The operating lease market, which is under strain from softer lease rates, lower yields and eager investors, has one lessor source questioning whether the model underpinning the business is broken.
"Aircraft overproduction has put significant pressure on lease rentals, while the shadow created by the next generation of aircraft has applied equal, or greater, pressure on book values," says the lessor. "Even if the traditional white knight of the leasing industry, which is inflation, comes riding to the rescue, we have long-term leases that have been locked-in against historically low interest rates - who will find that investment profile attractive?"
In the past, the source explains, when an operating lessor was not satisfied with the profile the market has generated for its orderbook, the lessor would purchase additional aircraft through sale and leasebacks, achieving "improved entry point pricing and yield".
"In this market, though, that approach no longer works. If you already have a full orderbook of Airbus A320 and Boeing 737 aircraft, how much more exposure do you want to an asset for which a new generation replacement is imminently available?"
It is difficult to "bolster an existing portfolio" with higher-yielding asset types, says the source, and it is "difficult to otherwise grow by tacking on desirable aircraft types" - both traditionally achieved through the acquisition of sale and leaseback aircraft.
"My primary concern is that the leasing model is broken," says the lessor.
Exacerbating this sentiment, he says, is the "head-scratching reality" that there is still a lot of "impatient" money chasing these deals down to anemic yields. "There are too many young and new lessors in growth mode. This has lead to some of the market space being very crowded."
Also, the source believes some lessors, which are touting "heady bottom line numbers", could be relying on mismatched funding.
Operating lessors have traditionally matched a 12-year lease with 12-year debt, but the growing number of lessors capable of doing unsecured bond issuances has "created a natural opportunity to move away from matching and into more rigid scenarios," he says.
"I think lessors could be issuing more shorter-term paper against the longer lease terms and, in some instances, funding on a floating basis against fixed interest rate leases," says the lessor.
Another problem is that the lessors are being funnelled towards a "small number of aircraft types and yields are being driven down too".
"Widebody aircraft at a 0.8% lease rental factors would be called crazy in anything other than today's market," he says.