IBA recently updated its analysis around overspend in relation to redeliveries. As the infographic on page 9 highlights, overspends have increased since 2016, with engine costs being the key driver.
As a result, we thought it useful to update our 2016 pulse survey, where we canvassed a selection of Lessors and Lessees on five questions:
1. What is the primary reason for a late redelivery?
2. Which area of the aircraft is most challenging to redeliver on time and on budget?
3. Lessors, how often does the Lessee engage too late in the process?
4. Lessees, how often do you find your internal teams engaged too late in the process?
5. What are the key issues that Lessors face in 2017?
As part of IBA's continuing research into the challenges around transitions, we revisited these questions and added two more in order to capture changes in the market, or shifting sentiment:
6. What changes to end of lease trends in narrowbodies have you noticed in the last 12 months?
7. What changes to end of lease trends in widebodies have you noticed in the last 12 months?
In the previous report we received 72 responses, with a split of 65%/35% for Lessors and Lessees. This time, we received an increased number of 140 responses, with a more even split of 53% Lessors and 47% Lessees.
Key conclusions from the research include:
Both Lessees and Lessors agree that the redelivery process is not started early enough.
Records and engines top the list of the most challenging elements of a redelivery.
Resource, liquidity and increased returns are key concerns in 2018.
Below we report on both the larger more recent datasets, highlight areas of note, and recommend steps to maximise efficiency
There are both positive and negative trends around the responses to the reasons behind late returns. Encouragingly, there is more awareness amongst Lessees of the level of effort required than previously and there is also less disagreement over contracts.
A drop in disagreements certainly echoes the improvements to drafting that we have seen in the last two years. However, while ambiguous terms have reduced, there has been an increase in Lessee's demands being met. For example, delivery conditions for interior configuration being a Lessor's obligation. For redeliveries the top tier Lessees are able to negotiate diluted conditions, much less than half life in some cases.
Less positively, engagement is still taking place too late. We recommend engaging around the options at least 15 months out, more if possible. Planning redeliveries late immediately makes the challenge of juggling numerous parallel processes more challenging. Unscheduled repairs and failed borescopes were identified once again as a primary reason for late redeliveries, suggesting Lessees continued to be caught out.
As more operators build up or outsource dedicated redelivery resource, we were surprised that the feedback around the technical team focusing on keeping the fleet flying, not redelivering, had crept up a little. Our view is that while mindsets do take time to adjust, the increased number of redeliveries has absorbed much of the additional resource. Anecdotally, the airline collapses of 2017 also caused a spike in demand for delivery and redelivery resource.
Also there are big differences in what resource is actually available at the airline - clearly the LCCs redelivering aircraft have much less manpower in-house than a legacy carrier. We anticipate further issues in this area, especially since some LLCs appear to be pushing the obligation onto their MRO and that in itself causes conflict on points such as records/certification.
Here we saw very consistent findings compared to 2016. Records continue to be a primary challenge. The concept of Lessors hiring cheap labour to scan records at the last minute is compelling but risky and while systems and digitisation are certainly improving, translations and back-to-birth traceability remain a perennial concern.
We were surprised to see that Interiors and Interior items didn't generate more responses. In all IBA's recent redeliveries, interior condition was a point of robust negotiation, plus there are well documented concerns around seat supply when looking at the next Lessee's demands.
Again very consistent responses with the last survey which was interesting in itself given the increased sample size on this occasion. Once again the results suggest very strongly that Lessors feel Lessees engage too late - indeed the percentage of those responding "very often" has grown from 47% to almost 60%.
When asking the same question of Lessees, we have seen a swing that suggests some Lessees are much more aware of the need to engage early, but perhaps aren't executing the early engagement as much as possible.
In the largest shift in perception between surveys, in the 2016 survey, circa 50% of Lessees felt they engaged early enough. However, as the chart below highlights, in 2018, both parties agree that they need to engage earlier.
In one of our new questions we asked what changes our respondents had noticed. While for 30% of narrowbodies and 50% of widebodies there were no changes, there were trends across extensions which we would attribute to the following: Our final question this year asked what redelivery challenges are being faced this year.
Delays of A320neo/737MAX deliveries as a result of EIS engine issues.
Continued relatively low fuel price, though this is tracking higher than forecast by IATA.
Regional instability, impacting demand and fuel price.
Continued demand for capacity. Traffic growth remains robust and an extension can be achieved at a reasonable rate, especially on widebodies.
A worry for Lessors as the options to find new homes is tough, despite deals being offered (eg lower rents).
Some regional distress - Qatar/Middle East and US competition.
Our final question this year asked what redelivery challenges are being faced this year.
94% of respondents foresaw a challenge. Insufficient Lessee resource is unsurprising given the result from Question 4.
