Fitch Ratings-New York-02 April 2018: A strong secondary market for midlife commercial aircraft coupled with gradual deliveries of new generation airplanes have reduced the average age of aircraft lessors' owned portfolios, Fitch Ratings says. This is a positive for the aircraft leasing sector as younger portfolios, particularly narrowbody aircraft, are attractive to a diverse set of airlines. Declining average fleet ages should continue over the next several years as more ordered aircraft are delivered, although there is a natural limit to how young fleets can become, as existing aircraft become a larger proportion of the overall fleet and secondary market demand for midlife airplanes varies through market cycles.
Based on Ascend data, the weighted average (WA) age of lessor-owned fleets fell by 25% to 7.4 years in 2017 from 9.9 years in 2013, while the age of the overall global commercial aircraft fleet has come down only slightly, remaining in a range of about 11-12 years. Production rates for new-generation aircraft, such as variants in the Airbus A320neo, Airbus A350 XWB, Boeing 737 MAX and Boeing 787 Dreamliner families have increased since 2013, but still remain relatively small as a percentage of the global fleet.
Lessor-owned portfolios can be broadly grouped into three categories: those with fleets that have a WA age of less than five years, which include firms like Air Lease Corporation ('BBB', Outlook Stable), BOC Aviation Limited ('A-', Outlook Stable) and SMBC Aviation Capital Limited ('A-', Outlook Stable); those with fleets that have a WA age ranging from five years to seven years, which includes firms like AerCap Holdings N.V. ('BBB-', Outlook Stable), Avolon Holdings Limited ('BB', Outlook Stable) and Aviation Capital Group LLC ('BBB', Outlook Stable); and those with fleets that have a WA age exceeding seven years, which includes firms like Aircastle Limited, Apollo Aviation Group, and Castlelake, L.P.
The recent resilience of both young and midlife aircraft values is evidenced by relatively low impairment levels over the last several years. For example, from 2013 to 2017, Air Lease (3.8 years WA fleet age at Dec. 31, 2017) did not book any impairments; AerCap (6.8 years WA fleet age at Dec. 31, 2017) booked impairments averaging 0.2% of flight equipment; and Aircastle (9.1 years WA fleet age at Dec. 31, 2017) booked impairments averaging 1.6% of flight equipment.
The relatively narrow differences between impairment levels across these portfolios indicate that fleet age is currently not a primary determinant of the level of residual value risk taken by lessors. Instead, impairments have primarily arisen as a result of lease restructurings or lease terminations, dictated by factors including the types of aircraft owned, the depth of the airline operator base, and the ownership strategy (hold-and-sell versus part-out).
Demand for midlife aircraft has been strong in the current environment, driven by relatively attractive yields, increased appetite from investment managers, business development companies, insurance companies and mid-life focused lessors, as well as a supportive ABS market. For example, on March 23, 2018, Avolon issued $768.4 million of ABS in its Sapphire Aviation Finance I transaction, which funded a portfolio with a WA age of 12 years. This compares with a WA age of 5.3 years for Avolon's entire portfolio as of Dec. 31, 2017. That said, Fitch expects the currently strong secondary market demand for midlife aircraft to moderate in a higher interest rate environment, when other investment alternatives may offer comparable returns.