Narrowbody Rentals Still Low Even With Strong Demand

April 1, 2019

Shortage Exists Despite Corporate Failures

Demand for seats remains strong with January recording a growth rate of 6.5 percent and as such operators are needing to acquire additional capacity but lease rates for narrowbodies continue to be at odds with such growth – except of course where airlines are needing to compensate for the grounding of the B737MAX.

The five year growth rate in passenger traffic as reported by IATA (which however, does not include the traffic reported by some larger carriers such as Norwegian, WOW, Wizz, Ryanair and Southwest) is now above seven percent compared to the 20 year average of just over five percent. With such growth rates in passenger traffic over recent years, a rate of 6.5 percent translates into a considerable number of additional passengers and therefore seats.

Accommodating the additional passengers can be facilitated by carrying more passengers in each aircraft, utilizing existing aircraft more intensively, adding aircraft, adding more seats to existing aircraft, retiring fewer aircraft or acquiring larger aircraft. Over the last few years airlines have been acquiring new narrowbody aircraft with ever more seats – the 150 seat A320 is now the 180-186 seat A320 for example and B737-800s have usually featured 189 seats. Airlines have also reconfigured aircraft to accommodate more seats and sought to offer a single class rather than two classes. The full service operators have had to follow the lead of their low cost competitors. With respect to load factors, this has been increasing such that 80 percent is now the norm which compares with around 50-60 percent in the mid 1990s. This means that at peak times the aircraft is likely to be full although of course at 80 percent load factors airlines are having to be flexible in determining their fare levels. The manufacturers have been adding aircraft and increasing production of narrowbodies such that the number of available seats also increased as of January 2019 by a similar amount to passenger growth. This means that load factors have remained unchanged and shows that the manufacturers are delivering many more aircraft than in the past. The grounding of 371 B737MAX aircraft is having an effect but the fleet represents perhaps 1.5 percent of the fleet and less than that in terms of the number of seats. The rise in delivery rates of the A321 is particularly notable as is the lack of interest in the A319neo and the B737-7 although the A220 is gaining ground.

Despite the growth there have been some notable collapses of airlines while others are struggling. This demonstrates that above trend growth rates are no guarantee of corporate success. The grounding of the B737MAX will affect the ability of some airlines to meet their schedules and see increased costs, not least in terms of fuel although of course there will be compensation to be paid by Boeing not least because operators will be paying leasing and finance on aircraft that are not being operated for a number of months.

The lease rentals of the narrowbodies are generally under pressure as the leasing industry encounters more competition and lessees face cost issues. However, the grounding of the B737MAX is seeing a rise in short term lease rentals for other aircraft although it must be noted that the problems with the Rolls-Royce Trent engines also saw a rise in the demand for used widebody capacity and therefore short term rentals – although this will not translate into improvement beyond the end of this year with long term rentals expected to be unaffected. Indeed, once the B737MAX issue is resolved and operators are able to restore operation of existing aircraft and receive an influx of newly produced aircraft, there may likely be increased pressure on rentals as demand for older aircraft suddenly falls. In the interim whereas the problems associated with the GTF engine on the A320neo may have seen a reluctance to apply comparable rentals to the B737MAX, the situation may be temporarily reversed with A320neo rates achieve parity or even higher levels.


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