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Ascend by Cirium Weekly Team Perspective: The Implications of Airline Reorganizations for Operating Lessors

April 14, 2021

LATAM rejecting seven Airbus A350s it leases from AerCap, as part of its US Chapter 11 restructuring, is a potential blow to the lessor and illustrates new operating lessor risks.

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April 14th, 2021

By Rob Morris, Global Head of Consultancy at Ascend by Cirium

The recent news that LATAM is rejecting seven Airbus A350s it leases from AerCap, as part of its US Chapter 11 restructuring, is a potential blow to the lessor and amply illustrates the risk that bankruptcy reorganizations pose to operating lessors.

These specific A350s were all acquired by AerCap from LATAM via purchase and leaseback on delivery from Airbus, between September 2016 and December 2019. The Cirium Core fleets data indicates that the leases were typically scheduled for a 12-year term. Although we are not party to any details of the specific leases, if these aircraft entered those leases at our extant Current Market Lease Rates, then the rents would have been between $1.07 million and $1.1 million per month. We thus estimate that at the start of 2020 AerCap would expect to be collecting just over $7.6 million per month from LATAM for these aircraft.

If the documents submitted to the bankruptcy court are correct then these aircraft will be returned to the lessor in three batches between this month and early June 2021. At that point the lessor will lose the $7.6 million rent – we have no indication of receivables since the onset of COVID-19 so this may already have been the case anyway – and be faced with the significant challenge of placing these seven A350s in a very difficult marketing environment. Even if they are able to place these aircraft relatively quickly at our Current Market Lease Rates, which now stand between $580,000 and $700,000 per month, then the aggregate rents will be some 40% lower per month at around $4.6 million.

In the context of AerCap’s average monthly basic lease rents collected for FY2020 – reported at around $314 million in their Q4 2020 earnings release – the monthly delta of $3 million may not seem significant. But the net cash income loss over the contemplated life of the lease is potentially significant. Based on the rents discussed above they would indeed likely exceed $300 million over the life of the originally contemplated 12-year leases.

AerCap are surely not alone in this predicament. Most operating lessors are likely to be facing similar challenges with other airlines and aircraft types on a weekly basis at present. Whilst there are signs of optimism in demand recovery, it seems likely that lessors will be bearing the cost of airline reorganizations for some time to come.


April 7, 2021

2021 – End of the road for a number of business aircraft types

By Daniel Hall, Senior valuations consultant, ISTAT appraiser, ASA senior appraiser, Ascend by Cirium

In a market downturn, product streamlining is commonplace, as is announcing new models or upgrades as the market starts to rebound. The below commentary discusses three different types which saw production announcements in Q1 2021. All of these models were built in the same location – Wichita, Kansas.  

Bombardier will end production of the iconic Learjet; over 3,000 have been built since 1964 and more than 2,000 remain in service today. Annual deliveries had been below 20 for some time, and the Learjet is now a casualty as the manufacturer further streamlines itself for efficiency. During the pandemic Lear 45 and 60 values have actually performed quite well but the Lear 70/75 has continued to rapidly depreciate.

Textron’s Beechcraft announced the end of the King Air C90GTx. The clue was with announcements of new KA 260 & 360 (replacing 250 & 350i). Since the early 1960s almost 3,000 of over 25 variants of the KA90 have been built with around 2,200 in service today. Deliveries numbered around 50 annually pre-2008, but have been sub-15 annually for six years now. The KA90 has actually exhibited really strong value retention and we expect the future outlook to remain bright.

The OEM’s Cessna brand announced the end of the Citation Sovereign+. This had been expected following full certification of the Latitude and Longitude. Those aircraft were clean sheets with superior cabins, and while the Sovereign could compete on a midsize segment price among other aircraft which didn’t offer a true transcontinental range, Embraer’s Praetor 500 has commenced deliveries and offers that. Historically competing with the Hawker 125 / 800 series, 450 were delivered since 2004. More recently, new deliveries had fallen to below 10 per year. 

Although the pandemic has forced the cessation of these aircraft types, OEM product support is expected to continue, which will sustain the products’ life and value cycles.


