In this market, indeed in this world at the moment, planning for the future is no easy task, but plan for it we must. For airlines and lessors the news from Airbus on the zero-emissions aircraft this week confirms that the technology sea change we have been warned was arriving in 2035 remains on-time and definite (at least for now). Boeing will also be there with its offerings, be sure of that.
It might be that recent governmental intervention speeds this process up and entry-into-service is slightly sooner, but come-what-may, new greener hydrogen-powered aircraft and new generation designs will be in service from 2035. This is both excellent news and a headache. Airbus and Boeing seem set on making sure this technology enters into service not with large wide-body aircraft but in the more prolific and profitable narrow-body market, they would be blindingly mad not to take this course of action. With so many airlines across the globe having to be bailed out by governments, and with governments looking very hard at increasing emissions taxes heavily, and with many financial agreements pegged to greener performance/lower emissions, it is clear that airlines will have no choice but to order the next-generation of aircraft as soon as they are able to do so. If true, that means we have just 15 years remaining before aircraft start entering service and say 18-20 years before production rates start to make a significant impact on the global market.
Let’s say you are a lessor and you have a 737MAX delivering over the next three or four years, all calculations and assumptions will have to be made on the basis of 10-15 year useful life not 15-20 years, this in turn should drive-up lease rates over the coming decade to keep the required minimum margins intact. That is all well and good, but the airline market coming out of COVID-19 in 2021 is going to be cash-poor and restoration of routes and therefore passenger numbers and revenue will be gradual as a result. Most airlines accept 2024 as a year when we will see revenue return to 2019 levels and this is not disputed. In this uncertain and volatile market, any lease deal might be considered a good deal – but what about the economic life of the aircraft; what about the future?
I am sure some will argue that they might not be around in 2035 so it is all about today. But large lessors, especially listed ones, battered by COVID-19 will have to take the long-term view and that means that maybe, just maybe, smaller players with cash on the hip will be able to start outbidding them on contracts by some margin and indeed will be better placed to win in the short term. However, even they must now consider that current generation narrow-body aircraft (including MAX and Neo) will have a first tier lifespan of no more than 15-odd years, bringing those narrowbodies into line with the wide-body market.
On a separate note, we should also consider the effect that dealing in the widebody market has had on lessors over the past five years. Very few lessors have been able to make the numbers work in their favour and very few lessors would want a widebody aircraft on their books at this moment in time. Going forward, at least in the short term, is the risk of widebody aircraft on the books just too much for all lessors to cope with? You have to wonder.
Philip Tozer-Penningto