MROs are flagged as a bottleneck by 19% of respondents, anecdotally, the MROs often say they are engaged too late by the Lessees. Both points are merited when Lessees do not involve MROs early enough, only to find that slots are already booked. We canvassed some MROs on the subject and several commented that they found the returning Lessees to be reasonably organised for the End of Lease check (EOL). They were more frustrated when dealing with returning Lessors who want last minute changes to meet the next Lessee's demands.
Lack of Lessees - especially for widebodies - is a concern. We are seeing the return of used WBs after the first lease, regardless of the extension offer.
While extensions have been the order of the day for the last two years, increasing returns combined with a lack of Lessees would indicate increasing concern for liquidity and would also feed the slight, but noticeable, increase in disputes which can occur when a Lessor receives an unplaced aircraft.
There are positive trends emerging from this year's survey - most importantly around awareness of the effort involved in redeliveries. One of the largest swings in results saw 'underestimation of effort' drop considerably as a primary reason, an encouraging trend given the plethora of new entrants. Adding to the increased understanding was a switch in Lessee attitudes, moving from a majority perception that they engage early enough, to almost mirroring Lessors in their view that Lessees did engage too late.
As such, while an understanding of the effort has improved, execution of a redelivery still appears to challenge. Redeliveries continue to test both Lessees and Lessors and we can split our conclusion into two areas to be aware of, one tactical and the other strategic.
Tactically, there are further improvements to be made in planning and resourcing redeliveries. Insufficient Lessee resource, increased returns, scarce support from the Lessor and insufficient MRO support accounted for over half of our responses on 2018 redelivery challenges. Combine that with late engagement, the most frequently flagged reason for late redeliveries, and you have a perfect recipe for a likely overspend.
Strategically, there are potential red flags emerging around supply. 22% of respondents flagged a lack of new Lessees as a concern, a sentiment also voiced when asking for additional comments, where more concerns were flagged around liquidity than previously. According to IBA.iQ and our analysts, the current picture does not yet suggest that more popular aircraft are failing to be re-leased, but we are continuing to monitor parked aircraft and re-lease rates carefully.
As of early May 2018, IBA.iQ indicates that the number of passenger widebody returns has reached 48, with two thirds re-leasing within just a few months. It is unknown as to whether the remaining 17 have homes to go to just yet but their average age is 17 years old, whilst the fast movers averaged at just 10 years. Unsurprisingly, half of those that remain parked are four-engined aircraft, whilst the remaining half are made up of more challenging 777 classics and A330-200s. Encouragingly, those that have been re-leased include a good number of older 767-300ERs, a large number of A330-200s and 300s with even the odd 777-300ER and A340-600 for good measure.
Plan 15 months out for a narrowbody, and more again for a widebody with return conditions that require interior engineering as OEM engagement and lead times will be 18+ months.
Hire or outsource to plug gaps, a first lease narrowbody absorbs at least 120 man days resource, a widebody and/or multiple lessee histories can more than double that.
Engage with the other side to both build a rapport and to agree Lessor presence at end of lease (EOL) and redelivery check.
Run through each and every clause in the lease to identify:
What work needs to be planned in good time by the Lessee to redeliver per the lease or…
Decide if there are certain items that can be "bought out" for example, the Lessee does not perform an engine shop visit for a full refurbishment, but the engine is accepted as is by the Lessor, subject to cash compensation.
Mop up of Lessor obligations to Lessee such as AD cost share payment, and/or maintenance reserve payments. Agree any ambiguous terms in the return conditions, if not already covered, and ensure the redelivery resource is acquainted with the specific return conditions.
Remove the risk of unscheduled repairs by booking early with MROs and carrying out precautionary borescope if at all possible, or question whether it is required if the engine is under a full support OEM program.
Lessors, when you want the aircraft back, mitigate against lack of Lessee appetite or experience in returning aircraft by encouraging early planning and visibility of 'red flag' items, such as engine shop visits.
Greater focus on assets during operations. Lessors, make sure you utilise your inspection rights, particularly the penultimate annual inspection as per the lease plans for the Lessee redelivery.
Plan for operational demands consuming redelivery resource.
Ensure the records are in English, centralised, complete and correct.
Monitor values, availability and external events. The last 12 months has seen the unexpected return of A340s to service and the extension of older narrowbodies as EIS challenges continue.
Gauge Lessor/Lessee intentions as early as possible.
Lessors, begin remarketing as soon as you know the aircraft is returning or before, do not assume the Lessee will execute a verbal intention to extend. While any slowdown hasn't yet filtered through to our data yet, anecdotally we are aware of longer periods needed to find new Lessees.
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If you have any questions, comments or feedback please contact: Peter Walter
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Poorly managed redeliveries are a staggering waste of money. Every narrowbody and widebody whose redelivery is inefficiently handled can cost $USD 2 million and $USD 4.5 million respectively. Putting that into context, the unnecessary expenditure would be enough to fund six to eight months' lease rental for each aircraft, a Heavy C Check, or even an engine shop visit.