Aircraft lessors test charging ailing airlines by the hour

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• A “Power-by-the-hour” business model has long been in use for engine makers and was first tried by aircraft lessors during the Global Financial Crisis.
• Lessors are reluctant to accept utilization-based payments, but alternatives are scant — the least bad option given revenue-starved airlines.
• Today’s stopgap agreements test the viability of a future all-inclusive leasing model.

Much of the world’s fleet has spent the last 12 months in hibernation. As the COVID-19 pandemic and resulting travel restrictions prevented passengers from providing the industry its lifeblood of revenue, airlines were able to mitigate some of their costs by simply not flying empty aircraft. Although lower fuel consumption, deferred maintenance, and eventually-furloughed employees helped reduce cash burn, many airlines’ largest cost line marched on: aircraft ownership.

Just as with car financing, an airline is normally required to make full loan or lease payments on an aircraft regardless of how much it is used. If the operator is unable to pay, the aircraft is repossessed and moved to a new lessee capable of making payments.

Related: The Airbus A330 is lost in the pandemic’s economic Twilight Zone

But what if there are no new lessees at which to place a repossessed aircraft? For a lessor facing a tsunami of aircraft returned from operators without the ability (or willingness) to pay, the only financially viable option is to incentivize airlines to keep them. This upside-down dynamic has sent airlines and lessors scrambling to find new solutions to keep airplanes at airlines that will ultimately need them, without driving those carriers into deeper financial distress.

As the pandemic began to decimate passenger demand a year ago, airlines with marginal finances quickly realized their monthly aircraft lease costs were unsustainable. Many reached out to their lessors, asking to convert from traditional monthly payments to “power by the hour” (PBH) arrangements whereby they would pay lessors for each flight hour.

This TAC Analysis explores the shifting commercial relationship between lessor and lessee, and the accommodations that have been made to ease the burden on ailing airlines, while assessing an expansion of the model for aircraft ownership.

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