This year, passengers aren’t the only ones who have to pay more to fly.
A lack of aircraft is driving up the cost of renting planes just as travel demand is increasing.
According to aviation advice business IBA Group, the rent on a new Boeing 737 Max increased by more than 20% between April 2020 and this July to $316,000 per month. The competing Airbus A320neo has risen to $324,000 per month, a 14% increase from April 2020 and the highest price since before the epidemic. In July, the larger variant, the A321neo, was offered for $375,000 per month.
According to Cirium, leasing companies own or manage more than 51% of the world’s almost 23,000 single- and double-aisle jetliners. While many airlines own their aircraft, some prefer to rent them or combine the two.
Leases are used for a variety of reasons, including poor credit, which raises borrowing rates, and the desire, or need, to save money rather than spend it on new planes, which can cost more than $100 million at list prices.
The increased expenditures come at a time when airlines are already dealing with significant inflation, resulting in expenses that are typically passed through in tickets. Aircraft rents are reaching, and in some cases exceeding, 2019 levels, and are expected to rise further. The rise in oil costs this year makes newer, more fuel-efficient planes more appealing than older ones, and rising interest rates may further drive up lease rates.
Rising interest rates and increased cost of capital,” said Mike Yeomans, IBA’s director of valuations and consultancy. “This will raise leasing rates for the remainder of the year.
Leasing company officials told CNBC that many of their customers are extending leases since new planes are hard to come by.
According to Steven Udvar-Hazy, executive chairman of Los Angeles-based Air Lease, the company’s lease renewal rate is approaching a never-before-seen 90%, up from 65% to 75%.
“We’re seeing a lot of lease renewals on planes that we thought we’d have to remarket a year ago,” Udvar-Hazy added. That implies the company won’t have to worry about transition fees and will have a consistent source of cash.
The pattern is the consequence of an increase in airline bookings, while Boeing and Airbus are unable to ramp up production as much as they would want because to a demand and production slump during the early days of the pandemic, as well as supply chain concerns.
According to the International Air Transport Association’s most recent data, global passenger traffic increased 76% year on year in June, but is still down roughly 29% compared to before the pandemic.
According to Hazy, interest rates would have to rise and remain high in order to considerably reduce travel demand.
For the time being, airlines are “looking at a future where they can really deploy additional aircraft,” according to Andy Cronin, CEO designate of Dublin-based Avolon. “We’re absolutely witnessing a shortage of aeroplanes and rising demand that is above what we would have predicted at this point.”
According to Cronin, lease rates for Boeing Maxes and Airbus A320neos have climbed by 10-15% this year.
Manufacturers have been hampered from boosting output due to supply chain issues and manpower constraints. Part of the problem derives from sanctions imposed on Russia following the country’s invasion of Ukraine in February.
Now, we’re not talking about dozens and dozens of aircraft, but five to ten aeroplanes that these customers will be without engines because we don’t have the titanium forgings that we expected to get this year,” Raytheon CEO Greg Hayes said on an earnings call last month, referring to the conglomerate’s Pratt & Whitney engine unit.
“We’ll work through it, but it won’t be without some suffering for our customers.”