Airbus and Boeing have it in their power to take significant pressure off of the market by collapsing production rates and slowing the entry of aircraft into the market. The continuing delays in the MAX aircraft return to service has allowed airlines and lessors with the aircraft on order to reallocate those resources to store up cash reserves in the fight for survival in the post-COVID-19 environment. Boeing’s production rates are not a concern for now, but Airbus is still running at 40 A320neos per month. Admittedly that is down from 60 but 40 aircraft per month only two years ago would have been seen as totally flat out production rates. It would benefit the market if Airbus were to push production down to around 20 aircraft per month. Unfortunately the OEMs have a duty to shareholders, suppliers and employees to continue to generate revenue in this new operating environment. But after years of airlines and lessors telling them to ramp-up production as fast as possible, it is difficult for them to reduce output further. The primary aim of OEMs like Airbus must be, and should be, to protect its suppliers and ensure that they remain solvent, this Airbus will do if it remains at 40 A320neos per month. However, with 170 parked aircraft awaiting delivery already, Airbus will at some stage run out of parking spaces. The upside to make note and take with you for the weekend is that of those 170 aircraft none are at this time white-tails without a home following a customer collapse. We can expect most of these aircraft to require export credit assistance in 2021 and it will be the case, as it was after 2008, that the ECAs and independent insurance companies will need to rescue the market.
Meanwhile, quite a few investors of late have been suggesting that lessors have lost their attractiveness in such a stressed environment. But aviation is, and always has been, a long-term investment. Many lessors are in a decent position relative to many other sectors, and the mobility of assets will become a much more prominent attractive feature once again in 2021. The worry for lessors remains assisting clients – but not too much. The three letters of the alphabet keeping lessors up at night are PBH. Airlines across the board are asking for lease agreements to be switched to power-by-the-hour, which right now means zero payments of course. This is a worry and the situation must be monitored as it is likely that when those airlines do start flying again they will in no way be able to afford PBH and at that point they will likely say “there is no way we are paying that; we want a new lease agreement”.
PBH feels like desperation on both sides, from the lessor and the airline; or it is a case of the airline management team feeling they have the lessor in a position of weakness – either way it is not a good situation to be in. Lessors have been extending lease terms, and although this does nothing to assist cashflow in the immediate term, it does mean that lessors should gain on the back end of the lease extension, so long as the extension is longer than the COVID-19 downtime payment holiday. Therefore you would expect a two-year minimum term lease extension at current rates with a 12-month payment holiday attached to the same being the bare minimum offer. From what we have seen, most extensions are on better terms than this base-line. The worry is whether will the client still be there to carry that lease term through and if COVID-19 shutdowns rumble-on for longer than 12 months. That is where efficient and effective risk management systems and experienced personnel become even more essential. Whereas the former can be bought in, finding experienced people that have experience in a deep downturn is a hard task indeed and comes with a significant price tag – Maybe it is time for a 60-over-60 award?