Steady as it goes for region’s aircraft lessors

Aircraft lessors enjoyed a good year in 2023 and 2024 is expected to be even better. As the airline industry returns to normality post pandemic and growth resumes demand for leased capacity will increase, reports associate editor and chief correspondent, Tom Ballantyne.

February 1st 2024

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Aircraft lessor performance in 2024 is forecast to remain solid from improving lease pricing, reports Morningstar DBRS, the world’s fourth largest credit ratings agency. Read More » With airline profitability recovering in most regions, it also projects a low level of airline defaults this year.

“Overall, lease rental revenue improved a solid 6% year-on-year, reflecting declining lease deferral balances, declining power-by-the-hour contracts, as well as strengthening rates and modest aircraft portfolio growth. Results also benefited from sound gains of aircraft sales supported by improving aircraft values,” it said.

The optimistic forecast for the next 12 months coincided with major lessors reporting bumper business last year. BOC Aviation announced last month that 2023 delivered record operational performance. “We executed our largest number of transactions, including 142 lease commitments, since our inception,” managing director and chief executive, Steven Townend, said.

“We committed to purchase 95 aircraft as the foundation for balance sheet growth and we took delivery of 65 aircraft - the largest since 2017. Collections exceeded 100% for a second consecutive year and our aircraft utilization rate improved to 99% from 96% in 2022. With a strong aircraft portfolio and order book, we are confident of meeting our airline customer needs and maintaining our position as a top five global aircraft operating lessor.”

Avolon Leasing, based in Dublin and 70% owned by China’s Bohai Leasing, also reports business is thriving.

“Our balance sheet scale allowed us to order another 200 new technology aircraft, strengthening our delivery pipeline and growth into the next decade,” Avolon CEO, Andy Cronin, said. The aircraft order was for 100 A321neo, 80 737MAX and 20 A330neo. Avolon had an owned, managed and committed fleet of 1,035 aircraft last December 31, a 24% increase year on year.

In its forecast, Morningstar pointed out supply chain disruption and production related issues are creating record backlogs of new aircraft orders at Airbus and Boeing. “Depending on the aircraft type, these backlogs have resulted in very limited new aircraft delivery slot availability before 2028,” the ratings agency said.

“In the last few years, several aircraft lessors have placed large orders to capitalize on growth opportunities. While aircraft orders can serve as a source of growth, the timing of the deliveries is critical and viewed more favorably by Morningstar DBRS if scheduled as replacement aircraft and not for speculative growth.”

Nevertheless, aircraft lessors charted by the agency hold orders for more than 1,840 new Airbus and Boeing aircraft. “We see this proportion of aircraft orders from lessors as demonstrating the confidence of lessors in new technology, fuel efficient aircraft,” it said.

“Orders for narrow-bodies accounted for approximately 96% of total lessor commitments with original Equipment Manufacturers. Importantly, from an asset risk perspective, all lessor orders placed in 2023 were for fuel efficient narrow-bodies, including the A320neo, the A321neo and 737 AX. Lessors held 79 orders for wide-bodies at November 2023: 54% for 787s and 35% for A330s.”

“China is an important long-term growth engine for the global aviation industry with Boeing estimating in its 2023 Current Market Outlook that near 23% of the more than 42,000 aircraft forecast to be required in the next 20 years will be in China. However, with tensions between China and the West deteriorating, several aircraft lessors have been reducing their exposure with Mainland customers,” it said.

“Indeed, AerCap has trimmed the net book value of its aircraft portfolio on lease to Chinese airlines to16.9% at December 31, 2022 (the last date data was reported) compared with 20.5% at year-end 2018. Similarly, Air Lease Corporation has shrunk the percentage of its fleet on lease to Mainland airlines to 7.3% at September 30, 2023, a notable decline from 17.0% at year-end 2018.

“We see the willingness of aircraft lessors to reduce their exposure to potentially high growth and profitable markets, to contain overall risk, as demonstrating good risk management.”