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Understanding the impact of COVID-19 on supply and demand, asset values and lease rates

Rob Morris on the impact of the coronavirus pandemic on aviation and the prospects for airlines, aircraft manufacturers and lessors

Our latest webinar co-hosted by Rob Morris, Global Head of Consultancy at Cirium, drew on Cirium’s historical, real-time and forward-looking insights to assess the implications of the current global health crisis and review the outlook for key aviation industry stakeholders. You can access the recording and data presentations here.

In this article, we round up the need-to-know takeaways from the session to help the market plan and prepare for the most likely COVID-19 recovery scenarios. Morris provides insights on aircraft supply and demand, asset values, lease rates and more.

Understanding the unimaginable

The COVID-19 pandemic has stressed the industry far beyond anything we could ever have imagined, and it has had a dramatic impact on the demand outlook for this year and beyond.

To put that into perspective, at the peak of the crisis in mid-April, the parked fleet of commercial jet airliners reached around 64% of the overall global fleet. Recovery in Asia Pacific, North America and Europe has reduced those numbers and returned thousands of aircraft to service. But around 46% of the global fleet remains in storage, representing approximately 10,150 aircraft, including some 7,800 single-aisle and 2,350 twin-aisle aircraft.

impact is the COVID-19 crisis having on supply and demand

The question everyone is asking is what impact is the COVID-19 crisis having on supply and demand, which fundamentally drive asset values and lease rates?

Aircraft manufacturer aspirations

The Asia Pacific region is critical to near-term delivery aspirations of aircraft manufacturers (OEM’s).

According to Cirium Core Fleets Data, around one-third of deliveries scheduled through 2023 will be delivered to airlines in Asia Pacific.

Looking at data for aircraft actually built today

Looking at data for aircraft actually built today, there are 160 Boeing aircraft built and flown that are scheduled for delivery to operators in Asia Pacific. That includes 150 Boeing 737 Max aircraft, of which around 100 are scheduled for operators in Mainland China.

Airbus has the same issue, with 81 aircraft that have flown in the production cycle scheduled for delivery to airlines in Asia Pacific, largely in 2020. About 65 of them are in the A320 family, 40 of which are for China.

The good news is that unlike during the last two major financial crises in 2001 and 2008, Boeing and Airbus have moved to significantly reduce production. This will help mitigate a larger surplus of supply – at a time when demand is non-existent.

Looking at leasing

In addition to a reduction in OEM supply, we see potentially significant additional near-term availability from operating lessors. There are something like 260 aircraft already off-lease with lessors and available today, about 140 of them being single-aisle aircraft in the A320 and 737 families. By the end of 2023, roughly one thousand A320s and six hundred 737s are scheduled to be returned from lease, creating a potential supply surplus in the near-term.

Additionally, some lessors could face the issue of unplaced deliveries. The good news is most moved very early in the crisis to adjust their backlog volume. As OEMs reduced production, lessors have deferred deliveries or removed delivery slots in the near-term marketplace. So, whilst there may be a lot of used potential availability from lease returns, new aircraft availability is fundamentally lower.

In 2020, around 135 aircraft are scheduled for lessors, and the vast majority are placed. Likewise, in 2021 there are less than 100 unplaced aircraft with lessors.

Tracking transactions and calculating values

What impact has the pandemic had on values? Since the beginning of the pandemic, our value review boards have been meeting weekly.

Aggressive research into supply and demand dynamics and transaction tracking have allowed us to conclude a number of evidence based value changes.

For example, on the A320 200 we were seeing relatively strong values last year – particularly in midlife and older aircraft, which were being sold for higher values than we might have expected.

Broadly speaking, there has been a 15% fleet weighted decline in A320 values. That contrasts with the 737-800, which has seen a fleet weighted decline of just 6%. That is clearly a function of the lack of Max, which means 737 800s presently enjoy slightly higher demand.

On the wide body side, significant changes for the 777 300ER of minus 12%. The 787-9 is down 2-3%.

Lease Rates are also beginning to drive down although at the present time we have seen fewer changes as the market has seen relatively few new leases or lease extensions thus far. But we expect both Current Market Values and Lease Rates to remain under significant pressure and there are likely to be many more negative changes before things turn up again.

This isn’t the end of the story – it’s really just the start. A realistic recovery scenario suggests that the global airline fleet of in-service aircraft will remain below the levels seen at the end of last year until 2022 at the earliest, and most likely 2023.

For more Cirium insights on the impact of coronavirus on the aviation industry, visit our COVID-19 impact and analyses page here.


Note to editors:

Data referenced is reflective of the information presented during the June 23, 2020 webinar. The data does not accommodate any rapidly changing events that may impact figures since this date.

Ascend by Cirium is a global team of aviation experts. To discover how our consultancy services can help you plan for the future, talk to us here.

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