Lessors Profit From Tight Competition For Boeing & Airbus Planes

Summary

• Aircraft lessors are thriving due to increased demand for aircraft amid delivery delays by manufacturers.
• Advantages in an undersupplied market have led to lessors’ robust Q1 financial performance.
• Aircraft lessors continue to believe in their strong market position, especially with high interest rates in the global financial markets.

Aircraft lessors have continued to benefit from a market where airlines are continuing to struggle to add enough capacity for the upcoming peak seasons. Carriers are struggling with delivery delays, and unique problems affecting certain aircraft manufacturers.

Continuous financial success

While Q1 is typically a downturn period for many airlines in the Northern Hemisphere, as the post-winter holiday blues affect travel demand, aircraft lessors, including AerCap, Avolon, Air Lease Corporation (ALC), and others, have thrived in the past quarter.

AerCap, which announced its Q1 results on May 1, cited CEO Aengus Kelly as saying that the company’s business has continued performing very well. He noted demand for its aviation assets – aircraft and engines – remains robust. Growth in lease revenues Year-on-Year (YoY) has stayed relatively flat, going from $1.72 billion in Q1 2023 to $1.76 billion in Q1 2024. But the company’s adjusted net income rose more than 16% to $658 million compared to $566 million a year prior.

The Irish lessor explained that its adjusted net income excludes the after-tax impact of the amortization of maintenance rights and lease premium assets recognized under purchase accounting and net recoveries related to the war in Ukraine. When AerCap announced its 2023 results in February, it said it had recovered $614 million from Russia-based airlines and insurers in a settlement for its insurance claims.

At the time, AerCap estimated that its 2024 earnings per share (EPS) would be in the $7.50 to $8.50 range. Now, the company has increased its estimated adjusted EPS to $9.20, which does not include gains on sales of assets. Furthermore, its initial annual adjusted net income estimate was $1.6 billion, which grew to $1.8 billion at the end of Q1.

Tight supply market

Another Irish aircraft lessor, Avolon, showcased a similar story in its latest financial report, indicating that while its revenues stayed relatively flat – 4% growth YoY – its net income has almost doubled. This was $56 million in Q1 2023, growing a staggering 91% to $107 million during the same period in 2024. According to Andy Cronin, the CEO of Avolon, the quarter demonstrated the upward trajectory of its business, which was headlined by the increase in net profits.

“Our large orderbook provides us with a clear competitive advantage in an undersupplied market.”

Cronin’s remarks about an undersupplied market rings particularly true, considering that both Airbus and Boeing, the dominant aircraft manufacturers, have struggled to deliver aircraft on time. However, Boeing is experiencing its own unique issues, including a lack of ability to increase production of its 737 MAX following the Alaska Airlines flight AS1282 incident on January 9.

Not only has the FAA said that Boeing will not be able to increase production rates of its most important and popular aircraft family, but the aircraft manufacturer itself admitted that it has slowed production to improve its quality and safety standards. Brian West, the chief financial officer (CFO) and Executive Vice President of Finance at Boeing, said during the company’s Q1 earnings call that,

“[…] we deliberately slowed production below 38 per month to incorporate improvements to our quality and safety management systems, including reducing traveled work and addressing supplier non-conformances.”

On the other side of the Atlantic Ocean, Guillaume Faury, the CEO of Airbus, which reported its Q1 results on April 25, admitted that geopolitical and supply chain tensions have continued. Nevertheless, the European plane maker delivered 142 aircraft during the quarter compared to 127 aircraft a year prior. The company maintained its 800 aircraft delivery guidance for 2024.

“We delivered first quarter 2024 results against the backdrop of an operating environment that shows no sign of improvement.”

Interest rates and other factors

While ALC will report its quarterly financial results on May 6, the aircraft lessor’s 2023 financial report offered another hint as to why aircraft lessors have had so much success in recent months. According to the company, increased demand for its assets, combined with high interest rates and inflation, helped increase lease rates in 2023.

In its latest update on May 1, the United States Federal Reserve System said that it decided to maintain the current interest rates because it had made little progress towards its 2% inflation target. However, ALC noted that lease rates are still behind interest rates. The aircraft lessor expects lease rates to increase during the year, especially as its “funding advantage relative to our airline customers widens.”

“Lease rates are influenced by several factors above and beyond interest rates, including aircraft demand, supply technicals, supply chain disruptions, environmental initiatives and other factors that may result in a change in lease rates regardless of the interest rate environment and therefore, are difficult to project or forecast.”

Furthermore, the aircraft lessor stated that tighter credit markets and growing lease rates could result in a shortfall of resources for capital expenditures, which could increase the demand for aircraft leasing in the short term.

Turning to lessors

In its latest update, the International Air Transport Association (IATA) said that passenger demand, measured in revenue passenger kilometers (RPK), was up 13.8% in March. However, Willie Walsh, the association’s Director General, noted that while signs show that the strong demand will continue into the upcoming summer season, it was critical that airlines have the capacity to meet the demand for air travel.

“That means making urgent progress to resolve supply chain issues and for airports and air traffic management to be fully staffed and operating at maximum efficiency.”

In some cases, airlines, including Southwest, had to downgrade their capacity growth expectations. The carrier’s latest results indicated that it expects its full-year available seat miles (ASM) to grow by around 4%, while previously, it expected ASMs to grow by around 6%. It predicted that it would operate a fleet of 814 aircraft by the end of the year, yet it was forced to revise the forecast to 802 Boeing 737 aircraft.

This has already seen it cut service to some US airports.