Viewpoint

Lease rates increasing with age? That’s crazy. Or is it?

Chris Kjelgaard looks at the topic of lease rates increasing with age.

When talking to a certain regional airline recently, I came across a situation which almost every aircraft sales or leasing executive would find extremely unusual.

The airline was in the process of raising financing to buy its fleet of aircraft. There’s nothing remarkable about that; but the reason it was doing so almost made my jaw drop.

Even though each of the four small commercial turboprop aircraft the airline operated was well over 30 years old, the monthly lease rates on each aircraft have been going up, by an annual average of $5,000 per month per plane. They continue to do so every year.

Concerned about this and by the fact other operators around the world were trying to persuade the lessors which owned the aircraft to sell or lease them to those operators instead, this carrier wanted to make sure it kept control of its fleet.

I was surprised, to say the least. But looking into the situation beyond the surface, the airline’s reasons for trying to secure ownership of its fleet were entirely logical.

For a start, it’s important to know the airline was Winair, the national carrier of Sint Maarten in the Caribbean. The bulk of Winair’s entire operation consists of flights to two of the most difficult commercial airports in the world to serve.

One is Gustaf III Airport on the island of Saint-Barthélemy, an ultra-chic tourist paradise for the very rich. The other is Juancho E. Yrausquin Airport on the island of Saba, which largely consists of a potentially active volcano round which a small population – and remarkably a thriving international medical university – lives and works.

Surrounded on three sides by hills, Gustaf III Airport is known for having probably the steepest approach in the world. It requires a 10-degree descent angle and a hair-raising short final a few feet over the top of a traffic circle, followed by a dive about five feet off the ground down a 146-foot hill.

In March 2001, one aircraft (not operated by Winair, which hasn’t had a fatality since it was founded in 1961) didn’t make it and 20 people died.

The predominant approach to Saba is nearly as dramatic. Aircraft fly directly towards the volcano until about 10 seconds before impact, then make a steep left turn to arrive at a height of about 20 feet at a difficult horizontal angle over the threshold of the shortest commercial-airport runway in the world.

Then the aircraft have to straighten up and land in just 1,000 feet of tarmac. If pilots get the approach and landing wrong, there is a 60-foot sheer drop into the sea at each end of the runway.

Very few commercial aircraft can land safely at these airports, particularly with 19 passengers on board. But – as MRO Network News’ readers will have guessed by now – the venerable de Havilland Canada Twin Otter Series 300 can, routinely.

As MRO Network News readers also know, the Twin Otter is still being built, by Viking Air. So one might think Winair wouldn’t be concerned if the two Canadian lessors which owned its four early-1980s vintage Twin Otter 300s had their heads turned by other operators and took their aircraft back when the leases expired.

But that’s not the case. The practicalities of the situation meant Winair needed to keep control of its existing fleet.

Even though Viking Air announced in April it was cutting production of new Twin Otter 400s from 24 a year to 14, largely because the sizeable expected Russian market had collapsed, Viking has a seven-year production backlog and an agreement with a Chinese aircraft-sales company for 50 aircraft.

More importantly for Winair, a new Twin Otter 400 costs well over $7 million, an amount it simply can’t afford. The entire amount of the new financing Winair sought to raise – which included a sizeable war-chest for working capital to finance growth – was less than the cost of four new Twin Otter 400s.

Couple that with the fact Winair has performed all the required maintenance on its current fleet for many years and holds perfect records for the four aircraft and it becomes clear Winair’s best choice for the next few years was to keep the four Twin Otter 300s it already had.

De Havilland Canada manufactured 844 Twin Otters from 1966 to 1988. Other than new Viking Air Twin Otter 400s built from 2010 onwards – Viking had produced 68 by April – the youngest Twin Otter in service is 27 years old.

But because of the Twin Otter’s unique STOL capabilities, and the relatively inexpensive prices for used Twin Otters, this rugged classic from de Havilland Canada remains in very high demand. So lease rates for 35-year-old Twin Otters keep getting higher.

Oilfield, utility and island operators throughout the world treasure the Twin Otter. That’s why Winair knew it needed to raise financing to buy aircraft which, in any other type of commercial-aircraft operation, would soon be consigned for dismantling.

It’s just one reason the Twin Otter is my favourite aircraft.

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