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COVID-19 crisis could lead lessors to 50% fleet penetration

Rob Morris, global head of consultancy at Ascend by Cirium, describes how market opportunities created by the pandemic could propel the leasing sector into an increasing share of the industry’s assets

Way back in the dim, distant days at the start of the last expansion cycle, many commentators argued that commercial aircraft operating leasing – an increasingly popular form of aircraft finance for many airlines, and particularly beloved of the emergent low-cost airline sector – would inevitably achieve 50% penetration of the global fleet.

At the time the market share was typically around 40%, and those observers were simply – and perhaps lazily – extrapolating the trend illustrated by the accompanying chart.

Ascend by Cirium argued against that expectation, suggesting that the numbers of aircraft operating lessors would have to acquire to achieve that proportion was simply too great.

And so it turned out, with the market share growing, but not as rapidly as previously – so that by the start of this year, as the cycle was turning, penetration of single-aisle and twin-aisle passenger jets had reached around 47%. Gentle growth suggested that a 50% market share would be achieved sometime in the mid-2020s, if it continued.

Then, of course, the Black Swan landed and everything changed. However, for operating leasing that change is creating opportunity and our analysis now suggests that 50% penetration may be achieved, and sooner rather than later.

Forecasts are of course particularly challenging under the current circumstances, but Ascend by Cirium has constructed three potential traffic recovery scenarios against which we have also estimated new aircraft delivery and fleet in service scenarios.

The scenario that appears to be most likely, based on the traffic and capacity metrics we are measuring against, indicates that by the end of 2023 we would expect to see a fleet of around 23,400 aircraft in service – which includes some 4,400 new aircraft deliveries, and 3,000 retirements over the next four years (starting from beginning of 2020).

With airlines doing all they can to protect cash and generate liquidity, the sale-and-leaseback market (or purchase-and-leaseback from the lessors’ perspective) has become increasingly active.

Cirium fleets data indicates some 150 such deals done since the start of 2020. These have already driven a marginal increase in operating leasing penetration, from 47.3% at the start of the 2020 to 47.5%. Some 51 of those purchase-and-leaseback deals have been new aircraft acquired on delivery. In addition, lessors have accepted 57 new aircraft directly from their own OEM backlogs.

So overall in 2020 to date, operating lessors have acquired 55% of all new commercial jet deliveries. If this trend were to continue through to 2023, the implication is that lessors would acquire around 2,420 of those 4,400 new deliveries. As 1,250 are expected to be via direct delivery, the implication is also that another 1,170 of these deliveries will be acquired by operating lessors via purchase-and-leasebacks at delivery.

As noted earlier, the fleet in service and stored is projected to increase to around 23,400 aircraft at the end of 2023. That assumption requires around 3,000 retirements.

If the operating lessor share of these retirements is proportional to leasing share of the fleet today, then the effect of these deliveries and retirements would be that the overall operating lessor share of the global fleet at the end of 2023 would be around 49%.

However, there is potential for this share to increase even further as operating lessors are also acquiring used aircraft via purchase-and-leaseback as well.

Conservative estimates indicate that there could be as many as 6,700 unencumbered single-aisle and twin-aisle aircraft owned by airlines, with some 3,100 of these aircraft presently being less than 10 years old.

As airlines seek to generate liquidity in the near term, they are offering these aircraft for sale-and-leaseback. There have already been almost 100 such used aircraft sale-and-leasebacks in 2020, with airlines active in this market including Delta Air LinesUnited AirlinesSouthwest Airlines and JetBlue in North America, EasyJet in Europe, and China Airlines and Cathay Pacific in Asia.

Although the majority of the assets acquired are single-aisle aircraft, there have also been some twin-aisles. It is more difficult to quantify the impact of used sale-and-leasebacks on the increase of leasing market share, but it is likely that it will drive a further increase beyond just the new aircraft purchase-and-leasebacks.

Thus, it is increasingly possible that operating leasing may achieve a 50% fleet market share in the 2023-2024 timeframe, as lessors provide finance and liquidity to airlines through purchase-and-leasebacks of both new and used aircraft.

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