There can no escaping the magnitude of the decline in widebody rentals nor the difficulty in registering an improvement.
The international sector has registered a precipitous fall in demand which is leaving thousands of aircraft idle. Even where services have been restarted, these have been limited in number with low load factors. The problems associated with establishing travel corridors where the low risk of infection from origin and destinations allows for relatively unfettered services still creates difficulties for the wider network and regulatory authorities. Moreover, the travelling public will be risk adverse for some time to come given the potential to be even turned away upon arriving at the origin airport due to a high temperature. Given the incubation period for the virus, even a test on departure or arrival will not necessarily provides the reassurance sought by the public or health authority.
Even given the headline collapse in lease rentals, this needs to be seen in the context of both an existing lease and any new lease. An existing lease may see only a payment holiday or a reduction in the short term such that the lessor will recoup the full amount due under the lease over the entire lease term. For a new lease, then the lease rental in the first year or so may be much lower than pre-Covid levels before exhibiting a step change to a higher level. Consequently, a five to seven-year lease term being entered into today may require a multiplier to the applied to the lease rental.
Sale and leaseback transactions, which constitute an increasingly large proportion of new aircraft deliveries, continue to involve higher lease rates than those attributed to vanilla dry operating lease rentals. Lease rentals are provided by The Aircraft Value Analysis Company (AVAC) www.aircraftvalues.net (for China www.aircraftvalues.com).
|Percentage Discount Compared to 4Q 2019|
|Aircraft||% Change||Trend Analysis|
|A300-600R||49%||The lease rentals of the -600R have been under pressure for some years not least because the type has increasingly been displaced by much more efficient types. The -600R has increasingly been removed from service by the original customers such that only some 20 remained in service with Middle Eastern operators. This means that the lease rentals are something of an irrelevance in any event. The majority of the fleet have either been physically parted out or are in storage awaiting the same fate. The type will increasingly be retired but as long as sanctions remain the type will be used as a long as possible.|
|A310-300H||47%||The market for the A310-300 has been virtually nonexistent for years as the 40+ that remain in service are largely operated by non commercial enterprises such as governments. The placement of the aircraft in a commercial role is therefore limited to a few carriers in the Middle East who have little option but to continue to operating the type. The -300 never sold in great numbers as operators sought to use either smaller narrowbodies or larger widebodies. The fall in lease rentals is therefore largely irrelevant.|
|A330-200||40%||There can be no escaping just how difficult the market is for the A330-200. Despite attempts to talk up the market, nearly two thirds of the A330-200 fleet was still in storage as of mid May reflecting the limited restoration of international travel. The issue though for the A330-200 is in terms of seeing how many will return to service and how many will remain in storage. Of the some 400 that are in storage, it is expected that at least 25 percent will not see service in the next twelve months. Some operators of the type have already at the very least gone into administration which suggests that lessors may not receive owed rentals and have to accept lower rentals for some time. Repossession will be an issue that the lessors will be anxious avoid but some have had little choice.|
|A330-300||41%||The market for the A330-300 was already suffering before the Covid event so to some extent the few months before March saw a substantive reduction in rentals and values. Again more than half of the fleet are in storage and it remains difficult to see how they can be fully employed again in the next year, particularly if Airbus continues to delivery new A330-900s. It is noted that a number of passenger aircraft are now being used in a freighter role with some having removed seats (Cathay was one of the first operators many years ago to use the A330-300 in a cargo role when not being used for passenger flights). But such utility is a stop gap measure such that lease rentals will not recover to any great extent for perhaps two years. Rolls-Royce are suffering to a significant extent in view of their TotalCare program and the lack of flight hours. Engine values on the A330-300 have also tumbled as availability of spare engines is that much greater and demand is less.|
|A330-900||35%||The deliveries of the A330-900 have been progressing but unfortunately nearly as many are in storage as are in active service. TAP has taken out seats on two aircraft to use as freighters. Fortunately, the A330-900 will see an early return to service while the A330-300 languishes. Airbus will have to cut production still further which will benefit the -900. The aircraft has been marketed as a low cost alternative to the B787 and A350 – this is even more apparent in todays market.|
