OPINION: Widebodies show improving asset characteristics

Hong Kong
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Lukasz Pawlowski, senior risk analyst with Flightglobal consultancy Ascend, sees twin-aisle aircraft gaining in attractiveness as investment candidates

The asset characteristics of widebody aircraft are improving gradually – a development that probably hasn’t been given adequate attention in the aircraft finance community.

As a result, lessors will likely add more of these units to their fleets as financiers become more comfortable with lending decisions against widebodies.

This move will come about by three shifts in the aviation market. First, lower investment returns on highly commoditised narrowbodies will prompt more lessors to turn to widebodies to satisfy their investment demands – something that has already started to happen.

Second, a need for fleet diversity has whetted the financial community’s appetite for widebodies and other “alternative” aircraft categories, such as large regional jets, turboprops and helicopters.

Lessors have realised that portfolio liquidity, based upon dominance of one or two narrowbody assets, can be illusory if everyone is following the same strategy, and those particular assets happen to be in oversupply.

As anyone with high exposure to the Airbus A320 has discovered in the last five years, lessee diversification alone cannot replace the need for asset diversification.

Finally, manufacturers are shifting towards producing fewer widebody platforms and limiting the choice of engine supplier to single source or two at most, and away from offering dedicated products for small market niches (such as ultra-long-range, short-body variants, dedicated regional variants and combis).

Investors and financiers were looking at roughly 30 different permutations and combinations of widebody aircraft-engine platforms 10 years ago. At the moment, there are around 20-25 relevant platforms, and this is moving to 12-15 in about 10 years. It will be a lot easier to select the right asset once there are just 12-15 aircraft-engine combinations.

Current widebody technology offers enough range to cover almost any city pair in the world, and previous niche aircraft derivatives missed out on true success in the market.

In addition, widebody fleets have grown significantly during the last decade, attaining the critical mass needed to have good liquidity on the most popular types.

New entrants such as the Airbus A350 and the Boeing 787, which are at the beginning of their service lives, have on-order fleet sizes that took the previous generation of widebodies decades to achieve.

These anticipated changes are also being driven by growth in the average size of the leasing portfolio. Although the two largest lessors have not grown significantly since 2004, the sizes of the second to 20th largest portfolios have more than doubled.

A typical widebody aircraft value is two to four times that of a narrowbody, so it is easy to be overweight in a region, lessee or lessee business model if the portfolio is small. Growth in average portfolio size means that more lessors can venture into the widebody sector without straying from their original risk strategies.

However, there are also factors working against a possible increase in the share of widebodies in the near term.

Their popularity could be limited by uncertainty over which new types will be successful in the space where the 787 competes against the A350, and by investors scaling back their involvement in the last-off-the-line products such as the A330 and 777.

Also, widebodies will continue to have significantly smaller and more fragmented fleets than narrowbodies, something that could be an issue, particularly for new entrants into aircraft leasing, and the larger widebody variants still have limited secondary markets compared with narrowbodies.

Nonetheless, even with potential obstacles in place that may limit the size of the widebody fleet, a major change is taking place – one that should benefit the entire aircraft finance industry.