Competition Keeps Rentals Keen

November 13, 2017

The demand for leased narrowbody aircraft continues to rise with the lessors failing to satisfy demand yet this has not led to an increase in lease rentals.

The newer market entrants, including those companies taking over existing lessors, may have been under pressure to prove their worth by a number of measures. Becoming a member of the lessor community but either acquiring individual aircraft or via the purchase of a leasing portfolio can be expensive. In such strong market conditions, this means that the purchase price may be higher than considered desirable, particularly when compared to the prices being paid for new aircraft by established lessors. Such a premium would normally suggest that the new lessor would seek to place aircraft at a high rental but there are other factors at work that are make it necessary for a new market entrant to offer lower rentals. The leasing market is not just one driven by lease rentals but is one that relies on personalities and relationships to cement deals. To overcome such an established relationship then a new lessor will have to offer a lease rental that is particularly competitive. With the depth and breadth of the operator base, a large number of leases will be to the less financial secure which should warrant a higher rental to compensate for such risk. New or ambitious lessors may ignore such a necessity and lease at a lower rental. Equally, an investment grade airline will be expecting a low rental. Ensuring that the vast majority of a leased portfolio is placed is of importance to some lessors, particularly if the aircraft is returned or repossessed. This can mean the placement of an aircraft at a lower than market rent. The leasing of aircraft can also include taking older aircraft as a trade-in and some newer lessors may be tempted to place such older aircraft at low rentals because of a lack of experience with the type or simply to show that the aircraft has been placed. Longer than average lease rentals to a financially secure lessee will warrant a lower rental in any event.

The lease rentals are provided by Aircraft Values Pro or 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/Asian specification (a factor which has lesser significance due to the spread of the low cost model where galley equipment is less important), weaker credits and short lease terms may warrant a higher rental. A long-term rental to a strong credit will justify a lower rate. AVAC can privide a matrix of adjustment factors to reflect differing lease terms on request.

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