|A340-300H||40%||There are now only some 50 remaining in active service, if that even though at the end of 2019 there were over 110 in service. Any period of storage makes it even harder to see a return to service for the A340-300. Operators now have even more options when seeking a widebody. However, it is to be noted that the aircraft does not require ETOPs compliance except in terms of the Minimum Equipment List (MEL) which requires a greater amount of equipment to be functioning upon departure for longer flights over water.|
|A340-500||N/A||The market for the A340-500 in terms of commercial service is no longer relevant. There were some who dismissed the -500 as soon as it was launched considering the type to be marginalized rather than a niche aircraft. They were quickly proved right as the type was too expensive to operate.|
|A340-600||55%||Iberia and Mahan are the main operators of the type in a commercial role and given the problems of South African their examples may no longer be in service particularly as only one is currently active. The lease rentals were desperate before and they are even more so now. The engines may have green time remaining but simple arithmetic calculations do not tally with market realities.|
|A350-900||29%||There are as many -900s in service as there are active as of mid May which gives an insight into how limited the reactivation of the long haul fleet has been. Even those that are listed as being active are likely performing relatively few sectors each day with utilization low. There are for example still only a quarter of commercial flights being operated as of mid May than there were in late January. The international flights will be difficult to re-start because of the absence of commonality with regard to departure and arrival protocols. The lease rentals have fallen by a considerable amount but not as much as most other widebodies. The aircraft offers considerable efficiency.|
|A350-1000||31%||Although with the number of deliveries being rather limited to date, it still comes as something of a surprise that only some four -1000 units are listed as being in storage – two BA aircraft, one Cathay and one Qatar. The rest are in seemingly in service but again utilization may be an issue. The aircraft is large so leasing will be more difficult than might be imagined to secondary operators just as is the case for the B777-300ER. Yet as the A380 is retired and the B777-300ER is replaced then there will opportunities.|
|A380||59%||The market for the A380 is extremely limited. There are only five examples flying – four with China Southern and one with HiFly. B-6136 has flown recently but not on the 16/17/18th May illustrating the difficulty in keeping the aircraft in the air. Lease rentals have tumbled. A lessor will seek to be paid for a minimum number of hours on a power by the hour arrangement. Bringing the aircraft back into service will be ever more difficult given that a significant number are not simply parked but have been flown to storage facilities which suggests that they may be there for the long term. If an A380 is in storage for two years there is little expectation of it returning to service. In a Covid environment however, the interior space provides for social distancing that not even business jets can offer assuming that passengers are willing to pay a premium given that the load factor will be that much lower.|
|B747-400||44%||The lease rentals of the B747-400 were under pressure many years before Covid but there has been alacrity since then to retire the type that much sooner. The lease rentals have therefore fallen by 50 percent but again this needs to be placed into the context of a short term rental. The lease rentals of the type are not expected to experience any significant improvement even when international routes open up. Even the low price of fuel is not making any difference. COVID-19 has accelerated the demise of the aircraft.|
|B747-8I||55%||Air China continues to operate the type but there seem to be no other operators at the moment willing to use the aircraft. If the A380 is moribund then so too is the -8I. The type is a failure as Boeings own forecasts seemed to show before even launching the model. The freighter version should have been the only variant. The lease rentals are therefore very low for any operator seeking short term capacity. Power by the hour arrangements will be more likely for this type of aircraft. The freighter conversion program may now seem too complex and costly for such a limited number of aircraft. The preference will be for lease extensions rather than having to deal with a return.|
|B767-200ER||33%||The fall in lease rentals may seem low in comparison to other models but then the rentals of the -200ER were low in the first instance. The type has long since been displaced by newer types and it is to be expected that rentals would fall by the lesser amount. The retirement of the aircraft is expected to be sooner rather than later in todays environment.|
