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Airlines have been reducing capacity throughout 2020 to reduce cash burn and operate only a skeleton service during the lockdown periods. However, that reduction in capacity is becoming more permanent as airlines seek to downsize their fleets to better compete in a restricted marketplace. Almost every major airline – flag carriers in particular – indicated in 2020 that they will emerge from the crisis as smaller airlines, both in terms of headcount and fleet size.

Airlines have been reducing their fleets by retiring older aircraft earlier than planned as well as deferring deliveries of new aircraft where they can. With the sharp decline in long-haul, international travel, widebody aircraft – particularly older vintages – have borne the brunt of aircraft retirements during the crisis. But many narrowbody aircraft have also been taken out of the operational fleet, especially older A320s and A319s. Figures from Cirium (see chart below) shows actual retirements were lower than in 2019 but the parked fleet (see chart below) shows that more aircraft are on the ground and may be retired at a later date. It also shows that aircraft owners are not yet parting out their aircraft due to the depressed aftermarket space, and may be waiting for values to rise. 

Alaska Airlines plans to exit its Airbus fleet by 2023 with the retirement of its older A319s and A320s, and the sale of its 10 A320neos as it ramps up deliveries of its 737 MAX order. Alaska entered into a sale-leaseback with Air Lease Corporation (ALC) in November for 10 of its A320s and at the same time leased 13 737-9s, which is in addition to the 32 MAX aircraft Alaska has on order from Boeing. 

Delta Air Lines has been the most aggressive US carrier in streamlining its fleet to better compete in the altered marketplace, with the retirement of over 200 aircraft last year (four entire fleet families, MD90, MD88, 737-700s and 777s, have exited the fleet in 2020) with plans for this number to increase to 383 by 2025. Delta is moving to a more cost-efficient widebody fleet based on the A330 and A350 family and will retire its 777s and aging 767-300ERs. Indeed Delta has recently offloaded 11 767-300s to Amazon Air as its first direct purchase.

CHART 18: 18: AIRCRAFT DELIVERIES (SOURCE CIRIUM CORE)
CHART 19: AIRCRAFT IN SERVICE/STORED (SOURCE: CIRIUM CORE)

[American Airlines] will emerge from the crisis a smaller airline than we had anticipated prior to the virus, and go into 2021 as a smaller airline.

Doug Parker
CEO
American Airlines

American Airlines retired 114 of its mainline aircraft – 757s, 767s, A330-300s, E190s and CRJ200s – in 2020 and plans to take delivery of around 39 new aircraft (16 A321neos, 10 737 MAX 8s and 13 787s) in 2021 after reaching an agreement with Boeing to defer up to eight 737 MAX deliveries. American Airlines CEO Doug Parker told analysts in July that the carrier will emerge from the crisis “with a smaller airline than we had anticipated prior to the virus, and go into 2021 as a smaller airline.” 

British Airways’ then CEO Alex Cruz offered a similar statement in an impassioned open letter published in June in a UK newspaper. He wrote: “At BA, 98.2 per cent of our business is international. We know we will emerge from the COVID-19 crisis as a much smaller airline. We will have fewer customers and fly to fewer routes for years to come. Our business will be laden with hundreds of millions of pounds in new debt, much of which must be repaid over a short term, so any revenues we make when we return to flying will be swallowed up by loan repayments. Meanwhile, fleet-of-foot overseas competitors will be waiting in the wings to take the landing slots at Heathrow.” Although BA has now received a much-needed liquidity boost from the UKEF-backed loan facility, with international traffic still depressed, the airline is continuing to reduce its fleet, retiring its entire fleet of 31 747s early in the fourth quarter of 2020. 

Qantas also retired its remaining 747s in July rather than at the end of the year as planned, and the future for its currently stored A380 fleet is uncertain. The A380 has been a major casualty of this crisis, with Air France the first to announce the permanent and accelerated retirement of its fleet of 10 A380s by 2022. SIA has permanently retired seven A380s and parked the remaining 19 aircraft. Lufthansa, which took out all of its A380s as well as other older widebodies, has removed all of its A340-600s. As of December 1, Cirium fleets data shows 21 A380s in service and 219 in storage, with three retired. 

