2018 is likely to be a repeat of 2017 in terms of the number of aircraft entering the “lease end” phase. So, what does that mean for the lessors, financiers and the broader market?
In general terms (and ‘general’ can of course be a dangerous starting point, as with most things in life, the devil is in the detail), GDPs are heading the right way, that creates air traffic demand, oil price is reasonably/relatively low with no immediate sign of huge increases, therefore it is more likely that leases will be extended this year than terminated. This does raise a few key points.
The airlines are in a strong negotiating position. Why? They have options:
1. Offers of new aircraft from the OEMs and the lessors.
2. Lessors of the current leased aircraft will be keen to extend rather than manage a redelivery and need to place the aircraft.
3. It is inevitable that the airlines will be able to achieve reductions from the current lease rental but also be able to negotiate reductions in redelivery conditions and/or contributions towards upgrades/cabin refit
and/or resetting of maintenance reserves/end of lease compensation.
4. Aircraft redeliveries do have a cost (often not considered by the lessee). IBA research suggests that a narrowbody redelivery adds almost US$2m to the cash outlay as there is often a mismatch between how an aircraft has been operated and maintained compared to the redelivery conditions that are imposed by the lessor. This can often create earlier than expected/required component changes (including expensive engine shop work) per the lessee maintenance programme versus the OEM MPD. Repair reviews and modification certification are also areas that require additional work from the lessee.
5. However, point 4 above is often balanced by the lessor also needing to apply resource to manage the redelivery and transaction to the next lessee.
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