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Air lessors expect eventual lift from grounded 737 MAX

Reported progress in Boeing Co.'s ongoing efforts to return the 737 MAX to commercial service after a worldwide grounding that has entered its ninth month will come as welcome news to some of the primary customers of the embattled aircraft family.

Several leading aircraft lessors recently reaffirmed their confidence in the long-term viability of and demand for the MAX as they await re-certification by the U.S. Federal Aviation Administration and various international regulatory authorities.

Boeing on Nov. 11 said it completed one of five key FAA milestones before the 737 MAX can return to service in the U.S. As such, the manufacturer suggested that deliveries could resume to customers starting as early as December if the agency certifies the aircraft and rescinds its March grounding order.

Executives at Air Lease Corp., which ranks among the larger purchasers of the aircraft based on deliveries and commitments, echoed Boeing's proclamation that "the MAX will be one of the safest airplanes ever to fly" based on the rigorous regulatory scrutiny being applied through the certification process. President and CEO John Plueger said during a Nov. 7 conference call that he has "full faith and confidence in that aircraft."

Air Lease said in its most recent Form 10-Q that it maintains commitments to acquire 135 MAX aircraft between 2020 and 2024. That marks a decline from forward commitments totaling 150 MAX aircraft as of June 30 as the lessor entered an agreement with Boeing in October to convert 15 of those purchase orders into 5 orders for widebody 787-9 aircraft. The remaining MAX orders, which do not include options to acquire up to 45 737 MAX 8s, still accounted for 42.7% of Air Lease's commitments across aircraft types through 2024.

Executive Chairman Steven Udvar-Hazy added during the call that Air Lease had 15 MAX aircraft delivered prior to the grounding, and he expects them to "quickly" reenter service. Another 27 aircraft have been built by Boeing and are awaiting certification and delivery, and Udvar-Hazy expects "a large percentage" of the backlog to be delivered to Air Lease customers in the first six months after the certification process concludes. It could take up to two years for all the MAX aircraft manufactured by Boeing since the grounding to be delivered, but he emphasized that the delay would not extend to two years for every plane that has been built.

Plueger said Air Lease assumes that it will not take any MAX deliveries until the second quarter of 2020 based on its internal assumptions regarding the return-to-service process. He said all of its MAX deliveries are to international carriers, and the company anticipates that regulators outside of the U.S. are likely to certify the aircraft after the FAA does so.

Air Lease cautioned in the 10-Q that some customers may seek to cancel their MAX lease contracts to the extent the grounding "continues for an extended time" or significant delivery delays emerge post-grounding. The company said it is in discussions with Boeing regarding the mitigation of possible damages resulting from the grounding on owned aircraft and the resulting delivery delays on ordered aircraft.

Assuming "ongoing financial assistance" from the manufacturer, Plueger said, "We do believe ... we will retain most or all of our forward MAX lease placements." But, he cautioned, delivery delays stemming from the aircraft's grounding "shifts the timing of our aircraft investments into the future."

To that end, AerCap Holdings NV executives said during a Nov. 11 investor day that they expect capital expenditures to decline to about $4.2 billion in 2020 from an estimated $4.7 billion in 2019. That forecast not only takes the MAX situation into account, it also reflects ongoing delays in the deliveries of Airbus SE's A320neo family of aircraft.

The A320neo family accounts for 151 of AerCap's 320-plane order book, according to the company's most recent quarterly report. AerCap's order book also includes 95 MAX aircraft, not including five planes that had been delivered and leased out prior to the grounding.

Executives at both lessors downplayed concerns about the potential for re-certified 737 MAX aircraft to flood the market and, in turn, negatively impact lease rates.

AerCap CEO Aengus Kelly pointed during the investor day to continued historical strength in airline passenger load factor statistics as evidence that "the demand is still there" for the additional capacity the MAX will provide.

"As the biggest supplier of marginal capacity in the world, we are sold out," Kelly said. "That's probably the best metric I can give you. And we're sold out pretty much for the next couple of years."