John Plueger, CEO of ALC, comments that the most perceptive airlines are using this crisis to rightsize their fleets sooner than planned. “The pandemic is accelerating retirements. Airlines are in a survival mode, so they’re going to operate the cheapest airplanes but the most astute airlines, and especially the larger carriers, are using this situation to their maximum advantage to accelerate planned retirement of aircraft to leapfrog and push forward their environmental sustainability initiatives.”

Plueger observes an excess of older aircraft in operation that was needed to cope with the air travel demand over the past decade, which have been operated for “longer than their time”, adding that the pandemic has forced a “clearing out” of that older technology equipment. “We are witnessing a huge replacement cycle, which is only muted because there are fewer airplanes flying. There will be less airplanes flying, but the question is which airplanes remain parked and don’t fly again. That’s a big part of our calculus to determine who we think is going to be a survivor long-term by being able to replace older aircraft now and enhance their environmental sustainability and improve their profile for the long-term future.

”Lessors too have been reducing exposure to the widebody market – at least for certain types – young A330s and 777s, will make up the majority of the widebody fleet, while 787s and A350s remain desirable assets over the longer-term. 

“There has been a wholesale move to take the 747s, 757s, 767s, A380s, A340s, and the very old A330s out of the passenger business,” says Carlyle Aviation’s Robert Korn. “There has been a very non-uniform plan to retire and simplify fleets. We’ve seen planned retirements accelerated, where airlines had intended to extend leases until they receive their new deliveries but they’re now simply returning the airplanes. This has allowed for a very rapid reduction in a significant number of aircraft, as opposed to just airlines parking airplanes for a periodic storage. When we emerge from this, there will be a much more uniform fleet of A320 and 737-families of airplanes, and a much reduced fleet of widebodies in terms of aircraft types. We will see a much larger percentage of the continuing in-service widebodies be A330s and 777s. And as the widebody fleet grows, it’ll be with the new types. Only very few of the older types will remain in service over the next few years.”

Engine Lease Finance, which invests in all aero engines types, has seen its portfolio impacted by the reduction in demand, but CEO Tom Barrett remains convinced that capacity demand will return. “We will have some engines more greatly affected by an early part-out or retirement. However, based on previous experience, as the capacity returns, many of those stored aircraft are going to be required. There’s no question about that. There will be pockets where a return to service would be more challenging creating short-term leased opportunities. As long as you’ve got the right infrastructure to react to that, and as long as you’ve got the professional team with developed relationships with the airline customers over the years and all of your various partners in the industry, and the MRO shops also, most of the workhorses of the business – the CFM56-5/7B and the V2500-A5 – they’ve got a good life ahead yet.”

Many widebody aircraft – and some narrowbody aircraft – will transition to the air cargo market, which has been a real bright light in the darkness of the aviation industry in 2020. There is a clear demand for more feedstock for the PRF conversion market, as air freight demand remains high and belly cargo space is limited due to the restrictions on international, long-haul travel, due to the COVID-19 pandemic, which is expected to remain depressed for the near-term future. 

The continued lack of belly cargo space has led to the rise of “preighters”, passenger aircraft converted to carrying cargo as an interim solution, as airlines seek to generate revenue as passenger travel remains depressed. However, the long crisis period and the even longer predicted recovery, preighters are not a long-term solution since cargo has to be loaded by hand, which is costly and time consuming. Those airlines may now be considering a more permanent expansion in the air cargo space. 

We will have some engines more greatly affected by an early part-out or retirement. However, based on previous experience, as the capacity returns, many of those stored aircraft are going to be required. There’s no question about that.

Tom Barrett
CEO
Engine Lease Finance

In January 2021, World Star Aviation launched P2F Funding Programme, a new passenger to freight (P2F) conversion funding programme, which aims to offer a number of financing solutions to airlines and aircraft owners, including sale-leaseback financing as RESEARCHwell as senior secured and high loan-to-value financing, secured by the converted aircraft. Speaking to Airline Economics, Marc Iarchy, a partner at World Star, first discussed the idea for a P2F fund with Oaktree last year when the demand for additional air freight were peaking. “We have always liked freighters generally and have carried out many conversions over the years but there has been a massive demand for air freight over the past year. Added to that is the fact that P2F conversions slots have been booked by airlines and aircraft owners for the next three years as they reduce and replace their fleets. Those conversions will need to be financed at a time when airlines are massively cash constrained.”

