The good news, according to AerCap CEO Aengus Kelly, is that demand for air travel is roaring back. The bad news is that supply chain woes could hamper the manufacturers’ ability to deliver enough new aircraft on time.
Air travel demand has surged to almost 75 percent of 2019 levels in Europe and North America. Even in Southeast Asia, which has lagged the rest of the world in relaxing Covid-19 restrictions, has seen a resurgence, with traffic at Singapore’s Changi airport exceeding 40 percent of 2019, up from just 15 percent in February, Kelly said on the lessor’s first-quarter earnings call. “All the key tourist markets in Southeast Asia as well as India and Australia are now open to international travel,” he said. “This bodes well for wide-body demand as one of the key tourist markets for Southeast Asia is Western Europe.”
Asian airlines are reactivating the aircraft they stored during the depths of the pandemic, resulting in a shortage of maintenance facilities able to perform the work necessary to return aircraft to service, Kelly said. “This gives me confidence in the demand side for the years to come, so whilst there is still quite a way to run on a full recovery 2019 levels, I strongly believe that the only impediment to getting there is government intervention,” he said. “Once restrictions are scaled back, people return to the skies quickly and in large numbers.”
An aircraft shortage is looming, Kelly warned. Last year, during the early days of the airline industry’s recovery, carriers ordered hundreds of next-generation narrowbody aircraft, like the Boeing 737 Max and A320neo. Deliveries were delayed for both, especially the 737 Max as Boeing struggled to clear its inventory after regulators lifted the type’s grounding. But Airbus also faced difficulties in delivering its A320s as the supply chain buckled as companies scrambled to staff up to meet Airbus’ production targets. The airframer has since resolved those issues but has planned an ambitious ramp-up of its A320 production to 75 aircraft per month by 2025.
Now, Kelly said AerCap has seen stronger demand for widebodies, as long-haul routes recover. And a shortage of widebodies could be the next challenge facing the airline industry. Boeing has not been able to deliver any 787s — its best-selling widebody — for 15 months as the Federal Aviation Administration has mandated further inspections on the type, and its 777X program has been delayed until 2025. And Airbus has capped production of its A330neos to three aircraft per month. “So all this means that supply is limited on the widebody side,” Kelly said.
Airbus has said it plans to deliver 720 aircraft this year, and Boeing aims to deliver 500. Neither airframer will hit those targets, Kelly said. Given how far the manufacturers scaled back in the crisis, even if they hit their targets, there will be 400 fewer aircraft delivered than would have been between 2019 and now, Kelly said. This could push lease rates higher, redounding to AerCap’s benefit, he added.
One fleet type for which demand has soared is freighters, as the e-commerce boom shows no signs of ending, Kelly said. With preighters returning to passenger service, airlines are rushing to add dedicated freighters to their fleets. AerCap launched its Boeing 777 passenger-to-freighter conversion program with 15 aircraft, with options for 15 more. As of May 17, AerCap had commitments for 16 of those aircraft and is now seeking to expand its portfolio. The lessor also has seen demand rise for 737 passenger-to-freighter conversions, he said.
AerCap has the most aircraft in Russia of any lessor. When Russia invaded Ukraine on February 24, AerCap had 135 aircraft and 14 engines leased to airlines in the country. It has recovered 22 since the war began, but the remaining aircraft are trapped in Russia and likely unrecoverable. The lessor is taking a pre-tax charge of $2.7 billion on its assets in Russia.
AerCap is insured against the losses of its assets and is pursuing $3.5 billion in insurance claims on its aircraft in Russia. So far, those claims have not been paid out, Kelly said. To comply with Western sanctions against Russia for its invasion of Ukraine, AerCap terminated all its leases in Russia shortly after the war began. This has resulted in the lessor losing $33 million in monthly lease revenue from airlines in the country.
Air Lease Corp. earlier this year said most of its aircraft in Russia were placed at private airlines, not state-owned carriers, and the lessor was confident private airlines would be more willing to preserve their relationships with Western lessors to ensure access to aircraft after the war ends. AerCap was not as confident. “Three-quarters of our exposure, of our Russian assets were on lease to private airlines and a quarter to Aeroflot [and other state-owned airlines],” AerCap Chief Financial Officer Peter Juhas said. “But the reality is all those aircraft are gone, whether they were to private or state-owned [airlines], so I don’t think it makes any difference.”
AerCap reported first-quarter revenues of $1.8 billion, up 63 percent from last year. The lessor reported a net loss of $2 billion, including charges related to the Ukraine war. After adjusting for that and other charges, including those related to its acquisition of GECAS, AerCap reported a net income of $540 million. The lessor had 3,615 aircraft, engines, and helicopters in its portfolio at the end of the first quarter.