Aircraft Leasing Bubble in Trouble?

Alarming signals are coming from an unlikely place, the market that the industry long touted as an engine of infinite growth.

By MC01, a frequent commenter, for WOLF STREET:

In 1990, leased aircraft accounted for 15% of airline fleets. By 2017, the overall fleet of aircraft had ballooned, and within this much larger overall fleet size, the share of leased aircraft had surged to 40%.

There are three general reasons why companies lease aircraft: To operate without the financial burden of buying them, a particularly important factor for the rapidly expanding fleets of airlines in the emerging markets; to provide extra capacity for a limited time; or to temporarily replace part of their fleet which may have become unavailable.

Aircraft leases can be “wet,” dry,” or “moist” (“mixed”): in a wet lease, the lessor provides the aircraft (A), complete crew (C), maintenance (M) and insurance (I), so it’s also called an ACMI lease. In a dry lease, the lessor provides only the aircraft itself.

There are several variations to these two categories: for example, large cargo companies such as FedEx and DHL may buy the aircraft and lease them to other companies that will operate for them under an exclusive contract. This type of lease may be further complicated by the lessor also owning a stake or even a majority in the lessee. For example, DHL wholly owns European Air Transport Leipzig which operates exclusively for the parent company, from which it also leases all of its aircraft.

A “moist” or “mixed” lease starts out as “wet,” usually to allow the lessee to train and qualify the crews to operate a new aircraft type commercially and set up maintenance and insurance contracts. It turns into a dry lease once the lessee is ready to operate the aircraft.

Dry lease contracts run for a predetermined length of time, generally but not always starting at two years. Pricing is on a monthly basis, with provisions regarding insurance, depreciation, maintenance etc. For example, leasing an aircraft from a company partially owned by an insurance company may come with strong incentives to use that same insurance company. Maintenance Reserves (also called Supplemental Rents), meaning the funds collected during the duration of the lease to cover the costs of maintenance of the airframe, landing gear, engines and APU (Auxiliary Power Unit) may be bundled in the lease cost, unbundled, or be the subject of separate contracts. And so on.

The costs themselves vary wildly. An Airbus A320ceo less than six years old will set your fledgling air travel company back about $250,000 per month. An older A320ceo (over 12 years) will allow you to save a lot of money on the bare lease, costing you $160,000 per month, but will have considerably higher maintenance costs, as Maintenance Reserves are usually unbundled on leases for aircraft this old. The average “A Check,” a package of routine maintenance and inspection procedures performed on “classic” Airbus aircraft every 50 days or 425 flight hours (whichever comes first) is about $14,700 for an A320ceo.

Wet lease contracts are structured in different fashion, with the contract running for a certain duration and number of flights (say, four daily flights for four months) and pricing is by “Block Hours” (BH) meaning the time between the closing and opening of the doors during a revenue generating flight.

An Airbus A320ceo will set you back about $2,800 per BH while an Airbus A330 will be about $5,700. On top of this, most lessors will ask for a lump sum per staff member, usually about $57 to $85 per staff member per flight.

While there are dozens of aircraft leasing companies and also airlines offering wet-lease services – among the most active are Qatar Airways, Alba Star, and Air Atlanta Icelandic – the worldwide market is dominated by a handful of megacompanies owning over 250 aircraft each.

In descending order by fleet size (as of October 2018), they are: AerCap, GECAS, Avolon, Nordic Aviation Capital, SMBC Aviation Capital, BBAM, BOC Aviation, ICBC Leasing, the Air Lease Corporation, and the Aviation Capital Group.

GECAS (General Electric Capital Aviation Services) is probably the most famous of the lot. As the aircraft leasing arm of GE Capital, it rose to worldwide prominence between 1993 and 1996 when it took over many of the assets of leasing pioneer Guinness Peat Aviation, a victim of overambitious expansion plans. Despite a longstanding policy of buying exclusively aircraft with engines from GE or CFM (joint venture between GE and Safran of France), this policy was recently relaxed due to pressure from faithful customers such as Qatar Airways to include other engine options, such as Rolls-Royce and Pratt & Whitney.

GECAS has not been spared by the unfolding GE fiasco: After GE Capital sold off its banking unit, GECAS was cut off from a source of capital with extremely favorable conditions and was forced to finance its operations at going market rates. This coincided with a period of exceptionally loose financial conditions, which for a while allowed GECAS to shrug off these higher capital costs. But as it always happens, it worked until it didn’t.

GECAS has seen the value of its portfolio (not inflation adjusted) shrink from its 2012 peak of $34.1 billion to the latest estimate of $23.6 billion. Its fleet declined 42% from 1,600 aircraft in 2012 to 930 in 2017, as aircraft are either struck from the fleet and not replaced or simply sold to raise cash.

GE has hired Goldman-Sachs to carry out a review of GECAS and help decide its future. GE has already been in talks with several potential buyers, including GIC, Singapore’s sovereign wealth fund, BOC Aviation, and ICBC Leasing.

The latter two are particularly problematic as they’re subsidiaries of Chinese state-owned banks: BOC Aviation belongs to the Bank of China and ICBC Leasing to Industrial and Commercial Bank of China (ICBC). While GECAS is registered in Ireland like so many other leasing companies, it’s beyond doubt that the US government would take a strong interest in the transaction – GECAS is a big customer of the highly strategic US aerospace industry.