MARCH 31, 2021

A look at the fleet of the world’s new “largest” lessor in China, and its implication for Chinese lessors

By Yuanfei Zhao (Scott), Aviation Analyst at Ascend by Cirium

In recent years, there have been voices in the industry talking about the shift of market power between domestic Chinese lessors and foreign lessors, both of whom compete in the relatively large Chinese leasing market. While the Chinese owned lessors clearly manage the majority of the leased fleet in the domestic market today, some qualitative elements should also be considered when making such a comparison.

The portfolio composition of the world’s new “largest” lessor (the planned AerCap/GECAS merged entity) shows that the proportion of each of the most popular single-aisle and twin-aisle passenger jets managed by the largest lessor against the total lessor managed fleet in China.

While there are currently close to 70 domestic and foreign lessors actively managing fleet in China, it is noteworthy that the proportion of new generation narrow-body and wide-body fleet managed just by the AerCap/GECAS combination in the Chinese market is so high.

This reflects the fact that the world’s leading lessor is weighting more strategic focus on the high-end market in the world’s fastest growing aviation market. This strategy leverages its buying power and favourable slot positions at the OEMs. On the other hand, this also reflects the forward-looking nature of the top tier lessors who tend to plan and invest in premium assets.

The implication here for those Chinese lessors who do not yet have any orders for new aircraft types is that the current downturn provides the opportunity for them to proactively seek purchase and leaseback deals with airlines for new types, or seek to work with OEMs to provide finance for new deliveries where the existing financier has fallen away. Once the market has fully recovered and once again returned to long-term growth in the latter part of this decade, the barriers for acquiring new types could be even higher, so now is the time for action.


MARCH 23, 2021

It’s the hour for by-the-hour

By Thomas Kaplan, Valuations Consultant at Ascend by Cirium

US Bankruptcy courts have been busy this week as we learned of court approvals for amended lease agreements between BBAM & Aeromexico and GECAS & Avianca. These lease agreements are to be based on “by-the-hour” (PBH) payments, rather than a fixed monthly lease rate. PBH agreements have become very common now for new leases, lease extensions and lease restructurings, but what does it mean for lessor revenue?

The Aeromexico restructured lease was for 13 year old 737-800 MSN 34954 which has not flown since last April, per Cirum Tracked Utilization data. It is not known if there is a minimum monthly payment due, but if the utilization stays this low, the lessor won’t be getting much revenue and far below our Market Lease Rate (MLR) opinion of $138k.  Prior to Covid, the aircraft was flying over 300 hours per month which, in the unlikely event that utilization returns to those levels soon, the PBH could be more profitable than a 138k lease rate.

The Avianca leases are for 2010-build A320s, MSNs 4487 and 4599. While these sat idle for most of the time since March 2020, they started seeing utilization in October last year and in February 2021 MSN 4487 even notched over 100 hours. Our MLR for these is $140k per month, so even if we assume a high PBH rate of $1,000/Flight Hour, lessors revenue would still be ~30% below the fixed rate.

Why are lessors agreeing to PBH if it means a large cut in revenue? The difficult remarketing environment means that lessors have few alternatives in the short term. Should they take out their aircraft from the defaulting airline, where and when would they place it? And what costs would they have to incur in terms of storage, insurance, reconfiguration etc? And how much would they forego in terms of end of lease compensation with the original lessee? So long as demand for new leases remains low we’d expect these PBH type deals to continue.

MARCH 18, 2021

Scaling the wall of cash

By Michael Graham, Valuations Manager at Ascend by Cirium

Pandemic? What pandemic? Since the start of 2021, one could be forgiven for thinking that international bond markets have been completely ignoring the tumult caused by COVID-19, such is their desire to invest in commercial aviation. For example, at the end of February, EasyJet successfully raised €1.2billion worth of seven-year bonds at a yield of just 1.875% in an offer that was significantly oversubscribed, with almost €6bn worth of demand. In January, Castlelake enjoyed even healthier demand for its $595million CLAS 2021-1 ABS offering, which was up to 12.3 times oversubscribed. In January alone, lessors raised a combined sum of almost $15billion either through bond issuances or ABSs.

