Leas­ing

Can Leas­ing Be Made More Af­ford­able?

SP's Aviation - - TABLE OF CONTENTS - BY BY­RON BOHLMAN, VAN­COU­VER/CANADA

COVER IM­AGE:

In­dian Min­istry of De­fence has cleared a pro­posal by the In­dian Army for the ac­qui­si­tion of six AH-64E Apache at­tack he­li­copters from Boe­ing.

Cover Pho­to­graph by: USAF

AS ANY START-UP AIR­LINE can attest, a war chest of cash is an es­sen­tial thing to have on the com­pany’s check­list prior to the first flight. Not­with­stand­ing the ex­penses as­so­ci­ated with launch­ing ser­vice and day-to-day op­er­a­tions, a huge cash out­lay for ini­tial de­posits and pre-de­liv­ery pay­ments for the pur­chase of a fleet of new air­craft isn’t al­ways an op­tion. With­out a pre­vi­ous track record or ster­ling credit his­tory, a car­rier’s in­abil­ity to qual­ify for tra­di­tional fi­nanc­ing or its re­luc­tance to as­sume the risk of as­set own­er­ship means that leas­ing is of­ten the most eco­nom­i­cal and sen­si­ble al­ter­na­tive, even in to­day’s low in­ter­est rate en­vi­ron­ment.

REV­ENUE IN RU­PEES. EX­PENSES IN DOL­LARS

The Min­istry of Civil Avi­a­tion Sec­re­tary R.N. Choubey’s call for lower air­craft lease rates is likely a con­se­quence of the coun­try’s chron­i­cally low do­mes­tic air­fares that gen­er­ate the low­est rev­enue per pas­sen­ger-kilo­me­tre com­pared to lo­cal yields in Ja­pan, In­done­sia, Aus­tralia and Malaysia, ac­cord­ing to first-quar­ter 2016 IATA data. Re­duc­ing the cost of leas­ing air­craft would cer­tainly ben­e­fit fledg­ling re­gional air­lines yet rentals are com­monly paid in US dol­lars or eu­ros. The strength of those cur­ren­cies against the ru­pee poses a real chal­lenge for car­ri­ers to earn

suf­fi­cient rev­enue to cover not only the monthly lease ex­pense, but other dol­lar-based costs as well, like fuel. Given the num­ber of new air­craft and seats to be added by AirAsia, IndiGo, SpiceJet and Vistara, it’s un­likely that do­mes­tic air­fares will rise any time soon. If fares won’t go up, op­er­at­ing costs must come down.

SUP­PLY, DE­MAND, TIM­ING AND TECH­NOL­OGY

An­tic­i­pat­ing the need to re­place the world’s age­ing nar­row-body fleet, air­craft lessors went on a shop­ping spree be­tween 2007 and 2010. Their ac­qui­si­tions were wel­comed by air­lines who found them­selves re­stricted by tight ac­cess to cap­i­tal fol­low­ing the 2008 con­trac­tion in fi­nan­cial mar­kets. With oil above $100 a bar­rel and air­line bal­ance sheets awash in red ink, nar­row­body lease rates were un­der pres­sure by 2011-12, a re­flec­tion of too much sup­ply and not enough de­mand.

The high price of oil prompted man­u­fac­tur­ers to in­tro­duce more fuel-friendly, tech­no­log­i­cally-ad­vanced, high-ef­fi­ciency air­craft. Even with the A320neo, B737 MAX, E-Jets E2 and CSeries on the mar­ket, nar­row-body lease rates were re­cov­er­ing from their 2013 lows by last year. To­day, for re­gional air­lines want­ing to ac­cess Tier-II and Tier-III cities with smaller jet equip­ment, the strong US dol­lar, in­ven­tory of air­craft avail­able for lease, and mar­ket rates still aren’t con­ducive to at­tract­ing new re­gional en­trants as the Min­istry of Civil Avi­a­tion is hop­ing.

AGE AND SIZE IM­POR­TANT

The bal­ance of air­craft sup­ply and de­mand of­ten de­ter­mines mar­ket rates with older, less eco­nom­i­cal jets of­fer­ing the cheap­est rents. They may be a bar­gain to lease, but the trade off is usu­ally high op­er­at­ing costs, high fuel con­sump­tion, and the need for heavy main­te­nance dur­ing the term of the lease. More­over, there can be sig­nif­i­cant costs to re­con­fig­ure leased air­craft to en­sure they are com­pat­i­ble with the lo­cal mar­ket pro­file. Premium cab­ins, for ex­am­ple, have rarely been suc­cess­ful on re­gional routes.

Are re­gional air­lines in In­dia doomed to be dump­ing grounds for old airplanes? Fly­ing those fuel-hun­gry, high-main­te­nance low-rent jets to do­mes­tic Tier-II and Tier-III cities may seem like an in­ex­pen­sive way to pro­vide seats, but sched­ul­ing all their ex­cess ca­pac­ity in low-de­mand mar­kets en­cour­ages fare di­lu­tion and weak, un­sus­tain­able yields. Even though smaller, newer air­craft may com­mand premium rents, their lower op­er­at­ing and ob­so­les­cence costs and abil­ity to gen­er­ate higher unit rev­enue (up to 30 per cent higher, ac­cord­ing to Embraer) of­ten make them more eco­nom­i­cally vi­able.

May 2016 val­u­a­tions and sam­ple av­er­age lease rates for re­gional and nar­row-body jets pub­lished on MyAir­lease.com (ref­er­enc­ing re­cent trans­ac­tion his­tory and man­u­fac­turer-sourced prices) show how smaller air­craft with their lower op­er­at­ing costs com­mand premium monthly rents.

CAN RATES GO LOWER?

Lease prices are a func­tion of sup­ply, de­mand and air­craft age. Since a lessor’s port­fo­lio of airplanes can be placed any­where around the world, they of­ten seek the most cred­it­wor­thy, re­li­able prospects that are op­er­at­ing in a sta­ble en­vi­ron­ment. Leased air­craft are unique as­sets. Their mo­bil­ity al­lows the lessor to go where there is op­por­tu­nity and to price monthly rents ac­cord­ingly. Car­ri­ers with weaker fi­nan­cial foot­ings and poor track records will find their lease rates in­cor­po­rate an el­e­ment of risk should they fail. Lessors then in­cur re­pos­ses­sion and re­mar­ket­ing ex­penses.

In this cy­cle of con­tin­ued growth in pas­sen­ger en­plane­ments and fuel price volatil­ity, new, leased air­craft are in de­mand. Con­sumers have be­come more so­phis­ti­cated and ex­pect newer-tech­nol­ogy airplanes, which they of­ten equate with safety. The ex­pand­ing fleets of In­dia’s main do­mes­tic car­ri­ers re­flect the trend to new equip­ment. Any ac­qui­si­tions of very old, low-rent, over-ca­pac­ity jets by re­gional air­lines would be in­com­pat­i­ble with the drive for greater ef­fi­ciency in such a com­pet­i­tive do­mes­tic land­scape.

Re­gional car­ri­ers in In­dia may not have much bar­gain­ing power in this up­ward-mov­ing mar­ket where lease rates for new air­craft are not heav­ily dis­counted. Short-term gain rent­ing big, old, cheap airplanes may in­cur long-term pain when the price of fuel inevitably rises or the ru­pee slides against the US dol­lar.

Source: myair­lease.com, All amounts US dol­lars

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