Risk to lessors to plummet in India while aircraft deferrals and cancellations continue to mount

Juliette O'Neill
By Juliette O'Neill August 17, 2016 15:10

Risk to lessors to plummet in India while aircraft deferrals and cancellations continue to mount

R.N. Choubey, Indian Civil Aviation Secretary, has confirmed that the government is in the process of amending the legal framework to enable lessors to take back aircraft quickly from defaulting airlines: “We are exploring ways to de-risk the leasing business,” he said. “If the airline defaults on its terms, the leasing company or the owner of the aircraft could be allowed to take it out of the country quickly [within seven or ten days].”

But India may only change the rules for those airlines involved in the regional connectivity scheme, which at this time really cannot get off of the ground without lessor backing. Lessors want to be sure that the DGCA can swiftly deregister aircraft upon request by the asset owner – something that currently does not happen.

Meanwhile, pressure is building on the A380 program after Qantas announced that the airline “sees no market for the remaining eight A380 aircraft the airline is due to receive”, according to a statement by chief executive Alan Joyce: “There’s a network for 12 [the airline currently has in service] that’s very good and works very well, but the airline “struggles with a network for the next eight”. Although deferred the remaining eight A380 aircraft were never cancelled – this may change following this statement.

Given the rapid progress at Boeing on the 777-9, the A380 may struggle to survive for much longer without some sort of upgrade. This train of thought is exactly what Tim Clarke, CEO of Emirates, has been talking about for some time. He will be increasingly worried for his A380 order pipeline if Airbus is forced to slow production further or re-think the program altogether as Boeing is with the 747-8. Emirates and Airbus together will surely have to announce the launch of an improved A380 in 2017.

In another expected blow for Airbus, LATAM is pushing back deliveries. LATAM reported a wider-than-forecast net loss for Q2 2016 of US$92 million from US$50m for the same period last year.  LATAM has continued to cut capacity in the Brazilian market, shifting toward building up Lima as a hub.  Sales for the second three months of 2016 were US$2.1 billion, down from US$2.4 billion a year ago. In the first six months, the airline made a US$10 million profit.

LATAM will now defer 12 A320neo aircraft and two A350s. The airline has opted to redeliver five additional A320s, three A319s and one 777-200 freighter previously due for 2017 delivery.

The airline maintained its margin guidance of 4.5% to 6.5% for 2016, and said previously announced fleet reductions were proceeding in line with plans. Part of this decline was offset by the continued positive trend in costs, with total operating expenses declining by 12%, resulting in a 10.5% decline in costs per ASK equivalent.

As of August 2016, LATAM Airlines Group has reduced fleet assets for 2017-2018 by US$1.1 billion, in line with the company’s previously announced plans to achieve a decrease of US$2.0 to US$3.0 billion in expected fleet assets for 2018.

In July, LATAM entered into an agreement with Qatar Airways to acquire up to 10% of LATAM’s total shares. If/Once approved, a capital infusion of US$ 613 million will run through the books in Q4 2016.

LATAM Airlines Group’s fleet stands at 333 aircraft including 241 A320 family aircraft, five A330-200s and three A350-900s. 37 767-300 passenger aircraft, 11 767-300F cargo aircraft, 10 777-300ERs, four 777-200Fs, plus 10 787-8 and 12 787-9s.

Juliette O'Neill
By Juliette O'Neill August 17, 2016 15:10