WHY OWN AN AIRCRAFT? AVIATION SUB PRIME NEARS

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By TESTCustomwebLP TESTCustomwebLP November 25, 2010 20:20

WHY OWN AN AIRCRAFT? AVIATION SUB PRIME NEARS

In this market, seeing what we can on the horizon, we have to ask the serious question: Why purchase an aircraft when you can lease? Although, given that the true working life of an aircraft is reducing to 15-18 years, surely lease rates will shoot through the roof. Manufacturers will claim that the design life of civil aircraft is 25 years. As we know the economic life is reducing by as much as 19 years as evidenced by the recent A318 part-outs.

So is the aviation model viable? Not unless aircraft prices fall by between 30% and 40% or air fares increase rapidly by a compensating factor.

Alan Leeks, Head of Fleet Planning for Virgin Atlantic, says: “A rational airline would only acquire replacement aircraft now if those assets are sure to deliver a significant reduction in fuel burn. Of course if one were able to support the purchase with export credit subsidies there is additional motivation.”

It seems that the condition of the aviation market is not so dissimilar to the subprime crisis that caused the collapse of the financial markets. We have a large number of players who are over leveraged in the extreme, who can no longer rely on the residual value of their property to carry them through. This seems to leave lessors with no choice but to increase lease rates radically. Airlines will have to increase ticket prices to recapture the increase in lease rates or the higher rate of asset value depreciation. All this against a backdrop of massive tax increases on aviation. Ultimately the increase in ticket prices should quell demand and flying will not be as accessible to all as is currently the case. This could result in slower production rates and more sustainable levels of capacity which would possibly allow useful economic lives of aircraft to recover.

Aviation is financially unsustainable in its current format, there needs to be a market consensus on the issues affecting the future. As with all markets though, who is going to take the terrible risk of increasing prices first? Increase prices together at once and huge fines beckon so the only alternative is to compete until businesses start to fail.

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By TESTCustomwebLP TESTCustomwebLP November 25, 2010 20:20
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