved profitability, due mostly to infrastructure and distribution costs. Website-based distribution networks are allowing operators greater access to overseas markets. Passenger aversion to traditional operators may also be to the advantage of new carriers. Although Airbus will have cut assembly times for the A340 to only nine months as of 2007, new carriers will be seeking capacity as soon as possible. Rather than long-term fleet planning, there will be a need to satisfy short-term market demands.
The emergence of new long-haul operators with more need for leased aircraft should increase the potential for remarketing and thereby allow residuals a measure of improvement. With the emphasis on shorter-term leases, there should also be an opportunity for higher rentals to emerge. The granting of new intercontinental routes to non-traditional carriers is likely to increase significantly in the coming years as the process of liberalization sweeps through most industry sectors. Just as in the narrowbody sector, the arrival of new market entrants has stimulated demand and allowed lease rentals to recover. The widebody sector now offers the opportunity for a similar process to emerge, although at the same time increasing the potential for greater volatility.
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