In terms of Chinese aircraft leasing companies, HNA Group’s stupendous acquisition binge abroad ended up attracting the attentions of the Chinese government, which is now pushing the company to reduce leverage levels. So HNA made a deal to sell a 30% stake in Avolon to Japan’s Orix Corporation.

Avolon is a posterchild for HNA’s crazed and convoluted expansion drive: It was bought in late 2015 by Bohai Capital Holding, an HNA Group company, for $2.5 billion. One year later Avolon bought CIT Group’s aircraft leasing division for a massive $10.4 billion to create the world’s third largest aircraft lessor by fleet size.

Orix (part of the Mitsubishi keiretsu) will pay $2.2 billion for a 30% share in a company that in Q1 2018 was implied to have had an enterprise value of $23.7 billion. This means either a huge discount or that Avolon has taken from its parent group a highly convoluted corporate structure that makes determining its ultimate value extremely difficult.

BOC Aviation, one of the interested parties in the anticipated GECAS sale, has become a Hong Kong stock market darling since its IPO in May 2016. This has also allowed potential investors to have a peek at its financials, including net debt of HKD88.8 billion.

Like BOC Aviation, the entire aircraft leasing industry has become dependent on low interest rates and massive infusions of capital from China, whose investors (often state-owned or state-backed) now account for a 30% of total capitalization.

While complacency still reigns, alarming signals have already started to come from the most unlikely place, the one market which the air transport industry (including leasing companies) long touted as an engine of infinite growth: India.

Domestic Indian airlines have asked local authorities through the Federation of Indian Airlines (FIA) to be given “government assistance” in obtaining unsecured loans to offset their now depressingly common losses.

The true reason for this brazen request is Indian airlines have added so much capacity at such a rapid pace they are dealing with a glut of epic dimensions: To give an idea of what kind of crazy expansion we are talking about here, IndiGo had a 50-aircraft fleet in 2012. It now has 196 aircraft with a migraine-inducing 412 on order.

This fleet growth has led to a capacity glut which in turn fueled an all-out fare-war between India’s airlines that has destroyed profitability. For example, to win over customers from competition airlines, SpiceJet will often wave the bane of air travel, fuel surcharges, ending up with big financial losses as it has to eat the extra costs.

Indian airlines and leasing companies are still convinced the way forward is unbridled expansion, with fleets that are projected to be four times larger in less than a decade than their current fleets, and with the Ministry of Civil Aviation having already cleared eight brand-new airlines for domestic operations just over the past two years.

Aircraft leasing companies have already signed contracts to lease hundreds of aircraft to Indian companies over the next decade. As this engine of “infinite growth” stumbles and clashes with multiple problems, leasing companies will have to adapt and hope similar problems don’t surface elsewhere in the world. But with companies such as Indonesia’s Lion Air determined to more than double their capacity over the next decade, I predict a lot of changes in the industry, and a lot of lessons learned. By MC01, a frequent commenter, for WOLF STREET

The long-haul “low-cost carrier” business model in a world awash in cheap money. Read… Billions for Planes, Billowing Losses

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  64 comments for “Aircraft Leasing Bubble in Trouble?

  1. EEngineer says:

    When you look at the chart for Boeing you would think that everyone expects massive airliner orders going forward for the indefinite future. Or a war…

  2. Jarhead John says:

    Why own today’s aircraft when new technology is just over the horizon….The X-59 Quiet Supersonic Technology (QueSST) aircraft is slated for it’s maiden flight in 2021. The plane is designed to fly at a ceiling of 55,000 feet and a speed of 940 mph. According to NASA, the aircraft should completely change domestic commercial aviation with mach speed and low sound over population centers….

    • Wolf Richter says:

      This is a small experimental aircraft for a demonstrator program to prove that the concept of low sonic boom even works (acoustic validation). Community-response flight tests are scheduled to take place in 2023-25. This is when the experimental plane will be flown over US cities to see how people will react to the reduced sonic boom. There is no actual airliner of this type in the works yet, obviously.

    • MC01 says:

      Little dirty secret in the industry: those tests over population centers were already carried back in 1964, when the USAF flew the ill-fated North American XB70 Valkyrie at supersonic speed near Oklahoma City precisely to see what would happen. The police was swamped with complaints about “terrible noises” and “unearthly vibrations” and when the USAF revealed what had caused them (remember: those were the years of the Red Scare) they were flooded with damage requests for anything from shattered window panes to precious heirlooms being damaged by vibrations. Most requests were probably bogus, but it’s beyond doubt the test didn’t go well.

      Aircraft design goes through fades, and fades are often cyclical: in the 60’s there was an obsession with Mach2+ speed, regardless if there was any need for it. Super Sonic Transports (SST) were part of this obsession and before public opinion could sink its teeth into them, they were already dead because they made no economic sense.
      Pan-Am had calculated that any time savings an SST would have over the Boeing 747 they had already ordered would have been denied by the need of intermediate stops to refuel. The San Francisco-Tokyo route would have needed two stops enroute to give an example.
      Project Horizon, as the government-funded American SST was called, was the brainchild of the Kennedy Administration which had managed to push it through despite strong opposition by most Democratic leaders who rightly saw it as “frivolous Federal spending”: Boeing and GE had no problem accepting Federal funds to work on a project they knew was doomed to failure. It was a classic case of corporate welfare.

      The X59 program is exactly the same thing: corporate welfare under the guise of “helping the economy”.

