IBA Insights

IBA Contributes to the Aircraft Finance Review 2018/19

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.

There may be reasons why an airline will not want to extend irrespective of the above benefits:

  • The aircraft may be too old or in need of such significant investment that it is not deemed a good economic case.
  • Newer aircraft incoming from earlier orders to reduce the fleet age profile.


And, of course, the lessor may have options, such as:

A preference not to extend an older aircraft that has high value in either cash reserves or end of lease compensation. This can be realised as profit rather than being re-invested into maintenance checks and shop visits that may not create long-term payback.

There may be an opportunity to benefit from a relatively higher lease rental from another airline that cannot access newer aircraft and the lessor determines that with robust asset management that the potential higher risk is worth taking for a higher lease rental / longer new lease.

For some aircraft, such as the B737NG and A320 family, the advent of Passenger to Freighter (So called “P2F”) programmes provides a further opportunity to re-invest in older equipment. Some lessors have already secured conversion slots for the coming years.

Whilst the above points are ‘general’, there will be differences between aircraft types and the lessee’s status. A lessor that has been accruing maintenance reserves, either in cash or “condition”, will have much more flexibility than relying purely upon redelivery condition. There is an increasing trend in leases with fewer cash reserves, however, that is partly due to some countries/lessees having sufficient credit quality and or guarantees that allow the lessee to be comfortable in taking that risk. This leads to a ‘general’ fact that fewer leased widebody aircraft are paying cash reserves. In ‘general’, the widebody fleets are operated by flag carriers with strong government support, therefore the lessors will be reliant upon the redelivery conditions to be strong enough to allow remarketing to be simple. However, it can be the opposite situation with the flag carriers negotiating relatively weak redelivery conditions (in the favour of the lessee) and this gives the lessor the added issue of a lack of cash accruals for maintenance “re-lifing” coupled with low standard “as-is” condition aircraft.

Coupled with most widebody aircraft being enrolled in term-based engine support programmes which expire at aircraft redelivery, the costs to move the aircraft from lessee A to lessee B can become a multi-million dollar exercise with an associated downtime of at least six months.

2018 looks to be a busy year for the lessors and airlines

We have identified a total of 1,300 lease returns and extensions for the market to address. The accompanying charts analyse this activity by aircraft type, lessor and lessee. Naturally the A320-200 and B737-800 take the crown, accounting for almost half of all transitions, whilst the B767- 300ER and A330-200 lead the pack for the widebodies.

If fuel remains static, then a handful of the widebodies may well stay where they are too. The market will remain particularly interested in the B777-300ERs, and the few A380s that are expected to transition that did not quite make the chart. Younger A320s, B737-800s and A321s should stay where they are.

So how are the redeliveries split by lessor?

There is an obvious correlation between the size of the lessors’ fleet and the expected extensions and redeliveries in the coming year. Aercap, GECAS and Avolon lead the way. For many of the newer entrants they will benefit from relatively fewer redeliveries this year, but they will slowly but surely move up the table. A key action point for many of those new lessors is that they have to rapidly build up expertise or outsource the redelivery function well ahead of the lease end date.

And what about the most exposed airlines?

From the lessee perspective, IndiGo, AA, Air Canada, United and Alitalia are highlighted as the top five. There are many here that we expect to see selling to the operator or remain for another period, but a good number will return.

The bulk of the returns or extensions will come from midlife aircraft – the 10—20-year olds – whilst only around 200 aircraft below 10 years old will be available. IBA suggests some of the oldest will head for retirement, whilst a number of the mid-life narrowbodies may find their way into a conversion programme.

The redelivery process should commence around 15 months prior to the lease expiry date. Leases will vary, ranging from those which provide the airline with the option to extend, to those which remain silent on any such arrangement leaving it down to a negotiation.

Whilst the prospect of remarketing aircraft coming off lease may seem to be a formidable prospect, it is all part of the “day job” for most lessors, but there are still many smaller lessors and funds that have such a liability to face in the coming years. Similarly, as mentioned above, many airlines still do not take the redelivery phase as seriously as they should. We have seen several instances in the last year where a lack of resource at the airline has resulted in late redeliveries. Most leases have a late delivery clause that can mean additional rentals are due – ranging from 125% to 200% of the normal lease rental if the airline fails to meet the redelivery conditions in a timely fashion.


For more information contact Phil Seymour – CEO



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