Bombardier: Lessors can do well in the 60- to 150-seat jet market
With the Boeing-Airbus wide-body aircraft delivery supercycle coming to an end, the growth in airline deliveries is poised to come from the narrow-body jet market. While lessors tend to go for the larger single-aisle jets like the Airbus A320neo and Boeing 737MAX, significantly higher returns on investment might come from a smaller segment – the 60- to 150-seat regional jets. In this exclusive interview with AeroTime, Bombardier Commercial Aircraft VP for Commercial Operations Ross Mitchell, shares his insights on this “underserved” sector.
The Boeing-Airbus supercycle might be over after an impressive 12-year run, despite the expectations of it to continue for five more years, according to Teal Group’s analyst Richard Aboulafia. 2017 will still see an increase of around 3-4% in aircraft deliveries by value. For comparison sake, the past dozen of years saw an average increase of 9%.
With the production rates of Boeing and Airbus wide-body planes remaining unchanged or even diminishing, the growth is expected to come from the narrow-body market. The narrow-body market itself can be roughly divided into two segments: the above-150-seat sector with Airbus A320neo and Boeing 737 MAX having amassed backlog orders in the thousands; and the sub-150-seat sector where Bombardier and Embraer are actively competing for a place under the sun.
What makes the 60- to 150-seat market segment stand out of the rest of the narrow-body market (and other aircraft categories, to be precise), is the fact that it has the oldest installed base. Since the planes are older, they will soon be phased out and require replacement.
Another important reason making the 60- to 150-seat segment more relevant to airlines and – as a consequence – leasing companies, is the rise in regional aviation in such major markets as China and India. In the case of the former, one must also mention the new regulations that incentivize the purchase of smaller passenger planes. The Chinese incentive, known as Rule 96 mandates airlines to operate a fleet of no less than 25 regional jets in order to get green light to fly larger aircraft. In India, the Regional Connectivity Scheme is poised not only to revitalize unused airports, but also increase the demand for regional aircraft.
Having all that in mind, the 60- to 150-seat market segment seems underserved when compared to the wide-body market, according to Ross Mitchell, VP of Commercial Operations at Bombardier Commercial Aircraft. Mitchell kindly agreed to share his views on the prospects the second-tier market might bring to lessors with the readers of AeroTime.
What is the next “hot” market for aircraft leasing companies to look out for in the coming years?
Right now, we’re seeing significantly higher lease rate factors and overall returns with regional aircraft than may be available with larger jets. For example, we are actively promoting both the CRJ and the Q400 to the lessor community because there are significantly higher returns on investment to be obtained.
There have been a lot of orders and players in the above 150-seat market segment compared to the 60- to 150-seat market segment, so there are significant opportunities for lessors who become active in this under-served second space, where there is less competition and great demand for aircraft. We believe that lessors can do well in being more and more involved in the 60-150 market.
The aircraft leasing market seems to be dominated by several major players. Is there room for more?
It is true that GECAS and Aercap somewhat dominate the leasing market due to their size, but there are more than 10 lessors who have already ordered both Airbus A320neos and Boeing 737MAXs. This means that there is great lessor vs lessor competition to place aircraft in the 150+ seat market, whereas in the 60- to 150-seat market, there are fewer lessors active.
Some experts claim that the aviation aircraft demand cycle has already reached its peak in 2016. What is your opinion on this matter?
When people say that, they are talking mainly about the market above 150 seats where many of the aircraft have been bought on the basis of strong growth. The 60- to 150-seat market has a different dynamic as it has the oldest installed base of any aircraft category, so the demand is there. Since the aircraft are older, they will soon require replacement. We strongly believe in the market demand for the 60- to 150-seat aircraft and we foresee no issues with respect to peaking. On the contrary, this market segment is currently under-ordered.
An increase in energy prices in 2017 will negatively impact airline profitability. How will it reflect on the leasing market?
An increase in fuel price would help the C Series, as it is the only all new single-aisle aircraft optimized for the 100 to 150-seat market segment. The C Series already offers up to 18% lower cost per passenger than larger re-engined aircraft and the lowest fuel burn – at only 2 liters per passenger per 100 km. The C Series would then have even more significant advantages for lessors who have it in their portfolio.
In addition, we believe that high energy prices could also increase the rate of aircraft replacement. In a high fuel price environment airlines tend to ground a portion of their older and less efficient aircraft, then, when the market turns around, many of these aircraft remain grounded. In affect it accelerates the retirement and replacement cycle.
What global events can potentially affect the relative stability of the aircraft leasing market?
GDP growth has an important impact on overall aircraft demand and hence also has an impact on the leasing market. Anything that could potentially impact GDP – be it positively or negatively –will then potentially affect the leasing market. In a down cycle, any airline bankruptcies that result in aircraft suddenly becoming available also results in a short-term impact on lease rates. Once these aircraft are placed, the market returns to balance.
How important is leasing availability when selling Bombardier aircraft?
The distribution channel provided by lessors is important for airlines that don’t want to or can’t acquire aircraft themselves. Our leasing customers have on average represented about 20% of our order book over the past 10 years. It offers airline customers the flexibility in terms of methods to acquire the aircraft, and also more flexibility over their cash flow that in some cases can be critical. Lessors therefore help to build the operator base faster, as more airlines can join the program by leasing the aircraft than would be in a position to only buy them.
We are very careful and always make sure we have a balance that works well for the airlines in terms of having availability, but also works well for the lessors in terms of maintaining the value of their investment and preserving residual value. On the CRJ and the Q400 for example we have a lot of airline campaigns in progress right now, where we could use more lessor availability.
Ross Mitchell joined Bombardier in 1998 in the Contracts Department of Regional Aircraft. In 2000, he transferred to Sales in the International region, working in Europe, Africa and the Middle East over the next ten years. As of October 2015, he assumed the role of Vice-President, Commercial Operations responsible for Strategy, Deal Management and Industry Affairs.
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