Rents For Boeing Jets Can Exceed $300,000 Per Month, Causing Havoc In The Aircraft Market

This year, passengers are not the only ones who have to pay more to fly.

A lack of aircraft is driving up the cost of renting planes just as travel demand is increasing.

According to aviation advisory firm IBA Group, the rent on a new Boeing 737 Max increased by more than 20% between April 2020 and this July to $316,000 per month. The competing Airbus A320neo has risen to $324,000 per month, a 14% increase from April 2020 and the highest price since before the Covid pandemic. In July, the larger version, the A321neo, was going for $375,000 per month.

The world’s largest aircraft leasing companies, such as Air Lease, Avolon, and AerCap, which purchased GE’s airplane leasing business last year, are benefiting.

According to Cirium, leasing companies own or manage more than 51 per cent of the world’s nearly 23,000 single- and double-aisle jetliners. While many airlines own their aircraft, others prefer to rent them or combine the two.

Leases are used for a variety of reasons, including poor credit, which raises borrowing costs, and the desire, or need, to save money rather than spend it on new planes, which can cost more than $100 million at list prices.

The increased costs come at a time when airlines are already dealing with high inflation, resulting in expenses that are typically passed along in fares. Aircraft rents are approaching, and in some cases exceeding, 2019 levels, and they are expected to rise even further.

The rise in oil prices this year makes newer, more fuel-efficient planes more appealing than older ones, and higher interest rates may also drive up lease rates.

“You have the rising interest rates and higher cost of capital,” said Mike Yeomans, director of valuations and consulting at IBA. “That will push lease rates higher through the rest of the year.”

Executives from leasing companies said that many of their customers are extending leases because new planes are hard to come by.

According to Steven Udvar-Hazy, executive chairman of Los Angeles-based Air Lease, the company’s lease extension rate is approaching a never-before-seen 90 per cent, up from 65 per cent to 75 per cent.

“We’re seeing a lot of lease extensions on planes that a year ago we projected that we would have to remarket,” said Udvar-Hazy. That means the company doesn’t have to worry about transition costs and it gives the lessor a steady stream of income.

The pattern is the result of an increase in airline bookings, while Boeing and Airbus are unable to ramp up production as much as they would like due to a demand and production lull during the early days of the pandemic, as well as supply chain issues.

According to the International Air Transport Association’s most recent data, global passenger traffic increased 76 per cent year on year in June, but is still down about 29% compared to before the pandemic.

According to Hazy, interest rates would have to rise and remain high in order to significantly reduce travel demand.

For now, airlines are “now looking at a world where they can actually deploy more aircraft,” said Andy Cronin, Dublin-based Avolon’s CEO designate. “We’re definitely seeing a shortage of aircraft and accelerating demand over and above what we would have expected at this stage.”

According to Cronin, lease rates for Boeing Maxes and Airbus A320neos have risen by 10%-15% this year.

Manufacturers have been hampered from increasing output due to supply chain issues and labor constraints. Part of the problem stems from sanctions imposed on Russia following the country’s invasion of Ukraine in February.

Raytheon CEO Greg Hayes acknowledged last month that supply shortages would have an impact on some customers.

“Now we’re not talking about dozens and dozens of aircraft, but you’re talking five to 10 airplanes … that are going to be without engines because we don’t have the titanium forgings that we had expected to get this year,” Hayes said on an earnings call last month, referring to the conglomerate’s Pratt & Whitney engine unit.

“We’ll work through it, but it’s not going to be without a little bit of pain to our customers.”

(Adapted from MSN.com)

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