SMBC Aviation Capital’s successful negotiation to delay the delivery of 68 Boeing MAXs until 2025-2027 is the right outcome for both the lessor and the US airframe maker, said chief executive Peter Barrett.
A number of lessors and airlines have announced delays of their MAX deliveries (see Tui story in Airline News) in recent weeks, but Barrett told Airline Economics that the discussions with Boeing had been underway since the plane first experienced problems in 2019.
“We an important customer of Boeing and we have been in discussions with them since March last year when the planes were grounded by tragic accidents - because it very hard to manage an order book when you don’t know when the airplanes will arrive. SMBC focussed on the planes that weren’t in the production process and the decision to defer deliveries is the right outcome for us and the right outcome for Boeing.”
The news that SMBC has deferred delivery of more than half the 133 MAXs it had on order with Boeing came in the Dublin firm’s annual results which were published today and saw the company post an increase of profits to $364.5 million, a rise of almost 5.8% on in its 2019/2020 results.
SMBC’s results were for the period up until March 31 which Barrett said meant the full impact of COVID 19 had yet to be felt in the firm’s bottom line, but he was confident the lessor is well placed to weather the next stage of the economic cycle.
Currently new technology aircraft comprises 48.3% of SMBC’s portfolio, an increase on 37% in the previous year, while the weighted average of its overwhelmingly narrowbody portfolio is 4.1 years.
“The aircraft market has been very liquid in recent years and SMBC has used this opportunity to do a lot of portfolio management. So we now have one the youngest fleets in the world and it has a narrowbody focus which will stand us in good stead at this stage in the cycle.”
The sheer scale of the impact on the pandemic on the aviation market potentially weakens the difference in earnings volatility between lessors and the airlines they serve, but Barrett was confident there is still enough of a structural gap between the two sectors.
“The business model differential is still there – lessors have long terms contracts, which is different to airlines trading in the consumer market. But it’s also correct to say that aviation is in a substantial and global downturn it does create new challenges for the leasing sector.”
Data from Cirium earlier this week showed that passenger numbers in China overtook the US for the first time and Barrett said that it was clear the aviation sector in east Asia was starting to return – albeit at a slow place, but that Europe and the Americas should follow suit.
“We believe the market will return but it will be tentative. I don’t think everything is going to back to normal any time soon, but when we look at our customers in Asia, we do see an improvement in both the amount of flying and the loads on planes. It’s not back to where it needs to be for the long term, but we do see some green shoots.
You will see more flying in the summer season in the Americas and Europe, but it will be a lot less than last year. The current situation won’t be fixed quickly and it will be well into next year before we see major changes.”
With backing from major Japanese financial institutions SMBC is a strong liquidity position with $2.9 billion of equity and $7.7 bn debt financing of which $3.2 bn was undrawn as at 31 March and in a statement accompanying the results the chief executive highlighted this.
“SMBC Aviation Capital came into this crisis in a very strong financial position, with a business model built to perform through the cycle, not just the favourable market conditions seen in recent years.
Being owned by a substantive and supportive Japanese financial institution together with our disciplined asset investment strategy positions us well to manage the challenges of this changing operating environment and take advantage of opportunities that will arise,” said Barrett.