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A320neo and B737-8 Lease Rentals Remain Below Expectations

August 20, 2018

The lease rentals being secured for new A320neos and B737-8s remains lower than might be expected, particularly where a longer lease to a good credit is involved.

Despite the extensive backlog, high demand for aircraft and potentially higher interest rates, the lease rentals for the A320neo and B737-8 are not as high as anticipated although the monthly differential with the outgoing A320ceo and B737-800 remains far higher than the $10,000 that some sources have indicated with $20-30,000 or higher more the norm. When the A320neo was first mooted, a lease rental in excess of $410,000 per month was considered likely. This was always considered to be optimistic even in a low interest rate environment and a capital cost of some $49 million. Yet, rates have not been as strong as might be expected though in contrast to years gone by there has been far greater emphasis on the rental being based on a certain percentage above LIBOR rather than being fixed during the entire term of the lease.

The lower than expected rentals are function of a number of factors. The competition among lessors is intense with newer market entrants perhaps anxious to gain market share and to avoid having aircraft unleased for any period. The major lessors, some with strong parents, have a low cost of funds. Innovative financing packages such as that created by ALC, also facilitate new sources of finance. The capital cost of new aircraft remains comparatively low. Finally, overall low interest rates are a consideration. The problem of low inflation does however, pose a risk in terms of depressed residual values.

The lease rentals for a new A320neo with a good credit and on a 12 year term can be lower than $370,000 per month. Such a rental would generate $53 million in revenue, compared to a capital cost of less than $50 million, less interest. The $370,000 per month translates into a lease rental factor of 0.74 percent, which is reasonable in a low interest rate environment. A B737-8 can attract a slightly higher rental of $385,000 per month. However, to some extent the lower than expected lease rentals ignore the change in emphasis in terms of return provisions and maintenance reserves. An end of lease full life compensation clause at the end of the lease may see a lump sum payment of more than $8.5 million (before the CFM announcement) for an aircraft returned in half life or higher for an aircraft return in less than half life. Maintenance reserve payments always ensures that the aircraft is in the equivalent of full life. Consequently, at the end of a 12 year lease based on $370,000 per month, the lessor will generate $53 million in lease payments, perhaps another $8.5 million or more in an end of lease compensation payment, and still have an aircraft that is worth some $20 million.

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