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Values of Mid Life Aircraft Stutter As Rising Interest Rates Bite

August 16, 2022

The market for mid life aircraft continues to remain difficult despite the sometimes sporadic recovery in traffic while rising interest rates are causing problems for investors and lessors.

The values of mid life narrowbodies are failing to see any improvement not least because of the greater demand for more efficient aircraft. The A320ceo and the B737NG may have been enjoying the “Ripple Effect” whereby the absence of the more desirable assets – such as those with a A or at least B Aircraft Rating – forces the market to less efficient models. With the recent rapid rise in interest rates the preliminary agreements made on aircraft in previous months may now not be so attractive when the IRR (Internal Rate of Return) is recalculated using the higher interest rates. While the cost of borrowing for some financial institutions and lessors may be low, others may be borrowing at higher than market rates. With the higher fuel prices comes the risk that the mid life aircraft may be replaced that much sooner, potentially resulting in lower residual values. Financial institutions are also reviewing other asset classes which may see higher returns than aircraft in a high inflation/ high interest rate environment.

Lessors have been able to extend lease terms because of the shortage of newer aircraft, delays to the delivery of aircraft on order and because of payment holidays and discounts granted during the pandemic. These lease extensions may see a swathe of mid life aircraft being returned to lessors at lease expiry in the next few years at a time when delivery rates of new aircraft are much improved and environmental pressures are forcing operators to carefully consider which aircraft to operate.

The A320ceo is particularly exposed due to this potential flight of mid-life financing as there are nearly 600 examples still in storage. The age profile and replacement by the A320neo as well as the A220 and the A321 contribute to the problems facing the type. Lending against the type may have seemed certain to generate a reasonable return but with higher interest rate calculations, the result is now less certain than if a new A320neo were to be financed.

 

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