Air Lease Corporation CEO Pinpoints Pandemic Aftershocks – Skift

There’s a lot of talk about the pandemic’s repercussions, but few opinions carry as much weight as those of Steven Udvar-Hazy — the man credited with creating the aircraft leasing industry.

At Skift Aviation Forum on Thursday he predicted the future will involve more frequent flying using smaller, electrified planes — in a race won by Airbus — while flight-shaming will only grow stronger. Airlines have also become experts at “begging.”

“You have periods of growth, and then you have what I call these earthquakes, usually caused by external events. Geopolitical, massive changes in energy prices, regulatory changes and 9/11,” he said. “You have events that are not forecastable by the airlines. So you have a growth period, then a massive shock to the industry, then there’s recovery.”

Udvar-Hazy made his reputation during one such shock in the 1960s: the arrival of the jet age. Today, an estimated 40 percent of commercial airliners are leased.

During that period, he identified how European airlines needed to switch from propeller aircraft to jet planes, but unlike their U.S. counterparts lacked the finances to buy these new planes themselves.

Steven Udvar-Hazy, CEO of Air Lease Corporation.

He went on to found International Lease Finance Corporation in 1973, a business that began life out of the trunk of his car and roadside phone booths — in between his day job as an Los Angeles County lifeguard.

But speaking during the forum’s “Managing the Cyclical Changes of Aviation Out of a Crisis” session, Udvar-Hazy warned this time round the recovery would be more complex than any he’s seen  before.

“(Coronavirus) has affected the air transportation system in a different way. Part of that has been because it’s so difficult to forecast the road to recovery, and technology has in fact eaten into the traditional ways of meeting and doing business,” he said. “The most challenging part to forecast is the recovery of the long-haul, intercontinental, high-end and high-yield business traveler.”

Playing the Frequency Game

One trend he was prepared to forecast is the ongoing rise of the new midmarket aircraft.

“There’a a split between wide-body and narrow-body aircraft,” Udvar-Hazy said. “The shift even started before the pandemic to smaller and medium-sized wide-bodies, and away from the A380, 747-400… It’s difficult to sustain a year-round profitable operation with a 500 or 600-seat airplane. There’s only a limited number of city pairs where that’s profitable.”

When quizzed by Skift editor-in-chief Tom Lowry on what aircraft were “hot” in the market right now, he replied the A321LR and A321XLR. “As a lessor, an owner of capital goods, and not meaning to be discourteous to Boeing,” he added. Udvar-Hazy is currently executive chairman of the board at Air Lease Corporation, which he founded in 2010.

“I’m not saying wide-bodies are going out of style, but airlines are finding ways to operate the large single-aisle aircraft in a way that’s different to what we’ve had in the past. It’s become much more a frequency game. They’ve actually down-gauged in a lot of these markets.”

Is there still a need for a new mid-market aircraft, Airline Weekly editor Madhu Unnikrishnan wanted to know.

“Boeing could probably build another airplane, like a quasi-757. But once you figure in the capital and R&D costs, can it compete with the A321? Even if it’s more efficient, and the operating costs are a little better… the investment to build and develop has already been essentially recovered. But with a brand new airplane, you’ve got to recover that through the pricing,” Udvar-Hazy replied.

“I have doubts whether Boeing or Airbus can design a new plane, using current aerodynamic and engine technologies, that can have a meaningful, double-digit economic advantage over what we already have.”

A Prius Approach

The next phase in the cycle may be more in keeping with how the automobile progressed, with Udvar-Hazy tipping further evolution in hybrid technology.

He believes electric propulsion could augment high-bypass turbofan engines to reduce the weight of aircraft, with that electric technology used as incremental thrust during take-offs and landing to reduce the overall trip fuel burn by up to 20 percent.

“We didn’t go from the piston engine and diesel cars to all-electric cars. There was that transition period with hybrids, like the Prius. I can see that evolution, and I can tell you that Airbus is working hard on solutions along those lines,” he said.

“Boeing is obviously distracted, and at this time I just don’t see how the board could commit to a $15 billion program until they get over their challenges — not just on the 737Max recertification, but also on the 777X, which has turned out to be a difficult one for them financially, and at the wrong time for the airline customers. I personally don’t think the board and the leadership in Chicago would write a blank check for a 797.”

More hybrid aircraft will be welcomed by climate change protesters, but Udvar-Hazy has little time for the flight shaming movement and thinks aviation is only punished  because it’s an industry that can’t hide from the public.

“I don’t know what planet these people are coming from,” he said. “They don’t realize the economic damage to the world if air transportation is artificially curtailed. In Europe, I think anything under 500km will either be curtailed, or taxed to death.
But then the money that’s collected from that isn’t going to help the environment, that’s for other social agendas, giveaways and projects, it’s like money going down the toilet.”

He thinks the trend will accelerate after the pandemic.

Ahead of Its Time

Back to big planes. The 777X is Boeing’s latest wide-body aircraft, but if the future is looking slimmer — what will happen to larger aircraft types like this?

“The 777X feels to me — and this is a personal comment, not an Air Lease official statement — like an airplane that’s ahead of its time. It’s maybe three to five years out of phase with what the airline industry needs. So you have most of the 777X customers wish they would come later at a lower cost of capital, and Boeing wants those airplanes delivered as quickly as possible to generate the cashflow that they need.”

He also said that the all-cargo plane euphoria was more of an “interesting” phenomenon because of the cargo flows of medical supplies and items like uniforms being flown out out of Asia. “I’m not sure we’re looking at double digit growth in all-cargo planes,” he added.

In the meantime, expect to see airlines raise even more cash — a trait which has impressed the leasing expert the most since the crisis began. “They’ve all become experts at being beggars. They’re beggars for government aid, financial aid, they’ve mortgaged the kitchen sink,” Udvar-Hazy joked. “They’ve been really adept at raising capital, selling their frequent flyer programs, borrowing against slots, borrowing against intellectual property.”

While wide-body aircraft may not be back in vogue until 2025, and climate change protests pose a real threat to the aviation sector, Udvar-Hazy is optimistic of an overall recovery after 24 months, predicting airline travel will be double gross domestic product growth. “I don’t think there’s any way to stop that,” he said.

Until the next earthquake hits, that is.

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