Air Lease is willing to support customers affected by flight cancellations and falling passenger traffic amid fears over the coronavirus.
The US lessor says it can help airlines by purchasing aircraft, either for cash or via sale-and-leaseback, or by allowing temporary lease-payment reprieves.
“It’s only in the last five or six working days that the dialogue has become more intense to discuss their particular circumstances,” said executive chairman Steven Udvar-Hazy, in reference to working with impacted customers, during an earnings call on 14 February. “Whether acquisition of aircraft via sale-and-leasebacks, deferrals of short-term rents, or applying other security deposits we have for some assistance, this is in the very early stages of formulation.”
Preliminary estimates by ICAO indicate that the ongoing coronavirus outbreak could wipe out $4-5 billion in airline revenues for the current quarter.
This is based on assumptions that overall passenger capacity will decline 39-41%, equivalent to a reduction of 16.4 to 19.6 million passengers.
The estimated financial loss, however, does not take into account the reduction in Chinese domestic air traffic, or in traffic to and from Hong Kong, Macau and Taiwan.
“While the current coronavirus has had a huge and large immediate impact, the airline industry takes a sound, long-term view in their overall fleet growth plans,” Air Lease chief executive John Plueger said during the earnings call, in which Los Angeles-based Air Lease disclosed 2019 revenue of nearly $2 billion – an increase of 20%.
Comparing the coronavirus with the SARS epidemic in 2003, Plueger suggests that the “severity” of the current outbreak “does seems worse”, noting that traffic growth to be flat or even negative for 2020.
Compounding the coronavirus-related unpredictability, it remains uncertain when the Boeing 737 Max will be re-certificated. US carriers have been pushing out their expected re-entry dates into the second half of the year. This means that airlines could be facing their second summer without their Max jets.
Air Lease has a total of 15 Max jets in storage expects to take four in 2020, management said during the results briefing. The lessor should have taken delivery of 27 aircraft by the end of 2019.
Unwanted jets from Asian customers could be placed with Max customers “struggling to get lift in the face of still-uncertain Max delivery timing”, says the lessor. Udvar-Hazy notes that “a dozen” carriers in Europe “won’t hit their summer demand” without extra capacity.
Plueger observes: “Max customers still need aircraft, and Airbus can’t step in.”
Depending on how the situation evolves with the coronavirus, there may be a “shakeout” in what has become increasingly competitive aircraft leasing market, he says.
For several years, the leasing industry’s incumbents have complained of fierce competition from newcomers who have access to capital but lack knowledge of the craft of aircraft leasing, often applying the label “tourist capital” to such investors.
“Anyone with a college degree that has money and speaks some English thinks that they can be in aircraft leasing,” Udvar-Hazy said during a January 2018 panel discussion.
If new entrants should start to destabilise as a result of uncertainty in the Asian market, Air Lease, with $22 billion in assets and $6.3 billion in liquidity at 31 December 2019, will seek to pounce on opportunities.
“We have some stress in Asia,” Plueger said in response to a question about possible M&A in the near term. “Stress does one thing: it tends to separate the men from the boys. There will be some shakeout there and maybe we can take advantage of that. In times of stress, the people that entered the business with ease, when capital was aplenty, tend to get their mettle tested.”
