Lessors Now Question The Wisdom Of Mega Airliner Orders

 - July 11, 2012, 2:00 AM
Boeing Commercial Airplanes CEO Ray Conner and GECAS chief executive Norman Liu seal a deal for 100 Boeing 737s at Farnborough 2012. (Photo: Gregory Polek)

The trend over the last few years in which customers have placed extremely large orders for airliners has raised questions about the underlying reasons and its potential effect on OEMs that continue to raise production rates in response. The practice seems most prevalent among customers for narrowbodies, prompting both Boeing and Airbus to project rate increases to well beyond 40 per month in the coming years and raising concerns within some circles of a so-called bubble in the sector.

In an informal poll of several hundred aircraft traders and lenders taken during the recent ISTAT airline finance conference, 74 percent thought narrowbody rates from 2013 to 2015 would prove too high. Only 9 percent rated narrowbody rates too low, and 17 percent “just right.”

Meanwhile, some of the industry’s highest profile leasing company executives offered mixed, but carefully considered, reactions to what CIT Group Transportation Finance president Jeffrey Knittel called the “mega order syndrome.”

“There’re still a number of egos running airlines around the world,” quipped ILFC chief executive Henri Courpron, “but for a number of reasons it doesn’t make sense to place small orders. As you start a business, you need to give visibility to the investors, you need to give visibility to the community around you and the people committed to your growth. So that comes with a fleet plan.

“This said, there seems to be a little bit of exuberance in airplane orders,” added Courpron. “But this will sort itself out…Boeing and Airbus are doing their jobs.”

Air Lease chairman and CEO Steven Udvar-Hazy similarly refused to offer a blanket judgment. “You have to look at each individual circumstance,” he said, while noting that the 100 Boeing 737-900ERs that Delta Air Lines ordered last year will replace 28- to 30-year-old 757s.

Udvar-Hazy called this past January’s Norwegian Airlines order for 100 B-737MAX 8s, 22 B-737-800NGs and 100 A320neos a mission to “be both offensive and defensive,” and follow a strategy designed to react to a possible implosion at SAS. Finally, he explained, both Lion Air, which in February placed an order for 201 B-737 MAX 9s and 29 B-737-900ERs, and Air Asia, which holds orders for 200 A320neos, plan a pan-Asian expansion beyond their predominant markets of Indonesia and Malaysia. “So each of these mega orders has its own flavor of ice cream,” said Udvar-Hazy.

Gecas leasing group boss Norman Liu noted that customers have spread such orders over eight to ten years, making the delivery schedules manageable. “The ones I get a little bit nervous about are the ones in which they start talking about leasing company ventures or when everybody has the same idea but it’s in the same region,” Liu cautioned.

Finally, Awas leasing group CEO Raymond Sisson reached the most absolute conclusion. “I think manufacturers are trending production rates too high temporarily,” he said. “I believe you will see that contract in time, as the delivery world matches the order world more closely.

“As a lessor, I have a great deal of trouble making sense of speculative orders,” he added. “When you talk about Neo and MAX availability between 2017 and 2018, that’s a long time to be taking a risk on escalation.”

Comments

Carl Martin Gritzmaker's picture

It is a good strategy, if things don't work out due to poor economics of older aircraft the airline goes BK and rejects contracts on old fuel burners needing lots of maintenance and starts over with an up to date fleet.

Carl Martin Gritzmaker's picture

It is a good strategy, if things don't work out due to poor economics of older aircraft the airline goes BK and rejects contracts on old fuel burners needing lots of maintenance and starts over with an up to date fleet.

Show comments (2)