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Cheap Oil: Good For Lessors?

Standard & Poor’s seems to think so. The ratings agency has just upgraded Aercap, the world’s second-biggest lessor, to BBB- from BB+, thereby restoring the minimum investment-grade rating that the listed lessor lost after its purchase of ILFC in 2014.

And while S&P was mainly moved by the Aercap’s debt-reduction efforts, it also noted that lower oil prices would have a “net benefit” for aircraft lessors.

Its reasoning runs that even if cheap fuel depresses demand for new-technology aircraft, it buoys lease rates for lessors’ large portfolios of current-generation equipment, while also lowering the risk of default among their airline customers.

A counter-argument could be made that lessors have over-committed to expensive new aircraft that airlines will defer receiving, driving up debt once again.

Aercap’s backlog includes 300 A320neo and 737MAX aircraft, an order book that S&P is relaxed about.

“[Our] stable outlook reflects our expectation that Aercap's credit metrics will remain relatively consistent through 2017 as increased earnings and cash flow offset the company's assumption of incremental debt to fund its new aircraft deliveries,” it writes in a recent research note.

Some analysts worry that tit-for-tat production increases by Boeing and Airbus could see a glut of narrowbodies from 2020, which would be very bad news for the lessors, but much will also depend on where the oil price is by then.

Avitas economist Adam Pilarski – one of very few people who predicted the crash to around $40 per barrel – recently said that oil will rise again, but only to about $70 per barrel.

How that effects demand for new aircraft may depend on other factors, notably the labour contracts airlines agree in the current years of plenty.

Carriers such as Lufthansa, for instance, are trying to remain parsimonious despite record profits and consequent pressure from unions.

If other airlines can hold firm too, lessors may become increasingly nervous about their future portfolios.

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