Erik G. Braathen along with ex-Norwegian pilots, Brede Huser and Thomas Ramdahl, are starting-up a new Norwegian-based airline with leased aircraft (see more in Europe News below). This news comes just an hour or so after Wizz Air announced that it too was entering the Norwegian market. People are sensing blood and Norwegian is under attack in its core market. If Wizz and other new players are able to chip away at the Scandinavian market in a meaningful way for the first time then Ryanair will most likely be ready and waiting in the wings to take on all comers and move in also. The question is whether easyJet will be in a position to challenge also?
Meanwhile, an IBA report published today https://www.iba.aero/ paints a sober picture of the market. Phil Seymour, president of IBA, says: “Aircraft base and market values are diverging at the greatest extent ever seen and to the extent that, across the global commercial aircraft fleet owned by airlines, there is now a gap of around US$60 billion.” This figure is not related to leased aircraft, only those that are owned by airlines.
IBA states that the fall in passenger demand caused by COVID-19 is driving a dramatic fall in new aircraft commitments, with lease starts down 57% on 2019 levels. IBA is also seeing significant additional distress in the 777-300ER market at this time with a 40% value gap now showing between the base value of US$72.22m and the current market value (CMV) of US$51.64m. IBA’s current half-life market value for a 2015-built Boeing 787-8 is circa US$74 million against a base value of circa U$73 million. However, the current distressed value range for that aircraft is significantly lower at between US$42.69m and US$57.74m.
A big question emerging in this new environment is whether total market control covered under power-by-the-hour and aftermarket agreements have a future.
All investors are able to see clearly that if aircraft are grounded there is no revenue for an OEM business model built around power-by-the-hour and aftermarket agreements. Could we be returning to the tried-and-tested business model where engines are paid for up-front and a healthy aftermarket where third-party competition exists?
Aircraft list prices returning to the old normal would no doubt prevent many super large orders, but in a market where this is not going to happen anyway, why not move the business model back to the centre ground fast? If this were to happen, lessors and airlines and investors across the board would have a real gain on book values and this could be a real win-win for the entire market. Some key engine OEMs are “thinking about it”, let us hope a more sensible approach from them is around the corner.
Meanwhile, the 2020 Boeing Market Outlook (BMO) forecasts a total market value of $8.5 trillion over the next decade including demand for aerospace products and services. The forecast is down from $8.7 trillion a year ago due to the impact of the COVID-19 pandemic. Boeing sees demand for 18,350 commercial airplanes in the next decade – 11% down on the 2019 forecast, with the commercial fleet forecasted to return to its growth trend, generating demand for more than 43,000 new airplanes in the 20-year forecast time period.
Boeing is forecasting passenger growth of 4% annual average over the next 20 years, during this period, it says that Asia will continue to expand its share of the world's fleet, accounting for nearly 40% of the fleet compared to about 30% today.
Air cargo demand is expected to grow 4% annually, generating further demand for 930 new widebody production freighters and 1,500 converted freighters over the forecast period. Around the world, the long-term need for commercial pilots, maintenance technicians and cabin crew remains robust, says the US airframe manufacturer. Boeing's 2020 Pilot and Technician Outlook forecasts that the civil aviation industry will need nearly 2.4 million new aviation personnel between now and 2039.
"Commercial aviation is facing historic challenges this year, significantly affecting near- and medium-term demand for airplanes and services," said Darren Hulst, vice president, Commercial Marketing. "Yet history has also proven air travel to be resilient time and again. The current disruption will inform airline fleet strategies long into the future, as airlines focus on building versatile fleets, networks and business model innovations that deliver the most capability and greatest efficiency at the lowest risk for sustainable growth."
Also worth seeking out is a new report from Bloomberg’s George Ferguson, published in association with Oriel, which gives a snapshot on the current state of the leasing market. The report states that deferred payments may cut cash flow by 25% in 2020 at Air Lease and AerCap. The report states that deferred payments at AerCap were $92 million and $288 million, or 9% and 30% of 1Q and 2Q lease revenue. Bloomberg analysis indicates deferred payments may rise to $780 million or 20% of 2020 revenue and cut cash from operations 29% from 2019 levels, to $2.2 billion. Restructured leases, with longer terms but lower rates, will hurt both revenue and cash flow, with the largest impact to date from Norwegian. Air Lease's deferred payments, primary responsible for lower cash flow, reached about $27 million and $161 million, or 6% and 32% of 1Q and 2Q lease revenue, and may rise to $320 million for the year (23% of 2019 cash from operations) as payment holiday requests rise on expected weak winter traffic as at October 1, 2020.
The report also states that lessor revenue and margins will fall, with lease rates pretax profit, margins and earnings per share likely to dip through 2021 on lower yields, reduced gains on plane sales and impairments. Revenue and cash may fall the most at AerCap as some of its largest lessees, including Norwegian, restructure, resulting in lower cash payments or lease rates. Profit and margins may drop on reduced gains from asset sales, the cost of more debt to assure liquidity and impairments, which may surge 140% to $170 million. The Bloomberg scenario analysis shows adjusted EPS could drop 25% to $6.40 as pretax margin falls 650 bps to 20.7% in 2020. Air Lease may fare better as a growing, younger fleet offsets lower yields, though restructuring at major customers (such as Aeromexico) remains a risk. Assuming no impairments, EPS could drop 10% to $4.61, while pretax margin may fall 380 bps to 32.7% in 2020.
The underlying message from Boeing is consistent with all current knowledge from across the market. The demand is there; the demand will not go away; the demand will continue to increase year on year. People will not stop travelling and business travel, although not recovering in some areas for some time, will still be required in most sectors as an absolute necessity. Commercial aviation remains a very strong growth sector and COVID-19 will prove just how resilient most commercial aviation-related businesses are to prolonged global shocks and downturns.
Do not miss George Ferguson, Bloomberg & Olga Razzhivina, Oriel in conversation at Airline Economics Growth Frontiers New York (Virtual) on the 15th October at 09:15 NYC local time. Followed by a presentation from Darren Hulst, vice president, Commercial Marketing at Boeing at 12:10 NYC local time.
Register at: https://www.aviationnewsonline.com/conferences/newyork-virtual/