Historically, new delivery market lease rates have correlated well with 5-year swap rates, usually with a 6 to12-month lag. However, recent IBA research revealed that, despite rate increases since 2016, market lease rates have in contrast declined. We examined lease performances of the A320ceo and 737-800 both when new and at 10 years and summarise our key findings as follows:
Understandably, lease rates plummeted after the 2015 fuel price collapse, with the sudden uptake in lease extensions and in today’s prevailing low fuel cost environment airlines’ reluctance to pay premium rates for new aircraft continues. Other pressures resulting in depressed lease rates include speculative orders that create fierce lessor competition, an increase in direct orders with OEMs forcing a slowdown in sale leaseback activity and an influx of new investors buoyed by more affordable capital. Based on many lease terms we have witnessed, investor behaviour suggests the adoption of bolder, longer term strategies and the making of courageous assumptions about residual values and re-lease rates.
Again, there has been a milder negative trend since 2015 caused by lease extensions, the impending arrival of replacement technology and lessors competing to place secondary leases. Declining traffic demand and a weakening GDP could all potentially exert further strong downwards pressure. The MAX grounding stabilised 737-800 lease rates such that increases were observable only on shorter terms. Nevertheless, a record ABS market in 2019 saw 17 aircraft, many of which were mid-life A320ceos and 737-800s, launched by the end of November, 6 more than in 2018. This evidences investors’ solid conviction that these aircraft provide better opportunities for higher returns. An unprecedented number of aircraft and ABS assets were involved in airline failures this year. The speed with which many of the A320ceos and 737-800s were rehomed further demonstrates confidence in their potential to generate advantageous yields.
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