The majority of the orders at last week's air show have been placed by midsized lessors, some of which have seen their purchases exceed the book values of the corporate balance sheets. Air Lease Corp. ordered 118 aircraft despite its already sizable order book of 331 aircraft.
The popularity of certain aircraft models has meant that original equipment manufacturers' backlogs have lengthened. The Airbus A320 series backlog now represents over nine years of production, which means that lessor order books must also grow to secure a steady stream of deliveries. Order books of eight to nine years today compare with six to eight years in mid-2000s and just three to five years in early 2000s. Furthermore, orders being placed now at the upper point in the cycle are likely to be more expensive, which increases the risk that these aircraft do not meet their initial return expectations.
Over the past several years, operating lessors have become one of the dominant distribution channels for aircraft manufacturers to sell new equipment. According to recent estimates, lessors comprise roughly 15% of Boeing's and Airbus' backlogs.
The global airline industry is highly cyclical and prone to exogenous shocks, despite strengthening fundamentals over the past several years. The improvement has been driven by a relatively benign global economy, stable fuel prices and a more rational competitive environment. As a result, aircraft lessors have enjoyed minimal credit issues, while their customers look to grow their fleets and replace old equipment. However, at some point, lessors with large order books will be forced to place new aircraft deliveries into a weaker environment for airlines.
The potential winding down the
Lessors can partially mitigate long-term financing risks by spreading out the number of their annual aircraft deliveries, thus reducing the magnitude of financing need in any given year.
Committed financing, such as warehouse facilities and unsecured corporate revolvers, also helps mitigate financing risk, as it provides readily available funding. Both the duration and availability under such facilities have increased significantly over the last few years. While the unsecured debt market is currently as strong as it has been, issuance ebbs and flows, and execution has been non-existent in industry downturns.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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Source: Fitch Ratings
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