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Fitch: Aircraft Lessor Impairments Point to Residual Value Risk

November 14, 2013, 06:16 AM
Filed Under: Aircraft

According to Fitch Ratings, recent decisions by large aircraft-leasing companies to write down the value of certain older, uncompetitive aircraft fleet types in response to shifting global supply-and-demand fundamentals highlight asset quality risks for some lessors.

Fitch said International Lease Finance Corp. (ILFC) took a $1.2 billion noncash impairment charge in the third quarter after determining that future cash flows for 36 four-engine wide-body aircraft in its fleet did not support their previous net book values on the balance sheet. This decision reflected the lessor's view that the holding periods for Airbus A340s and certain Boeing B747-400s would be shorter than 25 years, which is the industry standard. The impairment charge, which comes two years after even larger impairments in 2010 and 2011, represents approximately 3.5% of ILFC's net book value. ILFC's ratings continue to reflect elevated residual value risk, which is driven by the relative size and age of its fleet.

According to the report, the A340 has a very limited global operator base, which contributed to ILFC's decision to reduce useful lives and residual values, said Fitch. The global fleet of A340s has grown to 350 since its initial debut in 1993. Amid increasing fuel prices, Airbus terminated production of A340s in 2011, citing increased competition from twin-engine aircraft. ILFC currently owns 17 A340-300s and 13 of the larger model A340-600s. Other Fitch-rated lessors do not have significant exposure to the A340 family. For many of the A340s it sold to airlines, Airbus provided guarantees that effectively limited the residual risk for owners.

Fitch believes changes in useful life and residual value assumptions for select older and less fuel-efficient aircraft may remain an issue for lessors as they adapt to changes in global airline fleet-plan priorities over the next few years and views increasing exposure to older, uncompetitive aircraft as a longer-term risk facing the aircraft leasing industry, which will play out over a number of years.

To read the full Fitch report, click here.

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