AerCap, the world’s largest aircraft leasing company, does not see the commercial aircraft shortage ending anytime soon, even as demand for aviation assets remains robust.
CEO Aengus Kelly spoke to analysts during the Dublin-based lessor’s second quarter earnings call Monday, painting a highly optimistic picture of the company’s prospects. It’s sure enough performing well financially, with lease rates strong. It regularly buys and sells aircraft as well. It also buys, sells, and leases aircraft engines.
Airline customers are eagerly entering new leases and renewing existing ones as they “look to keep whatever capacity they have in the air,” Kelly remarked. “I believe the shortage of aircraft in the system has also helped airline profitability as it enforces capacity discipline across the sector, resulting in healthy yields. Our customers are, in general, in good health at the moment and optimistic about the future.”
Interestingly, Kelly said the aircraft supply-and-demand balance hasn’t been normal since 2018. In 2019, supply was “severely impacted” by the grounding of Boeing’s 737 Max, even as airlines increased their flight departures by about 2%. In 2020, of course, the Covid pandemic shattered demand, while also forcing Boeing, Airbus, and engine builders to dramatically cut production. Demand measured by flights has since recovered to 89% of 2018’s levels (and more than that in most markets). But aircraft deliveries, he said, have only recovered to only about 73% of 2018’s levels. Kelly called today’s aircraft shortages “widespread,” and likely to last “for several years into the future.”
Boeing and Airbus production lags are not the only problems. Engine makers face bottlenecks and delays of their own, owing to “engine durability issues” on newer-technology narrowbody engines like Pratt & Whitney’s geared turbofans. “It will take several years to roll out any new fixes across the fleet,” Kelly warned. Maintenance and repair shops face issues of their own, including labor shortages and long backlogs of work related to engine fixes. Airlines too, “know that these supply issues are going to persist.”
But would a downturn in air travel demand ease the imbalance? AerCap downplayed the potential impact of a mild recession that might soften yields. A few U.S. airlines spooked Wall Street last week by indeed reporting some yield declines. But as Kelly explained, “That’s off exceptionally high levels.” The demand for aircraft, in any case, isn’t shaped by one or two quarters of yield movement. “Aircraft demand is decided by an airline over a decade-long period. What happens in one quarter or two quarters to yield is absolutely irrelevant to that decision-making time frame.” He added, “This is a global market. It’s not affected by what one airline says in any one market.”
Longterm, AerCap still holds to the expectation that every 15 years or so, the number of worldwide air travelers will double. “That’s always been the case.” Demand could get a boost in the near-term, meanwhile, if the China-U.S. market returns to pre-pandemic norms. The market is currently “on its knees” due to geopolitical tensions. But that’s an exception. Most longhaul international markets are booming, AerCap asserted, referring to comments by Air France-KLM and IAG in their second-quarter earnings calls. As a result, even the market for widebody planes is experiencing a “sharp shortage.”
“It’s just such a difficult thing to do, to manufacture aircraft, to repair aircraft,” Kelly said. “It’s one of the hardest things humans do. And you put 300 people in the air at 46,000 feet and you’re doing it 12 hours a day on the same machine for years and years, that’s a very hard engineering challenge. So, I’m not surprised at the challenges [suppliers are] facing right now.”
