WHY DELTA’S GREAT DEAL ON A BOEING 777 MAY NOT POINT TO A ‘HUGE BUBBLE’ IN AIRCRAFT.
Delta’s cut-rate aircraft purchase raises anxiety.
The CEO of Delta Air Lines Inc. made waves in the aviation industry shortly before Christmas when he said he had signed a letter of intent to buy a used Boeing 777 for just US$ 7.7 million — a 97- per- cent discount from the list price of a new one.
No details were given on the condition of the aircraft or who the seller was, but the shockingly low price appeared to confirm CEO Richard Anderson’s earlier declaration that a glut of wide-body airplanes was creating bargain-bin prices and “huge buying opportunities” for airlines like his.
“We’re s eeing a huge bubble in excess wide- body airplanes around the world,” Anderson said on an October conference call, adding that he expected the weakness to spread to smaller narrowbody aircraft as well.
The comment sent shares of Boeing Co. down four per cent, and those of aircraft lessors that supply about 40 per cent of the world’s commercial fleet followed suit amid concerns that their portfolio of planes may be worth less than investors had thought.
But a top executive at one of the biggest publicly traded aircraft leasing companies dismissed the industry fears raised by Delta’s cut-rate purchase.
“Certainly we don’t see any glut or overcapacity, generally speaking, globally across any aircraft type,” John Plueger, president and chief operating officer of Air Lease Corp., said in a recent interview.
“Year to year, quarter to quarter, month to month, there can be pockets of oversupply and pockets of undersupply based on aircraft type,” he added.
“But it’s difficult to be too fussed about any of this stuff because in my view it’s just normal market conditions.”
Since Delta’s comments, Los Angeles-based Air Lease Corp. has become one of the staunchest defenders of the residual values of wide-body aircraft.
The company, which has a market cap of US$3.4 billion, leases 235 aircraft to 89 airlines in 50 countries, including Air Canada and WestJet Airlines Ltd.
On a November earnings call, CEO Steven Udvar-Házy said there had been “a great deal of overreaction” in the media to Richardson’s comments.
“Aircraft values are strong and remain highly desirable cash- generating assets to own and manage,” he insisted, pointing out that global passenger t raffic rose 6.7 per cent in the nine months through September and the average plane was more than 80 per cent full.
“These are overwhelmingly positive figures and indicate a very healthy picture for the core demand and supply of air travel,” he said.
But Air Lease Corp. is focused on leasing new aircraft, as opposed to the decade- old planes that Delta’s Anderson was referring to when he made his “bubble” comment.
“For those with a young fleet, limited lease returns and a bias toward next- generation aircraft the outlook remains encouraging,” J. P. Morgan analyst Jamie Baker wrote in a recent note to clients.
“But for those with older assets subject to potential writedowns, challenges remain.”
Several headwinds are buffeting aircraft values, including slower growth in emerging markets, increasing production rates of new aircraft and the prospect of higher interest rates. Low fuel prices are also putting pressure on prices for newer, next-generation aircraft, according to some lessors.
Engine supplier Rolls-Royce Holdings PLC warned in November that “excess capacity” of older wide-body airplanes would cut its profit by as much as 150- million pounds ($ 306.6 million) in 2016, and industry appraiser Ascend recently lowered its value on nine- and 10- yearold Boeing 777-200 ERs by 13 to 15 per cent.
“The bottom line is that the market is softer than many realize … but that weakness is primarily contained in the older, widebody market,” Baker wrote.
But Plueger said he’s more concerned about the supply of new planes than demand for used ones.
“Both manufacturers, Airbus and Boeing, are basically now completely sold out for the next six to seven years,” he said.
“We don’t really see any discernible falling back in demand whatsoever.”
Plueger added that demand from emerging markets, particularly Asia, remains strong and he’s not overly worried about the impact of rising interest rates or low fuel prices.
“This industry has shown dramatic resilience over many, many years,” he said.
At the end of the third quarter, Air Lease Corp. had signed leases on 67 aircraft and added 17 new customers. The company’s aircraft are 100 per cent leased for 2016 and 86 per cent leased for 2017, and Standard & Poor’s recently revised its outlook on the company’s BBB- rating to positive from stable, citing “improved credit metrics.”
WE DON’T SEE ANY GLUT OR OVERCAPACITY, GENERALLY.