      • RepubAnon says:

        For an SST to make economic sense, the fares need to be low enough to make the time savings worthwhile. Only the ultra-rich could afford the tickets – and there aren’t enough folks who can afford the tickets to

        For an analysis, here’s a You Tube video: https://www.youtube.com/watch?v=a_wuykzfFzE

        • MC01 says:

          For an SST to make sense, it needs to have operating and financial costs comparable with an Airbus A350 or Boeing 787, as simple as that.

          There are all sorts of companies out there catering to customers who want the convenience of air travel without the hassle of actually owning the aircraft itself: they fly anything from the ubiquitous Pilatus PC12 to the long-range Gulfream’s and Bombardier’s.
          Flying on these aircraft is actually rather nice and to make things better you don’t even have to be molested by “security” controls at the airport. Fares compare favorably with those of the best airlines in the world, especially for frequent flyers.
          So why bother with an SST?

        • Dan Romig says:

          Thank you MC01.

          Nearly five years ago, the BBC had a nice feature on Boeing’s 787 and Airbus’ A350 lightweight carbon fiber composites.

          https://www.bbc.com/news/business-25833264

          I would expect that all future passenger aircraft will be of a carbon fiber fuselage and wings versus the aluminum alloy of yesteryear.

          Any insight into this MC01?

    • roddy6667 says:

      It will probably cost more to fly than the Concorde, which means it will not be commercially viable.

      • MC01 says:

        Henri Ziegler, the president of Sud Aviation and later first president of Airbus, famously blasted the Concorde for being “…an example of politically-driven prestige program, highlighting the absurdity of designing, testing, certifying and manufacturing an airliner without ever involving the airlines which should operate it in the process”.

        Ziegler famously clashed with the French political establishment for trying to force his hand on the Airbus A300, stuck to his guns (with a lot of help from his German and especially British partners) and was proven right: the A300 still flies to this day in large numbers while the Concorde is a museum piece.

    • Capt Hank says:

      The FAA will not us to fly over 41,000 feet, because we have to be able to get down to 14,000 in 4 minutes in case of loss of cabin pressurization. I’m a Boeing 737 Captain.

      • TheVoid says:

        What is your cabin altitude at 41,000 feet? Transport category aircraft are prohibited from a cabin altitude exceeding 8000 feet, which the 737 would bust climbing above FL410. See FAR 25.841

        I would expect an actual Captain to know that, and would immediately deplane if I found that mine did not.

    • Pat McKim says:

      Solely depends on cost per passenger mile. When you look at those new aircraft artist concepts, they are like the SST — not a lot of space and to push that much air aside takes lots of energy. There is such a thing as a “hull speed” on a ship where the cost of more speed is prohibitive. Will people want to be locked up in a very small tin can and pay higher prices? I doubt that getting to such a high altitude that has air thin enough to allow that kind of quiet speed will allow for short hauls. I suspect that these will need to be transcontinental and intercontinental flights. That cuts out a lot. With the 787 being so cheap, one wonders whether this will as big a winner. Still lots of unanswered questions. Right now every one thinks that all new tech works, but hypersonic for defense purposes and hypersonic for commerical purposes are two different things.

  3. Jarhead John says:

    Wolf, check NASA Press Release 18-093…maiden flight 2021…

    • Wolf Richter says:

      In case you haven’t looked at it, here it is. Make sure you also look at the picture of the plane. It’s a small experimental single-engine plane and has room for a pilot, and that’s it. They’re just trying to prove a concept. It’s part of a demonstrator project. The maiden flight will be of this small experimental plane.

      https://www.nasa.gov/mission_pages/lowboom/index.html

      https://www.nasa.gov/press-release/nasa-s-quiet-supersonic-technology-project-passes-major-milestone

      • Bobber says:

        You wouldn’t catch me ever riding in that thing. What happens when something goes wrong and the pilot has to maneuver? Have fun attempting an emergency landing in that arrow.

        I’d rather sit on a flight for a few extra hours to ensure my safety.

        But I’m sure there will be plenty of eager people hoping to get a ride in it. They come from the same ilk that crashed their Teslas while watching movies on autopilot. Technology wouldn’t advance without these human guinea pigs, so I’m glad we have them.

  4. Kaz Augustin says:

    Always love reading your comments and articles, MC01! Thanks for educating me. Again. :)

  5. kk says:

    Breaking news – “nearly free money gets thrown away really quickly ”…..drunken sailers also seen in bar, when asked why don’t they invest their money in certificates of deposit or pension, state that their modelling of discounted cash flows suggests drink and women offers higher rate of return.

  6. ST01 says:

    Excellent article. Looking forward to MC01 becoming a regular contributor.

  7. Ravi Uppal says:

    I fail to understand the aircraft and tourism industry with the POV of peak oil . A barrel of oil (42 gallons) when refined delivers only 4.5 gallons of ATF . ATF can only come out of conventional crude and not out of Canadian heavy sands or the shale LTO . The conventional oil peaked at 76 millions barrels per day in 2005 . It has been on an undulating plateau since then . The expected decline rates on this are about 5 % per year by IEA estimation . No new oil coming to replace this decline . So the question is at what stage do the USAF and other defense forces acquire all the ATF for their use and leave the commercial aircraft industry stranded . I am surprised that they keep building airports all over the world . To learn a lesson from history ,the Luftwaffe had a lot of planes but they were all grounded because there was no fuel.

