Listed lessors continue to cause concern for some; plus: Iran – Airbus takes first-mover advantage

Dino D'Amore
By Dino D'Amore January 26, 2016 20:46

Listed lessors continue to cause concern for some; plus: Iran – Airbus takes first-mover advantage

As aircraft orders and talk of potential aircraft orders take the headlines and the UK Export Credit Agency takes-up the mantle, we must not lose sight of the worrying trend that is seeing listed aircraft lessors lose value rapidly. On December 24, 2015 the share price of AirCastle, Aercap and Air Lease started falling rapidly, then after Dublin last week on the 22nd all three moved higher and it looked like a message had been received and understood on Wall Street, but yesterday in trading those minor gains were wiped out and the slide is continuing with all three lessors down 25% on the last 30 days alone and over 30% down over the past year.

Now the driver behind this is the thought by the markets that the lessors are over-exposed to a contracting Chinese economy and the very sharp falls on the Chinese exchanges overnight/this morning will compound this, but the reality is that these three lessors are not over exposed to China and moreover, and most importantly of all, even if the Chinese economy takes a total nose dive into let’s say 1.6% annual compound growth like most of Europe and North America, then the growth in air traffic and the need for new aircraft will not be dented.

The rate of growth both real and forecast for China is still well beyond any expectations at the point of order for aircraft being delivered today and that is a fact that all should remember; it is the case that the manufacturers cannot build some aircraft types fast enough. Aircastle, Air Lease and AerCap are in no way over exposed at this time on any aircraft type that might be considered a dud or a future problem at least. More realistically we could argue that the premium paid to get on the order books for the Max and Neo by lessors is the real problem as the main driver for these new aircraft, oil at $100 a barrel plus, has evaporated for the foreseeable future.

All lessors now agree that the Neo and Max will carry a monthly rental premium over the CEOs and NGs of well below the US$30,000 mark that was hoped for at the time of ordering, with some mentioning behind closed doors that the reality over the next few years is going to be closer to a US$15,000 to US$20,000 monthly premium for the new aircraft. That is the real damaging factor in play at this time for lessors, but investors have taken this information and applied it also to 787 and A350 types and new 777 deliveries, in the process asking if the price paid for these aircraft was, in hindsight, too high. That is a matter for conjecture that is for sure and to go into that here correctly would risk adding a good 5,000 words. Thus it is correct to add that lease rates for newly delivered 777s, 787s and A350s are showing only mixed signs of slight weakness at this time, if at all on some deals we are privy to. It is also correct to add that four engine aircraft such as the 747-8 and A380 are now well and truly in their element with economics that exceed all expectations due to low oil prices. So if you have a cargo version of a 747-8 being delivered any time soon then you are on a winner; also those seeking the A380 for lease such as THY and IAG should strike now. One wonders if Cathay Pacific will finally lease or purchase the A380 too – Look at Cathay Pacific’s great load factors, all evidence suggests that the airline should have started operating the A380 already on some routes. Cathay is certainly losing revenue and could do with an A380 at speed at the right price and terms of course.

Even Atlas Air Worldwide Holdings stock ended the day 0.63% lower on Friday at $36.07, trading below its 50-day and 200-day moving averages by 8.46% and 19.84%, respectively. Even though the news from this airline/lessor has been nothing but good over the past 12 months with the Amazon deal being one of the most interesting aircraft leasing deals of recent years, maybe signalling a new area of extreme growth for the air cargo market with this lessor here dealing directly with the company driving, and set to drive that growth for the long term.

And yet all the while AerCap’s major investors have been using this period to increase their stakes in the lessor, so they see the value, with Waha Capital taking the chance to significantly increase its holding this month.

Since US lifted Iranian sanctions, companies have been cautious in their decision to trade with Tehran. In the aviation industry, there has been caution from US companies in particular. US Ex-Im Bank’s Robert Morin confirmed during a speech at Airline Economics Growth Frontiers Dublin conference held last week that the bank would not be dealing with Iran at all for the foreseeable future. Airbus, and indeed export credit agency UK Export Finance, have embraced the lifting of sanctions and declared they are open for business in Dublin last week.

It has been confirmed by the Iranian deputy transport minister, Asghar Fakhrieh Kashan, in an interview at an aviation conference in Tehran, which has been widely reported, that Iran has struck a provisional deal with Airbus to buy 127 aircraft, including eight A380s to be delivered from 2019 and 16 A350s.

Asghar Fakhrieh Kashan also said that Iran was interested in the MRJ and the CSeries and said that he “has had some contact with both companies”. The most recent MRJ delays might well put Bombardier in the front seat for any such deal at this time.

Airbus has not confirmed any deal, stating only that the company did not comment on talks with customers. Boeing on the other hand may be looking to sell 787-8s into Iranian Airlines and as such we must wonder if Boeing and Iranian Airlines are going to fall-back on UK Export Credit to back the deal and push it through. Boeing may well need to get their bearings a bit around such a deal but one thing is for sure UK Export Finance is at the vanguard of re-equipping Iran’s commercial airlines – well done to them.

But as Iran looks to re-equip, it is certain that they will have to fall-back on lessors if they want new aircraft at speed, but will the client risk profiling of some lessors allow any such deal in the near term? If a top ten listed aircraft lessor were to announce a deal with Iran within the next month or so then it is certain that the in-house rulebook of any such lessor would have been thrown out of the window, temporarily at least. And so it is likely that Iran will still need to fall-back on the used aircraft market, and why not, with oil on the floor now is the time to take-on a mid-life aircraft as the economics of an eight to twelve year old aircraft in good condition completely knock new aircraft out of the park on a five to eight year operational basis, there is no competition at this time with low oil prices.

But wait! Before we all get a bit too taken aback with the opening-up of Iran we should not forget an important factor: The real winners in the short to medium term should be British Airways and Air France. If they can restart meaningful services into Tehran then they will be able to tap the Iranian diaspora in both Paris and London, which is very large indeed. Far from those that fled Iran making a beeline back, it is family members coming to London and Paris to visit loved ones and shop that will be of most interest. Iran also represents a market where, let us face reality, Emirates and Etihad will not be competing.

Dino D'Amore
By Dino D'Amore January 26, 2016 20:46