While passenger traffic growth continues to be above trend and the backlog of aircraft on order continues to extend, this has not translated into higher rentals.
Widebody lease rentals in particular are facing more difficult market conditions and some substantive falls are in evidence. The recent rise in the price of fuel is a major concern. The cost of a gallon of jet fuel is now above $2. This compares with less than $1.3 a gallon in June 2017. The last time fuel was above $2 a gallon was in 2014 when $3 was momentarily recorded. The stronger dollar is also an issue for many operators. For widebody aircraft and therefore long sector lengths, the fuel component of direct operating costs is proportionately much higher than for a domestic operation involving only an hours flight time. The fuel cost burden is therefore considerable and difficult to predict even if some hedge or distill their own.
The airlines have become used to lower fuel prices and accordingly have built their revenue and expenses around such lesser prices. Consequently, when fuel prices have risen, profitability has been quickly impacted. Even with high load factors which suggests that more revenue can be extracted from passengers as they have no other alternatives, competition means that raising fares by any substantial amount is not a realistic option, particularly when economic conditions are not robust and disposal income is contracting.
A number of airlines are therefore facing financial issues while others are having to adjust their operations to suit the new market conditions. The widebody aircraft being delivered today can act as replacement rather than growth capacity, accelerating the retirement of used aircraft. Moreover, the aircraft being delivered today can sometimes have more seats installed than the ones they are replacing. With the higher price of fuel, airlines may seek to reduce utilization of older aircraft in favor of working the new aircraft harder. The transition of the product line in terms of new types such as the A350, B787-9, A330-900 are all serving to make the market more difficult for the outgoing widebodies, including the B777-300ER. While some legacy carriers always prefer to the retain widebody aircraft until the end of their lives, others seek to adopt new technology and efficiency that much sooner which means that ten to twelve-year-old aircraft can be moved to other operators.
The lease rentals for used widebodies are therefore being impacted by a number of adverse factors. Higher fuel prices are making them less efficient; higher fuel prices make new aircraft even more cost effective; new aircraft can facilitate new routes; new aircraft have higher seat counts; the age profile of existing widebodies encourages replacement; lease rentals of new aircraft are comparatively low. The widebody market – particularly the larger capacity segment – is also adversely affected by the limited number of operators able to contemplate leasing the aircraft. Most of the larger airlines initially buy the aircraft at a significant discount from the manufacturers and then participate in sale and leasebacks. Adding capacity does not usually involve acquiring used widebody aircraft unless there is a specific need. For example, some airlines may require to add more aircraft of a type that is no longer in production. There is an argument that the widebody operating base in burgeoning as more used widebodies have become available. This is correct but perhaps because lease rentals are sufficiently low to offset lesser efficiency and reconfiguration costs.
Seeking to re-lease a widebody also needs to take into account the cost of reconfiguration. In view of the need for operators to differentiate their products, even returning a widebody in a standard two class layout will likely not match the requirements of the next lessee thereby requiring some additional work. Some lessors will also negotiate an end of lease lump sum to compensate for changes to the interior while others will seek a sufficiently long lease to ensure a full payment and allowing the return compensation or maintenance reserves to represent the profit element. Nonetheless, the problems associated with remarketing the widebodies have dissuaded many lessors from participating.