    • Max Power says:

      Well, mix heavy crude with shale LTO and you basically get conventional crude.

      That is, if you could only get that heavy crude out of Canada… ;-)

    • nofreelunch says:

      The largest product by volume to come from a simple distillation of the shale oils (Eagle Ford Bakken, Permian, etc.) is JET-A fuel. There is no peak, as more and more can be economically extracted at higher prices. It’s a soft hill, with one side being higher and higher extraction costs that become less competitive with alternatives. Only a fraction of the shales are being actively produced from, as there are large areas that are uneconomic at current prices. Oil extraction is more like gold mining. There are about 100 lbs of gold in a cubic mile of seawater, but its not economic to extract at todays prices. If the price went up high enough, there would be plenty of gold.

      • Ravi Uppal says:

        Shale oil is 43-45 API grade . This is as good as condensate . You do not get diesel or ATF from condensate . That is why there is little requirement of LTO from US refineries and has to be exported .Basically LTO is used as a dilutant to make the heavy oil flow in the refineries and the pipelines. A mixture of LTO and bitumen does not equal conventional oil . The molecular structure of 35 APi which is conventional is not the same as ^dilbit^ . In the refining process of ^dilbit^ at the refinery level you have a dumbell effect that is a lot of extreme products like petrol at one end and asphalt at the other but very little of the middle distillates viz diesel and ATF .

  8. raxadian says:

    Of course that the end of cheap debt affects everything in the badly called “everything bubble” because it was a bubble based on cheap debt to start with.

    Not to mention that comercial flying is a cutthroat business that tends to be badly managed and depends on government support to survive long term

    If I started to list the number of airlines that went too far on cutting costs and so seft destructed when that caused plane crashes they couldn’t defend in court, I will be here all day.

  9. Max Power says:

    Interestingly, Air France just announced that they will not renew their A380 leases, effectively halving the number of those monster airplanes in their fleet.

    What will happen to all of the over-capacity aircraft mentioned in MC01’s article is that they will be back on the secondary market and available to be used by airlines with stronger business plans.

    My hope is that all this excess equipment might help the US to experince the same sort of low-cost air revolution that Europe has gone through. I’d say that over the same segment lengths, flight prices over there are about half what we pay in the US, particularly if the origin and/or destination is a secondary market.

    • Atu says:

      Not sure where main costs could be reduced, aircraft is a smaller cost . Now that there is so much economic subsidy I am not sure anyone will calculate, beyond guessing how command and demand economies will make out with each other.

      http://airlines.org/dataset/a4a-quarterly-passenger-airline-cost-index-u-s-passenger-airlines/

      • Max Power says:

        I think it requires a more in-depth look at the issue than a simple breakdown. The newer planes coming on the market tend to have reduced fuel consumption than the current fleet which should affect fuel costs. Also, more equipment could result in more point to point operations which could lower the regional/feeder airline adjustments.

        At the end of the day Europe seems to have been able to come up with a much more more competitive price environment while not being a particularly low-labor cost place and with having maintenance and fuel costs and requirements similar to the US’.

    • MC01 says:

      The Airbus A380 was designed for a very specific customer (Emirates) and was only bought by European airlines to goose order books when the expected large orders from Asian companies turned out to be considerably smaller than originally envisioned. It has no room in the strategy of companies such as Air France and Lufthansa which operate radically different business models than Emirates.

      In my opinion there’s no secondary market for the A380: the lone Hi Fly aircraft is more a politically-backed stunt than anything. The first two aircraft to come back from a lease (Singapore Airlines) were scrapped at Tarbes earlier this year due to general lack of interest.

      Regarding the low cost model… one often overlooked factor about the European market is the fact that most airlines can use the EU’s free trade zone to their advantage, chiefly to reduce crew cost. Norwegian is infamous (and in the sights of domestic regulators) for using South East Asian nationals, chiefly from Thailand, under Irish contracts on their long haul flights. The present boom of airlines based in Turkey, Poland and Lithuania is tied to both the fiscal advantages these countries offer to airlines and the possibility of cutting crew costs.
      To the best of my knowledge NAFTA doesn’t allow a US company to engage in similar behavior, cherry-picking legislation to get economic advantages.

      On top of this, and at the cost of sounding like Cato the Censor, European airlines have benefited from years of ferocious financial repression which allowed them to savagely slash financial costs.
      When (it’s only a matter of time, whether the crybabies like it or not) these costs will start to go up, airline companies will have to raise more cash at a time when they can ill afford to increase fares due to competition. It’s the same situation India is in right now, but worse: most Indian companies are backed by conglomerates with mountains of cash, such as Tata and Wadia. Most of these European airlines are just backed by a wing and a prayer.

      • Escher says:

        Great comments, MC01, to echo some of the other readers.
        I thought the A380 was getting some traction with Singapore airlines and Cathay pacific. Is that not the case?

        • MC01 says:

          Singapore Airlines is firmly in the A350 camp right now, so much they had Airbus develop an Ultra Long Range (ULR) version to resume direct services from Singapore to the US. Trust me on this: Airbus wouldn’t have bothered if Singapore hadn’t guaranteed a large A350 order. With 67 already delivered or on order (one was being tested at Toulouse last week), that’s a pretty hefty order. ;-)

          Cathay Pacific never had an interest in the A380, since it doesn’t fit their business model. I am curious to see what they will do with their large A330 fleet since they seem firmly in the camp of a two aircraft (Airbus A350 and Boeing 777) passenger fleet. Since Cathay Pacific Cargo flies Boeing 747’s exclusively I don’t think they’ll follow in EgyptAir’s footsteps and convert them in cargo.

