Why Aircraft Lease Rates Refuse to Come Down

Global Aviation Round-Up from Aircraft Value Intelligence (AVN)

Aircraft leasing used to be fairly predictable. Rising interest rates pushed up borrowing costs, lease rates climbed, and airlines paid more to add capacity. When borrowing costs eventually fell, lease rates usually followed.

That pattern has broken down. Despite growing expectations that central banks will begin lowering interest rates, lease rates for many commercial aircraft remain unusually high. The biggest reason has little to do with the cost of money. There simply aren’t enough airplanes to go around.

The global shortage of commercial aircraft has become one of the defining challenges facing the aviation industry. Production delays at Airbus and Boeing continue to limit deliveries of new jets, leaving airlines with few options as passenger demand remains strong.

For carriers looking to grow their fleets or replace aging aircraft, leasing is often the only practical solution. That has shifted the balance of power decisively toward aircraft lessors, who can command premium rates for assets that are immediately available.

SMBC Aviation Capital recently noted that while interest rates still influence lease pricing, they are no longer the primary driver. Instead, today’s market is being shaped by a simple reality: demand for aircraft continues to exceed supply by a wide margin.

That means lease yields are likely to remain elevated even if benchmark interest rates begin to decline. Airlines need airplanes now, not years from now, and manufacturers still cannot deliver them fast enough.

It’s a striking departure from the way the industry has traditionally worked. Financing costs once played the leading role in determining lease economics. Today, availability matters far more. A ready-to-fly aircraft has become a valuable commodity, giving lessors pricing power that would have been difficult to imagine only a few years ago.

Backlogs Stretch for Years

The squeeze is especially evident in the narrowbody market. Airlines hoping to acquire popular models such as the Airbus A320neo or Boeing 737 MAX often face delivery queues stretching years into the future. Many have little choice but to lease aircraft or postpone expansion plans altogether.

The shortage has also extended the lives of older jets. Aircraft that might have been retired under normal market conditions are staying in service because suitable replacements simply aren’t available.

Scarcity is also changing the way aircraft are valued. Appraisers increasingly place greater emphasis on lease income and immediate availability. A midlife aircraft with years remaining on a solid lease can command a surprisingly high valuation because it offers something many airlines desperately need: capacity without the wait.

Eventually, manufacturers will work through supply-chain problems, production will accelerate, and competitive pressure should begin pulling lease rates lower. But that turning point still appears to be some distance away.

Labor shortages, engine production constraints, and persistent component bottlenecks continue to slow deliveries, leaving the market undersupplied and lease rates firmly supported.

John Persinos is the editor-in-chief of Aircraft Value Intelligence. For his recurring video reports covering the nexus of aerospace, technology and finance, click here.