The final composition of the world fleet depends very heavily on how long it takes for demand to return with analysts forecasts ranging from forecast range from 2022 to 2025. Robert Korn says when the market has a clearer picture of when that demand will return, it will play a large role in manufacturers’ delivery plans as well as permanent aircraft retirement planning. 

“We are watching, waiting, hoping to understand and appreciate as an industry, what the demand for seats and travel will be, and therefore how we can program the underlying needs of our industry,” says Korn.

Signs of a pick-up in demand is being keenly observed by airframe and engine manufacturers, which are eager to ramp up production once more to generate revenue. Prior to the crisis, there was a general acceptance in the market that there was an oversupply of aircraft from the OEMs that put significant pressure on lease rates. After the onslaught of the health crisis the manufacturers were first hit by the loss of workers due to lockdowns and the need to make COVID-19-safe workplaces. But even once they reopened, production needed to be reduced because aircraft weren’t able to be delivered to clients safely (although this was soon overcome with the first remote, e-deliveries that began with three A320neos to Pegasus in May). 

With expectations of a wave of deferrals and even cancellations as fleets remained grounded, in April, Airbus had cut production by a third to produce 40 A320neos a month, down from 60 a month. 

Despite deliveries being down by 34% in 2020 to 566, Airbus chief executive Guillaume Faury has commented that the manufacturer would increase production in the second half of 2021, with further ramping up in 2022 and 2023. Unconfirmed reports suggest that although the 40-rate per month would remain for the beginning of this year, Airbus has warned suppliers to prepare for a ramp up in production to 47 aircraft a month from H2 2021.

Rival Boeing has had a very difficult year in 2020. Already reeling from the impact of the grounding of the MAX, Boeing was compelled to end its merger agreement with Embraer as the pandemic hit revenues and it grappled with the need to cut production, rationalise its workforce, and raise eye-watering amounts of debt. 

Boeing also rounded off the year with a three-year deferred prosecution agreement with the US Department of Justice (DOJ), which settles the charges, including one count of conspiracy to defraud the US, and resolves the Department’s investigation into the evaluation of the 737 MAX by the Federal Aviation Administration (FAA). Under the agreement, Boeing will pay a penalty of $243.6 million and provide $500 million in additional compensation to the families of those lost in the Lion Air and Ethiopian Airlines accidents. The agreement also includes a commitment to provide $1.77 billion to Boeing’s airline customers as part of the company’s ongoing efforts to compensate those customers for financial losses resulting from the grounding of the 737 MAX.

In January, Boeing issued its latest orders and deliveries tally shows that the company delivered only 157 aircraft in 2020 – its lowest figure for more than 40 years. Despite the health crisis, Boeing did book more orders for the MAX in 2020 as commented above. However, the company is no longer confident of delivering the 500-plus outstanding orders due to the depressed market conditions and potentially looming airline cancellations. Boeing’s order backlog is reported at 4,223 planes at the end of 2020.

Boeing has not indicated any plans for the imminent increase in production, indeed it may reduce the rate further for some types. In September, Boeing confirmed that due to the impacts of COVID-19 on customer demand, it is currently producing 787s at a rate of 10 per month with plans to reduce that to six per month in 2021. Despite the MAX being cleared to fly, Boeing is keeping production rates low and has only commented that it would gradually increase output to 31 aircraft per month by the start of 2022. 

The duopoly of Airbus and Boeing ultimately acts rationally. This year, Airbus and Boeing could have put many airlines out of business by forcing airlines to take the airplanes they ordered and take the pre-delivery payments... they didn’t do that because they know that they would lose orders and they know that most airlines come back after a crisis.

Aengus Kelly
CEO
AerCap

AerCap’s Kelly is confident that Airbus and Boeing will continue to ensure that supply doesn’t overwhelm the market. “The duopoly of Airbus and Boeing ultimately acts rationally,” he says. “This year, Airbus and Boeing could have put many airlines out of business by forcing airlines to take the airplanes they ordered and take the pre-delivery payments, and if the airlines don’t take the aircraft, they could force them into bankruptcy. But they didn’t do that because they know that they would lose orders and they know that most airlines come back after a crisis. This is the same behaviour we saw from the OEMs after 9/11 and after the global financial crisis – they manage supply into the market in a regulated fashion. If they allowed the market to regulate supply, the result would be chaotic where airlines would be filing for bankruptcy all the time, and Boeing and Airbus would lose their order books.”