          Yes, two excellent albeit very expensive companies for the business passenger.

      • Escher says:

        On the topic of Indian airlines: one of the former high flyers, Kingfisher airlines, went bankrupt. Another big one (Jet airways) had to get a cash infusion from Etihad airways, and is still in financial trouble.
        Tata (Vistara, a new airline with relatively few routes) and Wadia (Go Air, also not too many routes) are relatively small players in the Indian aviation sector.
        The big daddy is Indigo airlines, which has been profitable for the last few years (and have a yuuuge order with Airbus) but is struggling in 2018 due to increased competition from local and new foreign entrants like Air Asia.

        • MC01 says:

          Yes, IndiGo posted their first operational loss in Q2 2018. I am not surprised given the pressure they are under and the cutthroat competition in the Indian domestic market.

  10. Cmoore says:

    A confusing business. Remind me never to buy stock in airline or related stocks.

    • Paulo says:

      Amen, Cmoore. It is absolutely the worst industry as far as business fundamentals and common sense. Capt Hank will probably agree. People are in aviation because they like aircraft and/or like to fly. You catch a ‘bug’. I know, I had it for years and many of my friends still do. :-)

      I’m not familiar with large aircraft leases, but I sure am with smaller turbines, etc. I have friends that lease out aircraft and the way it works for them is totally dry and by the flight hour, with a guarantee of a minimum number of hours over the term of the lease or by the month, whatever. It all depends on if the aircraft owner needs the immediate cash flow or not, the market, viability of the company needing to lease, etc. All those factors are priced in, and the for the aircraft owner it is a simple calculator exercise. Experience in the business is crucial!!!!!

      For the airline company, the goal is to fly only the minimum hours the lease requires, but no more as you make more money with your own aircraft than with a leased aircraft.

      I would never ever lease out aircraft as an investment, but my friends do quite well with it as they own their aircraft free and clear. This is their business and they know it inside out, know the operators, and usually even the flight crews. The aircraft are insured and upon term the aircraft has to be returned in same condition…or it is on the airline company’s dime. They also check up on things if the relationship is new.

      Airline companies lease aircraft for flexibility and customer service when it isn’t feasible to purchase more equipment. In general, the leased machine is the last to fly and the first to be parked.

      If you operate a restaurant with temporary staff, leased premises, trendy advertising, great signage, great internet presence, etc the customer doesn’t have a clue how shaky everything is. The local food truck might have more equity and stability than the fancy chain restaurant. It’s the same with airlines. They even lease computers and their reservation systems, why not aircraft?

      “Prior to deregulation, airlines owned their own reservation systems with travel agents subscribing to them. Today, the GDS are run by independent companies with airlines and travel agencies being major subscribers. ” (Wiki)

      Companies that lease equipment do it for two reasons. One, they can’t afford to buy their own. Two, they can walk away at a moments notice. Excuse the pun, but it’s pretty ‘fly by night’ as far as I’m concerned. “arh arh arh”.

  11. earl d says:

    What a great article. Anything re: GE is like catnip to me, so doubly interesting.

    Speaking of GE, GECAS is an example of what made GE Capital so seductive, e.g. get into a capital intensive business that drives demand from your best in class manufacturing into a capital starved industry.

    GE could be thought of as a vertical multiplexer for recently ‘deverticalized’ companies, something that was all the rage in the late 80s and 90s. That it became a system of arbitrage to help smooth GE profits, and that its speculation lacked proper controls so that its outsized profits turned into outsized losses when economic conditions changed ought to be placed squarely at the feet of Jack manager-of-the-century Welch — in particular his blinkered, portfolio based, a-good-manager-can-manage-anything philosophy, which, btw, *is* the modern US MBA program.

    Hopefully someone is writing a “Chainsaw Al” of GE (only insightful and well written), because it would not only be a Best Seller, but he GE microcosm would many of the problems of the current global economy.

    • MC01 says:

      There’s an old saying: victory has many fathers, but defeat is always an orphan.

      GE fits exactly in there.

  12. MCH says:

    I am kind of curious to see what the exposures are for all of these leasing companies. More than a few are fairly opaque about their fleet, and you’d have to go all the way back to their original announcements and check the OEM’s backlogs to kind of figure out what they had in place. There have also been name changes like AerCap (which used to be IFLC, before AIG spun it off), and it’s insane how many aircraft they all have in place.

    I wonder what might happen if the miracle of air travel predicted for China and India doesn’t materialize. The same is true to a large extent for the rest of Asia. For example, if you look at an LCC like Vietjet, they have a crazy insane backlog of 322 aircraft, both from Boeing and Airbus. You would think that with an LCC, you’d have one common type, not both. That’s more airplane on order than the rest of Vietnamese airlines. Then there was your example of Air Asia X previously. Both of these have more orders than China Southern, the largest airline in China. It’s utterly insane. That’s the lower end of the market, which will devastate Boeing and Airbus if orders for single isles collapses further.

