There are so many questions that we all have right now and so few answers. All we can do is keep on looking at the signs and update possible scenarios accordingly.
The Eurozone continues to put pressure on the global economy and as it does the US government senses that it is set to regain much lost business that briefly took flight in the 2000s. As this happens we should note that the US market, already in good shape, remains positive and with AA still on the verge of potential merger the outlook for the US internal business traveler market looks to be strong. This will filter through to lessors and all areas of aviation.
Europe is not all bad. There are airlines shining out there like easyJet who prove that if the offering is correctly placed then profits are not far away. In China the sheer number of people in the middle class bracket against aircraft serving them should all but ensure that things should only stagnate at worst. India is another story altogether, it is a right mess, enough said.
In all of this we have airlines collapsing, merging and cutting back which is leaving hard-to-shift aircraft on the market and at the same time there are rising volumes of new single aisle deliveries. This is the area to watch in the next 18 months as it gives leverage to operators. The effect will be felt far and wide, not least for the lessors, which although placing aircraft with relative ease are on the main increasingly seeing rates and terms totally at the mercy of the operators. In this current market lessors are geared to cope well, but what of five years out from this point?
Seven airlines of note that we have spoken to that all lease en-mass have told us that this is the new future and that lease rates will have to fall further. When asked about the premium lessors require for a Max or Neo the airlines we spoke to suggested that this would be worth paying, especially in the first five years of deliveries for the types but at the same time each of them are unsure about the economics of having an aircraft with a 10-15% economic advantage only to be paying 10-15% more on lease rates. This leads the airlines we have spoken to agree that delivery of leased A320 classic and 737NG aircraft over the next few years while lease rates are softening is a good play. For the lessors getting in on the Neo and Max there should be the required economies of scale to fix rates competitively and see the required margin come to pass. There is no reason to think that there will be any problem unless the manufacturers ramp up deliveries further.
For the older A320s and 737NGs? Well Africa is all but saying do not look at us to dump old aircraft, so that little number is out of play for many. The advantage in breaking the A320 is over for the time being in most circumstances. The 737-800NG will have its time for breaking but not yet, surely not yet.
Most lessors would agree that older A320 aircraft have already provided a good margin, the problem lay in remarketing them when coming off lease. Of late the cost of breaking has been the best economic option, but what if the breakers start to become overwhelmed? In that instance, prices for breaking aircraft will balloon and we shall see people getting into that area of business en-mass, then aircraft owners will have to watch out for the operational risk of dealing with a breaker that may not be disposing of aircraft materials legally. In the UK the Environment Agency is already tracking unregistered aircraft breakers that may well lead to the door of a few lessors.