Plane leasing market hits an air pocket

Lease rentals for aircraft in global markets have fallen by 15-20 per cent over the past four months, which dealt a further blow to bleeding Indian carriers looking at sub-leasing their aircraft to other airlines in order to shed excess capacity.

With losses of over $ 2 billion expected by the aviation industry this year, airlines have been looking at various ways to cut capacity and reduce the number of flights. One way has been to sub-lease their existing aircraft to another carrier which wants quick delivery at a premium, especially if it comes with a crew and pilot also. This market is now drying up.

 

“Demand and supply equations have changed in the aviation market space because of the fact that 25 airlines have closed down and airlines worldwide are reducing and redrawing capacity. This has resulted in softening of the lease rental market by 15-20 per cent and is likely to slide further in the second quarter of the current fiscal,” said Kapil Kaul, CEO (Indian sub-continent and Middle East) Centre for Asia Pacific Aviation.

“Carriers are rationalizing routes and as a result of it the utilisation of aircraft has also gone down considerably. Earlier if airlines were using an aircraft for 10-12 hours, they are using it now for six to seven hours. Naturally, this would lead to some of the aircraft not being used creating a surplus,” said Amit Mittal, general manager, Veling, an international aircraft leasing company with offices in Delhi.

So for airlines like Delhi-based SpiceJet with five Boeing 737s deliveries scheduled by the end of this year, finding an airline willing to sub-lease its aircraft is the biggest challenge. The airline, which has sub-leased two of its deliveries in the international market, will have no option but to defer its deliveries if it does not find an airline to sub-lease its aircraft soon.

“An aircraft of Boeing 737-type fetches anywhere between Rs 3.50-3.60 lakh per month as lease rental. This is currently fluctuating around Rs 3.20 lakh. Airlines get a premium of 5 to 10 percent on a sub-lease. But in today’s market, no one is hankering for that premium.

The game is not to spend the Rs 3.50-3.60-crore from going to dumps by finding an airline which is willing to take an aircraft on sub lease,” said a SpiceJet executive not willing to be identified. Similarly, Vijay Mallya-promoted Kingfisher Airlines did not find the right price when it looked at wet leasing two wide-bodied A 340 aircraft which it had taken delivery. That has now impelled the airlines to take the second option — sell the two planes outrightly.

Worse, Indian carriers have also been hit by the wrong end of the exchange fluctuation. “While the interest rates have not gone up very high in the US market, the leasing market looks good there but because of the fluctuation in the dollar pricing and dollar going up from Rs 39 to Rs 43, there is a hold up in leasing options from India,” said Mark D Martin, senior advisor (aviation), KPMG.