    Then, there are the heavies. In fact, if just Emirates starts having problems, it’ll have a deleterious affect on both the majors. Emirates has an insane 104 A380 and 138 777-300 ERs in service, although I’m not sure how many are active given the pilot shortage problems they have. But they also have an additional 200+ heavies that they are on order, and I don’t even think that includes the 787 orders. (Emirates alone could kill both the A380 and the 777X in one shot if they decide to cancel, just ask Airbus about the A350s, in fact, with the volumes involved, Boeing is at much larger risk than Airbus, given that everyone already knows the A380 is at the end of the line) Given Emirate’s penchant to retire “older aircraft” some of which are almost a decade younger than what’s operating by some of the legacy airlines, that’s got to put a ton of pressure on these leasing firms and eventually the OEMs.

    I’m just wondering stock should be shorted first when the collapse really gets going, I want to say Boeing, but the difficulty there is that Boeing has this large military business that’ll balance losses on the commercial side. Airbus, not so much.

    • MC01 says:

      You are not alone in having doubts about those maxi-orders from Asian companies and the leasing outfits catering to them: earlier this month the same doubts were expressed at a convention in Hong Kong I would have loved to attend.
      India is giving us all a warning because in many ways they haven’t got that many issues: most airlines are backed by huge conglomerates with mountains of cash (Tata, Wadia etc), the Indian rupee has recovered most of its losses against the US dollar and the euro, the Reserve Bank of India has kept its relatively sane policy (by BRICS standards) and Indian airlines are protected from external competition on the domestic market. These are luxuries airlines in South-East Asia haven’t.
      But it’s a warning few are heeding: complacency still reigns.

      Leasing companies are convinced the Chinese government will rescue the sector, no matter what, and failing that Japan will do, for no other reason Japanese firms such as Mitsubishi Heavy Industries, Subaru, Toho Tenax and Toray Industries are major Airbus and Boeing vendors. What, you though Orix bought a large equity position in Avolon because it’s highly profitable?

      While I am hoping and praying to be dead wrong, the behavior of companies like AirAsia, VietJet and Lion Air reminds me far too much of what we saw in the same area in the 90’s, but on an even larger scale.
      The people running these companies have no idea what the words “organic growth” mean and are accustomed to repressed conditions on capital market. They have little experience of dealing with tightening financial conditions and quickly maturing markets. Possibly worst of all they fully expect to be bailed out one way or the other if their business slows down a little, let alone if they have solvency issues.

      As I’ve said before I do not expect order cancellations to be a problem soon: delivery slots can be simply passed on to the next in line, and the line is still long. But even cutting one of these maxi-orders by 25% could have a serious impact a few years down the road.

      • Rowen says:

        I’m still trying to figure out how VietJet plans on using 100 737s, especially once the paper wealth from its spectacular real estate bubble pops.

        • MCH says:

          If it was only 100 737s, that would be nowhere near a problem, those guys have 300+ planes on order. It’s like somebody deciding to start an air force. Then decided they couldn’t figure out if it was better to have the F-16 or the F-18, so let’s buy both.

          I assume both Airbus and Boeing has some very odious cancellation clauses in place. I can also imagine the Ex-Im bank taking a hit over the Boeing side of things when the deal falls through.

          But hey, no worries, the 40 787s from Emirates will make up for that one.

      • MCH says:

        MC01, perhaps you could at some point do something more specific on the life cycle of a commercial airplane, from its first customer to the time that it gets stripped for parts or sent to the boneyard.

        The lifespan on commercial aircraft in service seem to vary quite widely these days. For example, United has had 777-200s in service today that were likely from the late 90s, while companies like Emirate would have taken those aircraft completely out of service. At some point, there is going to be a glut in the second hand markets. I assume that in part could be United wringing every bit of life out of their original -200s, while Emirates happily deals their newer -300ERs second hand out to some no name airline. Then, you could do a bunch of freight conversions, but at some point, there would have to be too many airplanes and then something has to give.

        Would be curious to see what happens to the airplane over time, after all, if you keep scrapping things, at some point, all you’ll have left is an empty aluminum tube.

        • MC01 says:

          I’ve previously hinted at the theme.
          A commercial aircraft is on average active for 25 years.
          After anything from 9 to 12 years (different aircraft owners have different financing costs and different staregies), the original owner usually reassess the value of the aircraft and decides whether to keep it or sell it off. If no interested buyers are found, the aircraft may be broken up for parts or, less often, converted in a cargo and kept by the original owner. The latter is what’s happening at the present to EgyptAir Airbus A330, as they are progressively replaced by Boeing’s.

          Breaking up an aircraft is never an easy decision, but usually it’s rapidly stripped of avionics, fuel management systems etc which are inspected, overhauled and stored in climate controlled warehouses awaiting a customer. These parts need to be periodically inspected to keep their certificate valid: they aren’t car parts a breaker carelessly toss on a shelf and forgets about until some bloke walks in and asks for them.
          The hulks themselves are progressively but speedily (remember: the more equipment sits idle, the higher the chance of expensive repairs) stripped of anything until all you have left is a bare shell, often sitting on platforms (tyres and landing gear are good money) and awaiting the day they’ll be turned into scrap metal. This is usually done using large escavators.

          As this is delicate business, aircraft scrapping hasn’t been fully outsourced to EM’s yet like we have done with commerical vessels, but it’s easy to predict we’ll get there eventually.

  13. tonykklau says:

    It’s not a stretch to say that aud/bmw/MB are in a similar leasing bubble.

