Air Lease Corporation (ALC) has reported that demand for narrowbody aircraft has come back strong at or above pre-pandemic levels. As the worldwide airline industry recovers, these aircraft have been in higher demand than manufacturers and lessors are able to provide. This simple equation of supply and demand has led to favorable lease rates for ALC, though not all aircraft are equal on this front.

ALC sees demand recovery among narrowbody aircraft

Speaking on the company's third-quarter earnings call, John Pleuger, CEO of ALC, stated the following on demand for narrowbodies:

"Today and looking forward, we see narrow-body demand at or above pre-pandemic levels for many aircraft types with lease rates on the rise."

He went further to discuss what narrowbody demand looks like:

"We'd like to point out that narrowbody demand is strong across both Airbus and Boeing products, but particularly the Airbus A320/21neo family, including the LR and XLR versions of the A321neo. Importantly, the Boeing 737 MAX is also recovering well in the marketplace, with lease rates climbing steadily from the lows of nine to 12 months ago and recent strong momentum on the -9 MAX. And, the A220 has also accelerated, gaining good placement momentum. The bottom line is that these lease rates are rising on all of these new aircraft types."

Boeing 737 MAX
The MAX is also coming back in popularity. Photo: Getty Images

The rise in pricing is largely part of an issue of supply and demand. The supply of jets is limited compared to demand, given that both Boeing and Airbus are producing narrowbodies with a set number per month with steady, but not dynamic, production rate increases. As a result, ALC has to do less work on pricing to incentivize new lease placements, meaning higher lease rates.

The factors behind this

Recent headlines from the last few months have been centered around the recovery in airlines across the world. Major markets like Europe and Canada saw widespread reopenings, leading to a mass increase in flight demand. The US also saw a strong recovery starting from March.

Airlines are looking at a variety of ways to get aircraft. Some have them on the books while others are working with lessors to pick up new aircraft. Given the financial battering airlines received over the last year and a half, leasing is a better option financially.

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Passenger demand is coming back strong in various parts of the world. Photo: Getty Images

The second thing airlines have been sounding the alarm recently over rising fuel prices. When asked if this was playing out, Steven Udvar-Házy, the executive chairman of ALC, stated the following:

"The ESG situation, particularly in Europe and North America and the increase in oil prices and the rate of increase in jet fuel cost since the beginning of the year, has really refocused a lot of airlines to accelerate their fleet planning process and to take a much more proactive look at modernizing their fleet quicker than they were planning to do back, say, in 2019. So all of that kind of comes together in what we've been saying in the last 45 minutes is that demand is now up, way up beyond our expectations."

Generally, older planes burn more fuel. While some airlines made large moves in retiring these older, inefficient jets, others retained them due to their low operating cost. The problem now is that the fuel costs on those aircraft are outweighing the benefits of a newer, more fuel-efficient plane.

There is also the factor of fleet replacement. Some airlines moved to streamline their fleet to a single type or manufacturer. Most of these have been long-term plans that were either accelerated during the crisis or have been acted upon now.

Stored aircraft Cotswold
One of the biggest fleet changes in 2020 was the retirement of large widebodies, like the Boeing 747. Photo: Getty Images

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Widebody demand is starting to come back

On widebody aircraft, ALC is seeing demand start to make a comeback, but there is one major factor impacting deliveries: the Boeing 787 Dreamliner. As Mr. Pleuger stated:

"We also have seen an uptick in demand in lease rates on the new twin-aisles. For example, the 31-aircraft transaction with ITA included 5 new twin-aisle A330neos, and we have several yet unannounced placements for 787s and A350s. Our main concern on the twin-aisle front is the ongoing Boeing 787 delivery freeze."

Boeing 787 deliveries remain paused as the aircraft manufacturer works with regulators on fixing some issues that have arisen. He detailed further that ALC is uncertain about receiving any more 787s by the end of the year. ALC has already canceled three Boeing 787s. Delays on other aircraft have been more limited.

The bigger issue with widebody demand is that long-haul international travel is not back to pre-crisis levels. While transatlantic demand is showing strong signs of life, Asia and the South Pacific remained as some holdouts. Coupled with the lack of a full return of long-haul international business travel, and airlines are taking it slower on adding new widebodies.