Is the turboprop aircraft market heating up with more investor’s appetite searching for yields that can no longer be achieved in other parts of the industry?
Certainly the last few weeks have seen turboprop manufacturers making the deadlines with operating lessor orders.
At the Singapore air show Dubai Aerospace Enterprise (DAE) placed a firm order for 20 ATR 72-600s, with a further 20 options. The deal was the leasing firm's first order for regional aircraft.
At a signing ceremony at the Singapore air show, DAE's managing director Khalifa AlDaboos, said the leasing company “aims to diversify” its portfolio and expand into regional aircraft to meet an increasing demand from airlines that are developing regional air connectivity.
ATR booked 89 firm orders in 2013, 80% of which emerged from operating lessors. Last year, operating lessors Air Lease, Avation, GECAS and Nordic Aviation Capital placed firm orders for a total of 66 turboprops.
Avation and GECAS signed five firm orders and five options each. Air Lease booked five ATR 72-600s while Nordic Aviation Capital committed to five ATR 42-600s, 46 ATR 72-600s and 80 options. In 2012, lessors placed orders for 12 ATR aircraft, while in 2011 a total of 44 orders were placed by lessors.
ATR says its backlog stood at 221 aircraft at 31 December 2013. Lessors represented 34% of the backlog or 75 new deliveries.
“Step by step, the backlog from lessors increases. Investors are continuing to consider that ATR turboprops are good investment aircraft,” says chief executive Philippo Bagnato.
Bombardier also clinched a new lessor order earlier this month. Dubai-based Palma Holding firmed four Q400s for forward lease to Ethiopian Airlines after signing a letter of intent at the 2013 Dubai air show.
The order also marks the company’s first time it commits for 70-seat turboprops. The lessor has been involved in second-hand transactions in the past but the Q400 order was “an opportunity” according to Anas Bennani of Palma Holding.
The lessor worked with Ethiopian Airlines to address the carrier’s fleet requirement at Addis Ababa, an airport at 2,300 meter altitude. The aircraft will be delivered in the summer this year.
Palma Holding says it “seeks and identifies high growth investment opportunities" that are tailored to the needs and criteria of its client base from the Middle East and North Africa.
The search for yield is a key element for investors. “Finding the value and appropriate returns will require a high degree of patience, ingenuity and leveraging of relationships,” says Avolon Aerospace’s head of strategy Dick Forsberg.
As competition for new sale and leaseback deals in the narrowbody market remain intense, Forsberg expects more lessors to shift their emphasis to less commoditised asset segments, including regional aircraft, turboprops and helicopters. "But one would expect any yield advantages to be relatively short-lived as competition increases,” he argues.
Another leasing source says lease rates factor on new turboprops can be in the 0.85% region whereas narrowbodies can be as low as 0.7%.
The used turboprop aircraft market is also getting some appetite. Turboprops traditionally tend to hold their values better than other asset type. In addition, near-term availability slots is a double-edged sword when considering the type's attractiveness to lessors, says Flightglobal’s Ascend. “The ability to receive aircraft within months of the order, thus avoiding price escalation, is a plus point in the thin-margin new aircraft market. By the same token, it also places lessors into close competition with manufacturers when marketing new aircraft,” says Ascend.
A remarkable aspect of the in-production turboprop value performance is that, in addition to the new aircraft, five-, 10- and even 15-year-old vintages also show positive trends, says Ascend. In contrast, the most popular investment jet types - the Airbus A320 and Boeing 737-800 - display marked differences in the performance of their new and used aircraft values.
The values of the ATR 42 and Bombardier Q300 have been stable or improving for most of the past 10 years. Even though Q300 production stopped in 2009, the values have only experienced a temporary dip. The ATR 42 values have also been stable, although its larger ATR 72 sister has stolen the popularity crown. This strong value performance is supported by the fleet dynamics, which is likely to continue and support the types' popularity in the future.
The 70-seater values were affected slightly during the downturn in 2008, but rebounded quickly and have been growing since. For Q400s, there has been a recent dip in values due to increased availability as carriers such as Flybe downsized their fleet. However, with lower production levels, this is unlikely to be a long-term trend.
The asset-backed securitisation (ABS) market saw its first ever deal featuring turboprop aircraft earlier this month.
Aircraft investment firm Castlelake, formerly known as TPG Credit, issued a $515.6 million aircraft securitisation, Castlelake Aircraft Securitisation Trust 2014-1, with a 79 aircraft collateral pool, of which 54% are turboprops.
The turboprop fleet includes one 1996-vintage ATR 42-500 and three 1999/2000-built ATR 72-500s.
There are seven Bombardier Dash 8-100s, that were built between 1986 and 1994.
The transaction also includes 18 1996/99-vintage Dash 8-200s, 11 Dash 8-300s that were built between 1994 and 2001 as well as two 13-years old Q400s.
The majority of aircraft have between four and five years remaining leases.
The maintenance adjusted market values vary between $8.3 million and $9 million for the ATR 72-500s, according to the prospectus. The ATR 42-500 is valued at $5.1 million.
The Dash 8-100s are valued between $2.2 million (1986-vintage aircraft) and $5.28 million (1993-built aircraft).
The market values on the Dash 8-200 fleet is between $4.9 million and $6.3 million.
The Dash 8-300s are valued between $5.4 million (1991-vintage aircraft) and $9.3 million (2001-built aircraft).
The two Q400s are valued in the $8.6 million range.
Kroll Bond Rating Agency views turboprops as a fleet type with a long useful life, good leasing characteristics and strong value retention. “The market for turboprops has quietly been gaining strength, with values resilient through the downturn. Due to limited availability in both the new and used markets and with few replacement options on the horizon, the average retirement age for turboprops is trending upwards, while the pace of retirements is decelerating, in contrast to the general pattern for commercial jets,” it says.
Flightglobal is aware of another ABS transaction in the marketplace featuring 25 new turboprops. The $500 million deal is said to be progressing.
Source: Cirium Dashboard