    • MC01 says:

      Forget car manufacturers: the three major agri machinery companies (John Deere, CNH and Agco) are sitting on a huge pile of combine harvesters, cotton strippers, tractors etc that returned from leases, as lessees don’t buy them at the end of the term and simply start a new lease for a new machine.
      These machines are worth a lot of money, far more than any luxury car, and are arguably far harder to sell.
      Those chicken will come home to roost sooner or later.

  14. lux,lucis,n says:

    These articles are very interesting .
    The airline industry is so nonsensical in its economics.
    It is arguably the worst industry on the planet without any improvement in 40 years, massively overpaid drivers and usually useless waitresses, bad unpredictable service. But most of us have to use it somehow. Though not always.
    So besides housing, jobs, cars, planes , banks and the stockmarket what else is central to people’s lives: healthcare.
    The level of nonsense in that industry is far greater than any other. The level of fraud is enormous. The gauging of customers is beyond Luciferian. The intermediaries aka insurance companies and hospital corporations are vicious.
    An industry that can bankrupt any customer in a matter of days without recourse/escape.
    Isn’t time to get some posts?

  15. Rowen says:

    Most of this technical talk is beyond me, but I did read that the helicopter leasing bubble may be bursting. Apparently, Waypoint focused on leasing helicopters to offshore oil rigs, which is like Inception-level bubble-on-bubble.

    https://www.marketwatch.com/story/helicopter-leasing-firm-waypoint-files-for-bankruptcy-protection-2018-11-25

    • MC01 says:

      As the present US President will no doubt remember painfully, helicopters are one of the most difficult markets out there.

      Part of the reason Waypoint went bankrupt is due to the nature of the helicopters themselves: heavy-lift Western helicopters, the kind used to service offshore oil rigs, are extremely expensive to acquire and to operate, and aren’t anything to write home about when it comes to performances.
      I am not a Russophile by any stretch of imagination, but Russian heavy-lift helicopters are just a better deal all-around, as proven by the enormous number of Mil designs in service worldwide. The fact HeliSwiss ended up buying Kamov heavy lift helicopters over surplus (read: basically free) military Swiss helicopters of French manufacture says it all.

  16. J.M.Keynes says:

    @MC01:
    – Do you have information to what extent airlines are being subsidized by governments of their home airport ? Can you give a general overview ?
    – E.g. I regularly hear complaints from european airlines that Turkey and countries in the Middle East are being (heavily) subsidized by their home country/countries. European airlines seem to be (fairly) independent and have to stand on their own two feet when it comes to (financial) support from their home countries.
    – I assume that some other countries in Asia (besides India ??) are also subsidizing their domestic airlines.Any info on that ?

    • MC01 says:

      European airlines are a funny business model.
      They enjoy some of the lowest financing costs in the world, large airport subsidies (more on which in a minute), a friendly legislature and they still find the will to complain about “unfair” competition.

      You see, Europe is dotted with commercial airports that make little financial sense, and the owners of those airports are desperate for business. These owners are often but not always local governments which built the airport as a vanity project, a make-work program for teetering local construction groups or both, very often with generous EU fundings.
      Ryanair pioneered and perfected the art of grabbing these desperate airport owners by the ankles and shaking them for pennies: they’ll demand low landing, handling and parking fees, very specific time slots and if they sense you are desperate enough they’ll even brazenly ask for outright subsidies.
      Has Ryanair come under scrutiny for this behavior? Yes, dozens of times, especially in France where the local government is desperate to protect the faltering gaggle of low-cost airlines such as HOP! controlled by Air France which serve as “parking lots” for personnel the flag carrier cannot let go for political reasons.
      Does Ryanair care? Not a tiny bit, in fact they have brazenly declared time and time again they are just taking advantage of existing conditions, they aren’t the ones creating them and that they’ll simply dump a destination the moment they cannot make more money out of it.

      Other airlines such as Wizz Air of Hungary have followed in Ryanair’s footsteps, especially with all the new or fully revamped airports in Eastern Europe generously funded by the EU. Low cost airlines are an absolutely vital part of the Greek and Spanish tourism industry: go to a tracking website such as https://www.flightradar24.com (my personal favorite) and center on Palma de Mallorca in June or July. You’ll get dizzy after five minutes.

  17. Wisdom Seeker says:

    MC01, I’m grateful for all your hard work, and learning a lot, but I have concerns about this article from a sort of journalistic perspective:

    1) Where’s the bubble? I don’t see any data or statements in the article that directly back up the premise in the title. The first paragraph just says that leasing has grown market share.

    2) Shouldn’t the main point of the article have been stated up front somewhere? (burying the lede, or something like that?) The article is full of interesting information, but it’s rambling.

    3) Significance… To what extent should someone outside of India (and/or the aircraft industry) care whether that nation (industry) overexpands its domestic airlines (aircraft inventory)? What are the consequences for outsiders? Naively I would think that airline startups and industry expansion in India (and elsewhere) are not necessarily bad. A competitive, low-profit airline industry is a very good thing for both workers and consumers. Competition means lower prices and thus a larger market, serving more people. Lower profits (within a large market) implies a higher fraction of revenue going towards labor. The interests of the public don’t align with that of shareholders here.

