With about 1,100 narrowbody and 200 widebody aircraft scheduled to be returned to their lessors in 2021, even before the Covid-19 pandemic, the commercial aircraft leasing market is set for considerable turmoil in 2021, according to IBA. In a recent webinar the noted that over 1,000 aircraft were now set to be returned to lessors without clear options for onward placement. In normal times the majority of those leases would have been extended, but that option is now extremely unlikely.

'The buoyancy in the commercial aircraft leasing market of the last few years is being brought to an abrupt end by Covid, and we foresee a significant impact not only on lessors but across the supply eco-system.' - Phil Seymour, IBA President

IBA forecasts that, due to the drop in demand caused by the Covid-19 pandemic, the vast majority of these aircraft will not now have follow-on leases secured at the point of return. And with increasing numbers of airlines looking to terminate longer leases earlier due to restructuring, and also because of airline failures, the number of aircraft returning to lessors without onward placement is only likely to increase. IBA therefore expects a higher level of disputes between airlines and lessors around returns and redeliveries.

IBA also expects a corresponding fall in engine shop visits. Prior to Covid-19, these were expected to rise from 3,200 in 2019 to 4,500 by 2023. But IBA now expects there will be only 1,000 shop visits this year and it will take until 2026 to return to the originally forecast 2019 levels.

Phil Seymour, President of IBA, said: ‘The buoyancy in the commercial aircraft leasing market of the last few years is being brought to an abrupt end by Covid, and we foresee a significant impact not only on lessors but across the supply eco-system – particularly in the MRO sector.’

In another IBA webinar the appraising firm’s director of valuations, Mike Yeomans, noted that the overall level of activity on all types of sale and leasing transactions were down on 2019. The level of lease starts, across new and used lease transactions, were down 57 per cent, in the first eight months of 2020 on 2019 levels and sold off lease transactions were down 42 per cent on 2019.
Demand remained relatively strong for sale and leaseback transactions, however, with August 2020 deals down 7 per cent on 2019 YTD.

With values under pressure for most types of aircraft it was likely that there would be changes in IBA’s next update of aircraft base values. Base value adjustments on some outgoing generation widebody types, were likely, he said, with the Airbus A330ceo and Boeing 777-300ER likely to face Base Value downgrades if performance worsens or does not improve. Some regional jet aircraft types also face continued pressure and market value adjustments are likely, along with some risk to base value, for example on mature Embraer E-Jets such as the E190 and 50-seat regional jets.

'We've seen some pretty hard negotiating tactics being put onto the lessors, lessors taking a much lower rate, a much higher risk, and in some cases barely breaking even just to keep those engines in service' - David Archer, Senior Engine Analyst, IBA.

In the most recent IBA webinar on the engine market Senior Engine Analyst David Archer noted that trading volumes had been held back quite significantly because traders who bought when market was high in the period 2016 to 2019, were now reluctant to take a loss onto their books, while any traders who are in the market looking to buy ‘are expecting some pretty significant discounts’ – in the region of 20 per cent for regional market engines and potentially much more for older widebody engines.

At start of the lockdown IBA had seen a pick up in sale-and-leaseback activity. While this had since slowed, ‘we expect to see a pickup in near future, mainly for new engine assets. And for new engines discounts remain pretty minimal,’ Archer said. The resilience of the freighter market had been helpful for the mature widebody market, although there were questions about how long that demand will stay, he added.

In relation to the softening in short term lease rate on engines, ‘We’ve seen some pretty hard negotiating tactics being put onto the lessors, lessors taking a much lower rate, a much higher risk, and in some cases barely breaking even just to keep those engines in service,’ he said. The industry was now well into the second wave of lease deferrals with the lessors, he said. ‘We’ve seen a lot of activity around trying to make a win-win situation for the airlines and the lessors. In some cases we’ve even seen engines provided to the lessor as a way of payment in lieu of the debt they owe to wipe the slate clean.’

While distressed sales had resulted in discounts being secured on mature assets of 30 per cent and more, this did not reflect IBA’s view on market values, he added. And while short-term lease rates were similarly down, Lease Rate Factors actually picking up in some cases, he noted, largely around the newish generation of engines.

With the failed summer season now leading into ‘a pretty dire looking winter,’ he said, he remained hopeful there would be more sale and leaseback activity, along with improving Lease Rate Factors, in the medium term. Looking at people’s expectations of a return to ‘normal’ in the long term Archer cautioned ‘I think it’s very debatable if what we had in the last few years was “normal”. We all knew a correction was due, this is a cyclical market, although what we are seeing is obviously much more than a correction. But we do expect to see recovery long-term, but whether we return to those 2019 levels, that’s debateable.’