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Widebody Rentals Remain Under Pressure

June 10, 2019

The market for widebodies is not as strong as for narrowbodies with lease rentals remaining under pressure as a result of higher fuel prices and weaker yields.

Leasing the widebodies on a vanilla operating lease poses more risk for the lessor. While the returns can be higher and more certain when leasing to the “flag carriers” for the first lease, there is far greater uncertainty when seeking to place the aircraft after the expiration of the first lease – as the experience of the A380 demonstrates all too clearly. Leasing a used widebody after the first lease requires considerably more planning than for a narrowbody because of the reconfiguration and lesser pool of potential lessees. The time required to reconfigure a used widebody has been increasing – as has the cost. The maintenance costs associated with a widebody are that much higher and slots at MROs for engine and airframe maintenance less available. At least a year may be needed between planning for an interior change and placement with the new operator due to the bottleneck that exists with interior manufacturers. A relatively high proportion of widebody operators prefer to lease a new aircraft for 10-12 years and then replace it with a new aircraft. Other operators may simply prefer to retain their aircraft for 15 or more years before opting for a new type which means that they have little appetite for used aircraft.

The last decade has a seen a significant increase in the number of widebody aircraft being leased mostly through a sale and leaseback but these leases have yet to expire but will do so in the coming years. The lessors have traditionally shied away from including too many widebodies in their portfolios because of the perceived greater risk and management time. The focus for lessors has been mostly on medium sized aircraft such as the B787 and A330 which have the potential to be placed that much more easily. Yet, a reasonable proportion of the widebody fleet are leased, having successfully transitioned from the first lessee or owner. Used widebodies are constantly moving between operators via a lease but at rates that can see considerable variation depending on the subsequent lease term and credit. There is also the issue of lessors having managed to secure a reasonable return on the initial lease, sufficient for a second lease to be arranged at a much lower rental as a means of generating at least some marginal revenue. Lessees of widebodies are all too aware of higher maintenance reserves or end of lease compensation arrangements which can sometimes represent a means of bolstering the base lease rental.

In terms of international passenger traffic growth according to IATA, this increased by 4.5 percent for the first four months of 2019 compared with a 4.7 percent increase in capacity. The overall load factor for the first four months was therefore slightly down but still at a healthy 80.7 percent. High load factors can however, misleading as more sophisticated yield management systems will simply seek to sell seats at a lower price to fill any remaining empty seats. This filling of economy seats at marginal pricing has contributed to the focus on smaller widebodies.

The demand for widebodies is not as great as it is for the narrowbodies as is demonstrated by orders and production rates. Boeing has recorded only 20 orders for the B777 and 28 orders for the B787 in the first four months of 2019. This compares with five passenger B777 deliveries and 48 B787 deliveries. The backlog numbers 995 excluding freighters. Airbus has fared even worse with a net reduction of A330s orders by three units with 29 new orders for the A350-900 but 40 cancellations have also been recorded for the first four months. There has been however, a net increase of 10 orders for the A350-1000 and a net decline of 31 orders for the A380. Overall this leads a reduction of 35 for the Airbus widebody orderbook. Deliveries have been slow with only seven A330 deliveries in the first four months, 30 A350s and one A380. The Airbus backlog focusses on the A350-900 with 968 Airbus widebodies on backlog, very similar to Boeing. Both manufacturers therefore have some five to six years worth of orders on backlog but some orders will be destined for delivery well into the next decade although there will be some difficult in securing delivery slots in the short term.

With delivery rates exceeding new order placements by a considerable margin, the used market comes under increased pressure as new aircraft are serving as displacement just as much as growth capacity. The placement of used widebodies is still be achieved but via lease rentals that are not as strong as might have been expected, particularly as rates for new aircraft are ever more competitive. The rates for new B777-300ERs has dropped as production comes to an end and as such rates for used -300ERs, which are beginning to enter the market, are also unable to be sustained at previous levels and are falling. With rates for new A330-300s also falling to below $700,000 and the shift towards the A330-900 then rates for used -300s can be expected to be on the decline soon. However, the problems being experienced with the B787 Trent engines have previously seen a boost to short term A330 lease rentals. The demand for the B767 is still very strong, at least for those in good condition but the same cannot be said of the B777-200ER which continues to see lower rentals. Inevitably, the higher price of fuel is an issue that is affecting older widebody aircraft making them less efficient and lessors are therefore having to compensate in offering lower lease rentals accordingly.

 

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