Fast 5: How Mid-Life and Mature Asset Demand Is Shaping Up
Daniel Watson, chief commercial officer at Austin, Texas-based aircraft and engine lessor Aero Capital Solutions (ACS), gives an overview of how the market has recovered this year and where demand lies for aircraft and engine assets.
How has aircraft and engine leasing demand changed in 2022 compared to the previous two years?
Let’s start with engines. During the pandemic, engine maintenance was regularly deferred as existing green time was utilized to support fleet operations. As airlines in both the Europe, Middle East and Africa regions along with the Americas have ramped back up to nearly 100% of 2019 operations, engine maintenance has restarted and put tremendous stress on MRO providers and their supply chains. The result is very strong demand on lease engines across the board. Aircraft demand has also rebounded more quickly in 2022 than expected, and there is very strong demand for narrowbody aircraft capacity. While there have been airport and operational bottlenecks, there are also delays in new OEM production, resulting in real demand for reasonably priced, immediately available, narrowbody aircraft. These factors have resulted in a robust lease market for both aircraft and engines, with lease rates nearly recovering to pre-pandemic levels.
How have factors such as rising interest rates and inflation impacted leasing contracts?
OEM price inflation and higher interest rates are combining to rapidly push both engine and aircraft lease rates up across the board. In essence, we’re seeing strong evidence of the market bearing higher costs with lessors successfully passing through hopefully “shorter” term inflation in longer term rates. Risk of higher end-of-lease maintenance costs, due to material and labor cost inflation, are simply increasing the likelihood and attractiveness of flexible delivery conditions and commercial buy-outs at lease-end.
What are you seeing in terms of green-time engine demand, and which assets are sought?
Engine demand on narrowbody engines has largely recovered and in some cases exceeded pre-COVID demand with rates rising accordingly. The CFM engines market is outpacing the V2500 market with CFM56-7B engines particularly seeing the strongest recovery, in part due to the additional demand and overall lower aircraft retirement rates resulting from the successful growth of the Boeing 737-800 freighter conversion programs.
Have supply chain challenges and the shortage of skilled labor impacted ACS as a lessor? If so, how has this been the case?
The impact of labor scarcity and parts availability has been felt largely through MRO activities, while transitioning aircraft to new customers or converting aircraft to freighters. We’ve seen recent easing of the pressure but continue to monitor the situation closely.
Where do you see the market headed for older aircraft retirements? Do you expect a spike in the next 1-2 years?
From a narrowbody perspective, which we focus on, the combination of new OEM production pacing below target and increased freighter conversions for both Boeing 737-800 and Airbus 321 aircraft has resulted in far less aircraft being retired than anticipated. We don’t expect that situation to change for the next two to three years.