The LRM (Lease Rental Matrix), which determines the average lease length and the adjustment to quoted lease rentals to reflect longer or shorter terms, has seen an extension to average terms as demand continues to outstrip supply but the last six months has not seen any significant change.
A long lease may actually be sufficient to achieve a full payout thereby reducing or eliminating any residual risk. Some of the leases secured for the A380 are on 12 years terms at rates that will fully eliminate the capital and interest cost thereby leaving owners with considerable flexibility, which will be helpful in view of the A380 being illiquid at present. Most lease rentals are based on a floating rather than fixed interest rate.
Lease terms can vary considerably and are to a large extent dependent on the market conditions. Lessors have been able to secure longer terms such is the strength of the market. This is not only a function of the lack of supply but also reflects the increasingly inability of operators to secure delivery slots in either the short or medium term. The lessors are also cognizant of the need to take advantage of the current stronger market and lock lessees into rates for as long as possible.
Generic lease rentals or lease rental factors (when the monthly lease rental is expressed as a percentage of the current – or future – aircraft value) are often quoted but these are usually dependent on the assumption of an average lease term, to an average credit, with average return conditions and at three months security deposit. The generic lease rentals can be adjusted to reflect the specifics of a lease changing the rentals to compensate for a longer or shorter lease, a stronger or weaker credit and a sale and leaseback transaction.
The adjustment factors used for the lease term and lessees credit ratings are however, a constant but are dependent on the state of the overall market. During weak market conditions, when supply and demand components are in favor of the former and equate to those of the period 2001-2003, the baseline lease term is that much shorter as lessors seek to place aircraft. Lease rentals tend to fluctuate more than values and in placing aircraft for a short time on a lower rental, there will be an expectation that rentals will improve. The aircraft will therefore need to be re-leased when the lease rentals have risen. Conversely, when the market is strong, lessors will be anxious to place aircraft on the longest possible lease at a higher rental.
The Aircraft Value Analysis Company Ltd (AVAC www.aircraftvalues.net) cites that a Tier 2 lessee represents the baseline case for the credit rating. A Tier 1, lessee with an excellent financial standing, will warrant a multiplier of 0.94 to the baseline lease rental; a Tier 3 lessee a multiplier of 1.09 and a weak Tier 4 a factor of 1.17 compared to the baseline lease rate. A sale and leaseback transaction may see a multiplier of 1.12 compared to a dry operating lease rental.
In terms of the multiplier for the length of the lease, in the current market conditions this is dependent on whether the lease is the first or subsequent lease as the latter lease term can be expected to be shorted in duration. The aircraft category will also play a role in determining the multiplier. A new A320 can be expected to have a baseline lease term of 9-10 years versus 7-8 years for a regional jet and 11-12 years for a widebody. A second lease will reduce these terms to 7-8 years; 5-6 years and 7-8 years respectively. A long term lease on a new widebody of 13-14 years will warrant a multiplier of 0.83 compared to the baseline case.