|B767-300||38%||The type was always second best to the -300ER and was ordered by a few operators. Dispersal among the wider operator base has been difficult and the Covid event is even more of an issue given that parting out seems the more likely fate even though the engines have little value now.|
|B767-300ER||34%||The withdrawal of the B767-300ER has been delayed time and time again. Firstly, the strength of the market in the mid 2000s was such that operators retained the type; then the delay to the B787 meant the type was needed for a little longer; then the expense of new aircraft saw renewed interest in the -300ER. But now there can be no escaping the inevitable fate of the -300ER. US operators have already indicated that some of their examples will be removed from service. Hundreds are currently in storage and most will not see a return to operation, not while there are also hundreds if not thousands of A330s, A350s and B787s also waiting to see restoration of demand. The lease rentals of the B767 were already falling before Covid but with a 34 percent fall, there is a clear indication that placement of the surplus will more than difficult. The fleet will inevitably shrink. Lessors need to keep the type with existing lessees. COVID-19 has made more efficient aircraft that much cheaper and has hastened the retirement of the -300ER although the lower price of fuel is a bonus.|
|B767-400||41%||Of course, some appraisers who prefer not to alter values or lease rentals or even present values or lease rental without transaction data will never even both placing a value or lease rental on the -400.|
|B777-200||40%||The B777-200 is being removed from service on a permanent basis now that there so many alternatives. In any event, the retention by existing operators was never a justification for assuming higher lease rentals except on the shortest of terms. In a weak market, lease rental behavior tends to experience a 180 degree turn whereby a short term will see a lower rental and a longer term, a higher rental – the converse being the case when the market is strong.|
|B777-200ER||36%||The lease rentals of the -200ER were already under pressure although before Covid 19 there were attempts to talk up the market due to retention by existing operators. But the experience of the DC10 should have highlighted this issue. The values of the DC10-10 were seemingly unassailable in the late 1980s because there was no availability. But as soon as the -10 did enter the market it became apparent that no other operator wished to acquire them at least in their passenger configuration. Actual purchase prices were a shadow of some appraised values. But seemingly this lesson needs to be included in the curriculum at the school of appraisers where there may a need to discuss actual market value behavior rather than how to present abstract base values.|
|B777-300||42%||The -300 was more of an experiment for Boeing just as the B767-300 was also the forerunner of better things to come. There are few operators. The market for the -300 was extremely limited before Covid and it is even more so now.|
|B777-300ER||37%||Such a turnaround but not unexpected. The market for the -300ER was much weaker even before Covid and this event has exacerbated an already difficult situation. Perhaps some 40 percent of the fleet is in storage. The lease rentals are much lower which is to be expected as the very operators that are the target for placement are the very ones who have little use for the aircraft. The arrival of the B777-9 does not represent the best of timings as these will serve to displace the -300ER rather than be used for additional capacity. The rates are again for a short term. There will be many lease rental holidays being sought or rent reductions but not all will be granted. Only after an operator has exhausted other avenues will some adjustment be granted. Taxpayers money should not be used to pay lessors rentals, who are perhaps the best placed to absorb some temporary loss of income.|
|B787-8||35%||The -8 was the poor relation even before the Covid event. The orders and deliveries had slowed considerably such that there were few of either despite Boeings attempt to revives its fortunes. The lease rentals have suffered as finding a home for any used aircraft is now difficult but even more so for a used -8. The lease rentals may recover reasonably quickly as its smaller size may suit a contracted market.|
|B787-9||29%||The best of the best despite the problems with some of its engines. Yet, the market is still difficult. A lesser proportion are in storage than for some other widebodies which is not surprisingly as this is the type that will be put back into service first even if load factors are still an issue. The lease rentals are expected to be among the first to improve but it will take some time to reach pre-Covid levels again.|
|B787-10||34%||There were only seven -10s in storage with the majority continuing to operate perhaps being the first to be placed into service as the type offers more capacity to enable passengers to be spread among the cabin more easily. But there are few in service and it must be wondered if delivery rates will fall by a greater degree than for some other widebodies.|