Airlines are flying back into profitability after racking up big losses during the pandemic. There is a cloud on the horizon, however: sharp increases in the cost to rent a plane.
More than half of the world’s commercial aircraft are owned or managed by leasing companies, and their rates are rising. For Airbus’s A320neo and Boeing’s 737 Max — the most sought-after single-aisle aircraft — lease rates have respectively risen 14 per cent and 20 per cent since the lows of the pandemic, according to IBA, an aviation consultancy.
The jump in rental fees is another consequence of global central banks’ push to raise interest rates as surging inflation ends an era of cheap finance. Higher interest rates mean that the specialist companies that own and hire out aircraft fleets have more costly debt. Lessors must calculate how to pass on these borrowing costs to carriers that are already dealing with ballooning higher fuel and labour expenses.
Air Lease, a Los Angeles-based lessor, last week raised $700mn through a bond offering at an interest rate of 5.85 per cent — roughly double the rate of a similar bond issuance in January.
The deal, the first such bond offering since Russia’s war in Ukraine, is “somewhat of a bellwether,” said Philip Baggaley, analyst at S&P Global. “They had to pay a lot more than they used to borrow at, but that’s the market reality.”
Air Lease executive chair Steven Udvar-Házy said he had not seen the cost of capital increase this quickly since the 1970s, when inflation was rampant.
The rapidity of the rise makes it harder to pass higher financing costs on to airlines, but Udvar-Házy said Air Lease has started already. Airlines, whose lease rates had already risen owing to scarce aircraft supplies and strong demand, are resisting.
“Airlines are always pushing back,” he said. “I’ve never had an airline say that our lease rates are too low. It’s like a big Istanbul grand bazaar: The leasing company says 100, the airline says 80, and we hope to negotiate at 99 and a half.”
Many airlines asked lessors for financial relief during the pandemic. But they are back in the black as air travel has roared back. “So it’s very hard to plead poverty,” Udvar-Házy said. “Yes, we’re going to work with our customers, but they read the newspapers, they see what’s going on….
Click Here to Read the Full Original Article at UK homepage…