Gary Rothschild also commended the market impact of the airframe manufacturing duopoly, which he believes will balance the supply-demand curve. “One of the nice things about the aviation market is the quasi duopoly that exists, which gives the OEMs the ability to better match the supply of aircraft to the demand. This is very different than other industries, such as shipping where manufacturers continue to build vessels throughout a downturn despite a lack of demand, in turn flooding the market and depressing prices. Such a situation is not in the interest of the aviation OEMs that are able to better calibrate deliveries in production to the demand.”

That said, OEMs are still in the business of selling airplanes and engines. Although production rates are remaining depressed as the lockdowns continue, all manufacturers will want to increase output – especially of narrowbody aircraft like the A320neo family and the 737 MAX – to deliver those outstanding orders to restore positive cashflow to the business. With airlines in significant financial stress, leasing companies will become much more important to the OEMs and indeed they already are. 

“There will be substantial pressure placed on airlines by the OEMs to take the aircraft they have ordered,” says David Butler, CEO of Seraph Aviation Group. “The problem is that most airlines won’t be in a position to take them as their balance sheets and liquidity have come under pressure. The leasing community will have an important role to play with the OEMs and these airlines, for example through sale-leasebacks. I see the OEMs and the larger lessors working very closely together in the years ahead.”

Kelly, however, sees Boeing and Airbus being much more cautious about who they are willing to take orders from in the future to ensure they can deliver on those orders. “The OEMs know in their heart of hearts that taking orders from someone with a pulse is not good business, and only serves to inflate their orderbooks in the short-term… Over the course of the last two or three years, we saw a number of lessors coming into the business, who claimed to be able to order airplanes and place them, but ordering airplanes, dealing with specifications with vendors requires the right systems, technical knowledge, and experience, which takes years to develop. And so I think that with the manufacturers, we’ll definitely see, a more selective element. Although I’ve no doubt they will forget this in five or six years and revert to past form.”

For companies whose balance sheets are in order and those with available capacity to acquire aircraft, there are good opportunities out there. But nothing is simple in this market. Asset and credit quality together will be important.

Karl Griffin
CEO
GENESIS

Engine OEMs too have been heavily impacted by the pandemic in terms of production levels. 

“They’re producing less than half the engines this year than might have been expected, which was on the back of a ramp up in production expected by both the aircraft manufacturers,” says Tom Barrett, CEO of Engine Lease Finance (ELF). “They have had to cut staff and have to face the reality that production will probably remain closed for at least next year, if not further. That’s a huge planning issue for manufacturers who will focus on core engine production as a priority for the next 12 months, to get back to pre-crisis production levels.” 

He adds though that the engine market is unlikely to see a shortage in supply for some time. “There is so much capacity still to come back into the system – all of the parked aircraft, all of the new MAX aircraft – so there is going to be plenty of engines available for some time. There will be pockets of opportunities and we will continue to invest through the recovery but it will be for quality assets. It’s no surprise that the new technology aircraft and engines will be most in demand but there is still life for the NGs and CEO aircraft, which will be delivering capacity in the market for many years to come.”

Shift to Lessors

Despite the obvious pressures on leasing companies to offer rent deferrals and renegotiate leases with their more troubled clients, lessors with available capital have been able to capitalise on the airlines’ dire need to leverage assets to increase their liquidity coffers. The demand for sale-leaseback transactions has skyrocketed and this time deals are being won at prices that make more economic sense than they have for the past decade in an overheated market. This market trend has attracted more lessors to the sale-leaseback sector than ever before – from new names, with new capital, to more mature leasing platforms re-entering the space. Cirium figures show that operating lessors acquired more than 500 passenger aircraft via purchase and leaseback transactions in 2020 – 60% of which were used aircraft – and forecasts show that 150 new deliveries are already scheduled for purchase and leaseback. 

“We were never very competitive in a new aircraft sale-leaseback market because the implied returns in those transactions didn’t meet our return hurdles,” says Apollo’s Rothschild. “Since the pandemic, there has been a significant switch from where our opportunities are coming from. Pre-pandemic, we saw 80% of our sale-leaseback opportunities in the secondary market, buying aircraft from lessors, with 20% coming from direct sale leaseback opportunities in the midlife space. That has now flipped. About 80% of our opportunities are coming directly from airlines for new aircraft. We now have the opportunity to move into the new aircraft space because of the imbalance between supply and demand and the challenges for airlines to finance those deliveries with stressed balanced sheets. As deliveries are ramped up – especially the MAX aircraft – there will be opportunities for us to find new sale-leasebacks that offer good risk-reward metrics and meet our return hurdles.”