    P.S. Re SSTs – cutting flight time in half doesn’t shave much off the total time for a trip, given the hassles getting to/from and in/out of major airports. Seems like a typical traveler faces about 4 hours of overhead regardless of the actual time in the air. Since most flights are under 4 hours, that’s where the real leverage would be in making air travel a better deal.

    • Wolf Richter says:

      Wisdom Seeker,

      Mea maxima culpa. The title is my responsibility. I chose it. So you need to yell at me about the title :-]

      MC01’s articles are different from mine. And that’s why I like them. They’re long and go all over a topic, from left to right and from front to back. They’re about a broader concept. And I learn a lot reading them.

      But it’s sometimes hard to find titles for them that with a few words accurately reflect the content of the article.

    • MC01 says:

      When I send articles to the Wolf Street HQ, I usually do so without a title because I am not accustomed at writing for a large public which may include people from all walks of life. Also I have always been terrible at choosing titles and writing suitable endings for anything: that’s part of the reason I chose STEM studies and why I wholeheartedly trust my editor-in-chief to correct my mistakes and to suitably modify my test to avoid people falling asleep in front of the screen.

      In my articles I try to cover “off the beaten path” subjects because, let’s face it, despite a growingly globalized economy most of what is easily available is very US- and Europe-focused. Even Japan and China get spotty coverage despite the huge size of their economies and how long they have been so economically important.

      I have long been thinking about writing about the crazy aircraft orders from Asian airlines because it’s something beyond insane even if the rosiest growth scenarioes play out in full, but the problem is I don’t want to be taken the wrong way, either as some sort of “the sky is falling” doomsayer or as some sort of “Eternal Growth” visionary.
      That’s why I inserted a relevant and very recent snippet of news here, to gauge reactions and provide a little insight in a reality very few people know.

      there are many subjects to cover, but the hard part is providing people both something useful (if only for the entertainment factor) and not to make it too technical: as I said before I very much doubt most people would be interested in an in-depth analysis about the steel alloys used in merchant vessels and the composites used by Boeing and Airbus in the jetlliners.

      • Wisdom Seeker says:

        Thanks to both of you! Expectations adjusted and please continue writing… I’m also a STEM guy, who sometimes has a lot to say (and frequently gets too detailed for general audiences) but not always familiar with the best way to say it. I am learning from your writing experience as well as the content.

        P.S. Regarding aircraft “orders”, sounds like a lot depends on the cancellation clauses. If the money hasn’t been firmly committed, expansion plans are really just wish lists publicized for PR/hype. For US investors, it’d be really interesting to know how quickly Boeing’s order book and revenues could deflate.

  18. Dan Romig says:

    Yes, MC01’s articles are very informative, but they also spark my curiosity regarding the subject(s) he writes about. This spurs me to look further into the topic he’s discussing, and as a result gain an even broader knowledge!

    Plus, we get to question/answer with MC01 in the comment section.

  19. J.M.Keynes says:

    – There may be still A LOT OF planes “on order” but when all airlines are canceling their orders then those backlogs can & will disappear at a giant rate as well.
    – I thought the chinese “Everything” bubble (build on a “mountain of debt”) would have collapsed long time ago. But now it seems that the “correction” of the chinese bubble is here at last. And that will be felt across the entire world. And the airplane lease sector won’t be spared, either. Ouch ………..

    • MC01 says:

      Never say never when it comes to China, and I am saying this as somebody who made a bundle out of the Shanghai stock market bubble which imploded so spectacularly in 2015.

      Make no bone about it: China hasn’t found a magical formula to ignore the basic laws of economics, but she’s far from a spent force. Her government is extremely skilled at pumping prodigious amounts of liquidity into the economy at a rate impossible for other monetary authorities around the world, even if the effects are only felt short-term and this flood of liquidity leaves large swathes of the economy even more dependent on repressed financial conditions.

      Nobody can guess what Chinese authorities will do and the supposedly smart financial markets overreact each time President Trump takes to Twitter on trade issues and Chinese authorities answer with some propaganda, meaning they are on the edge as well.

      As much as I have done well on Asian markets throughout my life I am staying out of this.

      • J.M.Keynes says:

        – From what I read (e.g. here on Wolfstreet.com), it seems China is now finally running into a brick wall (in a financial & economic way). Especially, because the socalled “Peer-to-peer” lending/borrowing has gone “pear-shape” and that has MAJOR ramifications. And this “peer-to-peer” system is something that’s (more) beyond the control of the chinese government.
        – I fear that the policies pursued by our US government – on an economic, political, military level and even on a domestic level (think: taxation) – only will help to “increase tensions” between the US and China. But when China enters an economic recession (or worse) then the rest of the world (e.g. the US and Europe) won’t be spared at all. In that regard, I fear that all the actions of the Trump administration combined could do “more harm” to the world economy than those of China.
        – Remember the chinese curse “May you live in interesting times” ?? Well, It certainly is going to be a VERY “interesting” time.

  20. jj says:

    For as long as I can remember, which is more than a decade, AerCap management repeats as a mantra “no OEM expects to deliver its orderbook.”
    Orix bought 30% of Avolon equity for 2.2B. E=7.3 EV = 23.7 ***D=16.4***
    The missing piece of relevant information is what is the book value of the portfolio. Assuming roughly 2.9:1 D/E, not unreasonable for the Ba1 debt rating, then the transaction went at a significant premium to book.
    The bigger question is who is going to buy the other 70% and who is going to buy GECAS.

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