With cash-strapped airlines scrabbling to cancel and defer aircraft orders, much of the industry’s focus has been on the woes of manufacturers. But Firoz Tarapore, CEO of the Middle East’s largest aircraft lessor, DAE, explains how the leasing market is just as subject to change.
Aviation Business: What are the main challenges for aircraft lessors currently?
Firoz Tarapore: The initial challenge for lessors is to manage through the crisis by responding to requests for relief by a large number of customers that have temporary cash flow issues while trying to limit the effect of the crisis on lessors’ own cash flows. At the moment, the crisis appears to be resulting in more of a delay to cash flows than a permanent reduction of cash flows although there we are seeing an increasing number of airline bankruptcies and a near-term oversupply of aircraft.
AVB: How might you see demand change post-pandemic? For example, might there be less demand for wide-bodies?
Firoz Tarapore: In the near-term, most market participants believe domestic markets will recover more quickly than international markets given the substantial number of border closures and quarantine requirements that may linger for a period as the post- pandemic recovery takes shape. The short-term impact will likely be felt more acutely on wide body aircraft but as recovery takes hold and travel impediments lessen, most liquid wide body assets should recover. While there is significant speculation over travel patterns and product development in a post pandemic world, we would expect that, over time, the travel industry will recover and not look too different from the period before the pandemic. In previous pandemics, traffic ultimately recovered, and air traffic has a long history of regaining lost ground after crises. Air travel transports more people at a lower cost than ever before; the economics of air transport will ultimately lead to an industry that looks substantially familiar.
AVB: If so, will you adjust your fleet structure accordingly?
Firoz Tarapore: We will continue to focus on liquid assets popular with our airline customers. We expect that most of the fleet types that were in high demand pre-crisis will be the assets that ultimately do well in the post pandemic environment. We do not expect dramatic revisions to our overall fleet strategy over time.
AVB: Do you see any benefits from the fact that airlines are shying away from buying aircraft from manufacturers? Might this lead to an increase in demand for leasing later on?
Firoz Tarapore: We will be watching manufacturer production rates and the customer uptake of new production equipment carefully as the industry recovers from the current crisis. In a period of low oil prices and tight financial market conditions, it will be even harder for airlines that previously contemplated taking new equipment to justify the capital cost. With that backdrop, leasing will offer airlines very attractive and flexible solutions to nurture their franchises in these difficult times.
AVB: What are the benefits for airlines that have a leased fleet instead of an owned one during a pandemic?
Firoz Tarapore: The benefits of leasing become even more pronounced during these difficult times as our clients look to build their cash cushions to manage through a potentially extended period of depressed airline revenues. Leasing allows airlines to add assets quickly in response to demand rather than wait for manufacturer delivery slots. The capital outlay for adding a leased asset is negligible relative to the capital cost of buying an aircraft and paying progress payments. Lastly, leasing allows airlines to not worry about the residual value risk of their fleet.
AVB: What are the main ways in which you predict the aircraft leasing market to be reshaped post-pandemic?
Firoz Tarapore: During this period, airline customers are recognising the value of dealing with financially strong lessors who have established platforms, experienced management teams and full-service capabilities to be able to offer comprehensive solutions during these difficult times. These established lessors will see an improvement in their relative standing in the industry.