Gary Rothschild’s comments have been echoed by almost every lessor that has contributed to this report. Airlines are struggling to find financing for new deliveries due to the reduced commercial bank market and as they seek to raise liquidity, they are turning to leasing capital as another survival resources. 

Austin Wiley, CEO of Sky Leasing, comments on the number of airlines coming to the sale-leaseback market, some for the first time. “We have seen airlines that haven’t traditionally used the lessor channel in a major way, utilising it now to fund deliveries. JetBlue, for example, had not done a sale-leaseback transaction for the better part of 13 years prior to closing the deal with us,” says Wiley. “Those are the rare opportunities that we wanted to grab. We also see a recognition of a more balanced approach for the different financing channels that the airlines want to use. We see the trend for sale-leasebacks continuing because they provide balance sheet and fleet flexibility. There are many opportunities coming with airlines that have good business models but they didn’t have the balance sheets to withstand this kind of crisis. So we’re focused on a number of airlines that we think are going to rebound, with strong management teams and sound value propositions in their markets. Our advantage is that we can have a different conversation with the airlines because we are fortunate not to have a legacy fleet to deal with any restructurings, which means we can provide capital for their go-forward fleet plans.”

Larger leasing platforms, which have raised copious amounts of liquidity in the second half of 2020 when the capital markets floodgates opened, are taking advantage of this trend to not only acquire new assets at attractive price points, they are also leveraging sale-leaseback demand to ensure other assets keep flying. Smaller lessors, which have capital to deploy – as a result of prudent portfolio management or simply good timing, are also pouncing on this opportunity to launch relationships with tier one airlines for brand new technology assets. 

“For companies whose balance sheets are in order and those with available capacity to acquire aircraft, there are good opportunities out there,” says Karl Griffin, CEO of GENESIS. “But nothing is simple in this market. Asset and credit quality together will be important. The market is at the right point in the cycle to take calculated risk, and companies, like GENESIS, will get rewarded for that in due course. So, there are opportunities to support airlines that have built up an encumbrance in their own aircraft and potential for sale-leasebacks. In addition to this, prices for the new-technology aircraft have now adjusted to the appropriate range, allowing for increased participation in this space. Over the next 6-to-12 months, focus will be placed on selecting the right counterparty and asset types. Debt will be more challenging to find than it was pre-COVID, but as the market improves and airlines start to recover, our expectation is that GENESIS will be able to opportunistically purchase aircraft and, if necessary, refinance them over the next 24 to 36 months”.

Manager

Total Portfolio

On Order

Est Portfolio Value ($mn)

Current Rank

AerCap

1,022

288

29,732

1

GECAS

989

253

19,377

2

Avolon

578

240

18,368

3

BBAM

516

18,250

4

Nordic Aviation Capital

483

72

4,573

5

SMBC Aviation Capital

473

223

16,670

6

ICBC Leasing

457

108

15,785

7

BOC Aviation

404

135

15,929

8

Air Lease Corporation

396

369

16,085

9

DAE Capital

365

8,737

10

Aviation Capital Group

336

67

8,678

11

Aircastle

280

25

4,664

12

BoComm Leasing

249

30

7,916

13

CDB Aviation

240

137

7,280

14

Carlyle Aviation Partners

232

2,761

15

Castlelake

227

3,414

16

ORIX Aviation

207

5,462

17

Macquarie AirFinance

191

52

2,962

18

Boeing Capital Corp

182

23

1,394

19

Goshawk

182

40

5,690

20

Jackson Square Aviation

181

30

6,365

21

AVIC International Leasing

154

4,807

22

China Aircraft Leasing Company

142

247

3,769

23

Standard Chartered Aviation Finance

134

3,739

24

AMCK Aviation

131

20

3,243

25

Cargo Aircraft Management

114

1,468

26

Falko

111

1,087

27

CMB Financial Leasing

109

3,761

28

GTLK - State Transport Leasing Company

106

1

2,158

29

Chorus Aviation Capital

99

1

1,252

30


Get in touch

If you have any queries on any topic raised in Aviation Industry Leaders Report 2021: Route to Recovery, please contact Joe O'Mara of our Aviation Finance team. We'd be delighted to hear from you.