While this can be seen a vote of confidence in the sector, the sheer demand exhibited by the market also testifies to the significant ‘wall of cash’ currently chasing after a limited number of suitable opportunities.

As yields on government bonds fell to virtually zero in 2020, many investors have found themselves moving towards comparatively riskier corporate issuances to generate income. It is perhaps unsurprising therefore that airlines, lessors and OEMs have taken advantage of this recent market appetite, in order to bolster cash reserves and refinance existing debt, lest the recovery in passenger numbers become more protracted than anticipated, or if bond investors become more nervous.

Indeed, in the past couple of weeks, there have been signs of turbulence within fixed income markets, with US 10 Year Treasury Yields rising to their highest level since January 2020, thanks to a hawkish US Federal Reserve, as well as the US Government’s $1.9 trillion stimulus plan, the by-product of which could be higher inflation. If central banks were to respond by raising interest rates, this would push up the cost of capital for all sectors, including aviation. A further sign, if one were needed, that the recovery from COVID-19 could be far from smooth.

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MARCH 10, 2021

Will Boeing 737-800 Values Have to Reduce Further?

by Rob Morris, Global Head of Consultancy at Ascend by Cirium

Early last week Skytech-AIC announced a mandate from SilkAir and Singapore Airlines to re-market seven 2014-2016 vintage Boeing 737-800s for sale. The 737-800 has enjoyed less used aircraft supply pressure through 2020 than many of its peers and competitors. As a consequence the type saw lower fleet weighted average Current Market Value declines last year than peer types.

However, as the global pace of demand recovery remains slow and 737 Max is now returning to service, further supply pressure is building. In addition to the Skytech-AIC mandate, there are two portfolios of Norwegian’s own 737-800s, each ten aircraft, being marketed by two different third-parties. A quick review of the Airfax aircraft availability listing for March 2021 reveals no less than 59 737-800s currently being advertised for sale and / or lease, including these 20 units but not the Skytech seven. That’s increased from only ten aircraft advertised in the same source in March 2020.

Our own Cirium Core fleets data paints an even bleaker picture. As of last Friday, we recorded 99 737-800s currently idle with lessors which have no future fate identified. There are also a further 41 such parked aircraft which are scheduled for future P2F conversion (23), new lease (16) and part-out (2). Back in early July 2020 that idle total was only 31 aircraft, so the recent change is evident and fundamental.

With this in mind we have already reduced 737-800 Current Market Values by a further 11%-22% this year, depending upon vintage. These changes are further supported by transaction data – a mix of cash sales, bids and purchase offers (including those that were rejected) and some part-outs that suggested our previous value opinions were too high.

Given the demand and supply outlook for the type, perhaps those value changes won’t be the last in 2021?

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MARCH 10, 2021

Ascend by Cirium Thought of the Week – How has the market evolved during 2021 Chinese New Year?

By Joanna Lu, Head of Consultancy Asia at Ascend by Cirium

Although the domestic market had more or less returned to 2019 levels, airlines in China were less aggressive in planning their capacities for the 2021 Chinese New Year holiday. Schedule data indicates capacity was typically planned around 10% below the same period in 2020 across different tourist cities. Importantly nowadays airlines are adjusting their schedules on a weekly basis and it is common to see capacity reduce significantly just a week or two prior to actual operation. There were signs of this prior to 2021 CNY. Flight tracking data then reveals the number of flights actually flown. These declined precipitously in the week prior to and during New Year’s week, but flights have now recovered to the same level as observed in December 2020.

 Although in the last couple of days traffic did bounce back, the overall air traffic number during the Chinese New Year travel period in 2021 was around 60% down compared to the same Lunar New Year period in 2020. Due to all the disruptions and uncertainty to travel, a new travel booking pattern might be that passengers are now booking flights on a much shorter time horizon, perhaps within a few days of travel now than the few weeks or months that was previously the trend. This leaves airlines with a significant capacity planning challenge as they seek to match their supply to a continued uncertain demand. 

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Source: Ministry of Transport of the People’s Republic of China

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