«It will have to be proven to many customers as to the capabilities of an A350 freighter»

The Covid 19 crisis hit the aviation industry hard. Did any of ALC’s customers go bankrupt?
John Plueger*: We were fortunate and avoided many of the larger bankruptcies. ALC was not involved for example at Latam, Avianca or Thai Airways. Nevertheless we have gone through some bankruptcies including Aeroméxico. But these leases have been affirmed, we have restructured the leasing terms and the airline is going to emerge from bankruptcy. We have gone through things like this also before the pandemic.

And apart from that?
It has been an extremely difficult period. It is very tough when all of your customers are financially really hurt and burdened. We have been working feverishly with them to help as much as possible. Offering limited deferrals or limited lease restructuring for example. Some of the carriers are also deferring their own forward deliveries but taking some of our deliveries, because they don’t have to finance our deliveries. We have that already covered for them.

Did ALC run the risk of getting into financial difficulties itself with so many burdened customers in this crisis?
Our earnings remain positive, our cash flow remains positive. We have raised our own liquidity to an all time high. And the amazing thing is that the airlines are getting through this crisis. They are getting cash from many sources, not just from us. There are many investors who are willing to lend. The airlines are paying their bills, more or less. The industry has shown an incredible resilience.

Sometimes the best time to start is when you see the ashes and fires burning from the past

Did this crisis also bring opportunities?
It gives us the great opportunity to work with the airlines and to really help them. And the people remember how you helped them in the times of stress and difficulty. At the moment lots of airlines have drawn on all their sources of capital in this difficult time and now the lessors as ALC are a remaining bastion of capital going forwards. So it is really the time for the lessors to assume a really dominant role in the recovery of the airlines and to accelerate the extent of leasing globally.

Now the situation is improving, especially on non-intercontinental flights, and the first airlines are slowly starting to order aircraft again.
Airlines are looking for an opportunity to refleet. They have parked and retired the oldest and least efficient aircraft and a lot of them want to improve and accelerate their environmental goals and timelines. The quickest way to obtain this is to get the newest, most technology advanced and most fuel efficient aircraft. And that is what we have got in our order book. So the crisis showed me that the business model of ALC is fundamentally sound. We buy brand new aircraft from the manufacturers using large scale orders and we keep our fleet young by selling those aircraft at an age of about eight years. That is a third of the roughly 25-year lifespan of an aircraft. Most airlines prefer this.

There are a lot of startups right now. Is it a good time to start a new airline?
We call it a leap of faith. Sometimes the best time to start is when you see the ashes and fires burning from the past. In the United States we see Avelo and Breeze for example. They think their timing is perfect because there is such a big pent up travel demand. With good timing it is clearly a good time to capture this market, especially domestically. But the key is to keep your cost the absolute lowest you can. Because airlines at the same time try to attract travel and to stimulate traffic by lowering fares. So it will be a very competitive environment.

With Aercap and Gecas we’ve seen a huge merger in the leasing industry. Hasn’t there emerged a player with too much power?
I don’t think so. It was a bold move and I congratulate. But at the same time I don’t think that the airlines or the manufactures want to have one dominant global player. They want to continue to have a healthy list of choices and not someone with too much influence. It is the same reason why we on the aircraft buyer’s side want a strong Airbus and a strong Boing, a healthy competition. Most airlines don’t want to put all of their aircraft with one leasing company. So I think natural market forces will come into play here and the market will tell the story in the next few years.

Will we see even more consolidation? And are you interested in buying other companies?
I do think there will be some additional consolidation or sale of some of the entrants who have come into the space in the last five to seven years when the times were good. And now during very difficult times you will see some people exiting the business, some of the smaller players or recent entrants, some of the bank owned lessors for example. We at ALC always look at capital allocation very broadly. How are we gonna spend our shareholder’s capital? Are we gonna buy more airplanes? Are we going to buy another company? What’s gonna give us the best return? So the answer is yes we always look at opportunities to well priced assets, aircrafts or companies. Or large portfolio purchases. Some leasing companies may downsize or sell off parts of their portfolio. All of that is on the table.

We need Boeing to get to a situation where they don’t have these things continue to come up

The Boeing 737 Max recently had electrical problems and the 787 Dreamliner is also experiencing production difficulties. How concerned are you as a big customer?
I think these problems are all being sorted out. But it does cause disruption and some difficulties. From the airline side of things, taking additional widebodies now is a challenge for many of them. Having less supply coming in right now some airlines will welcome that. But in the broader scheme of things we don’t like to see these production disruptions. We need to have confidence in a steady supply of aircraft going forward regardless of market conditions. We have 787 and 737 Max on order for this year and for the next few years. We need to know that these deliveries will be on time even though regulatory authorities like the FAA are taking a much closer look at things because of what happened in recent history. We are watching very closely and Boeing is giving us very regular updates. But we need Boeing to get to a situation where they don’t have these things continue to come up.

ALC has got 737 Max 8 and Max 9 – are you also interested in Max 7 and Max 10?
We have not yet ordered the Max 7 or the Max 10. Because the market demand has not been there for either aircraft. We think the Max 8 is the real sweet spot in the Max lineup, followed by the Max 9. But the Max 10 is not certified, not out there, there is not a lot of orders. The Max 7 also is not quite as high in the order book scale. And we like to concentrate our orders in the sweet spot of any product line. If an opportunity presents it self to be complementary for example on the Max 7 yes we would take a close look, but it would be a specific opportunity not a large scale order.

You don‘t have any turboprops in your fleet. Why not?
We had some in the past but we sold all of them to Nordic Aviation Capital many years ago. It is hard to see us in the future ordering small turboprop aircraft. Our company has grown to a bigger size and to achieve our financial growth targets we would have to order larger and larger quantities of smaller aircraft to have a financial impact.

But aren’t turboprops perfect for the comeback after the pandemic?
You are right, on domestic recovery smaller aircraft will probably play a role. The question is how sustainable and how long will that role be. Because in most countries airport slots are very constrained. There are very few new airports being built. And because of the limited amount of slots at every airport that is all you have. The smaller aircraft size is helpful in a recovery but after that you need to put in more passengers per aircraft. So we focus on 737 Max, A320 Neo and A321 which are the bread and butter aircraft and will dominate the single aisle marketplace.

This is part of the problem of the 777X: It is a very large aircraft and it is a very expensive aircraft

Cargo is booming. But you don’t have any freighters. Will you change this?
The cargo market is very strong today but over history it has been a much more volatile marketplace. Also most of the freighters are converted used mid or older life aircraft. And we don’t have midlife or older aircraft. The interesting aspect is e-commerce. That is going to continue to grow strongly. For this purpose you need as much cubic volume as possible but you don’t need that much structural strength in the floorings for example. We are watching the development very closely from this e-commerce perspective. But normally still almost 50 percent of the world’s airfreight is carried in the bellies of passenger aircraft. And this will continue to be the case.

The last time we talked, in November 2019, you were quite skeptical about the Boeing 777X. What do you think today about the aircraft?
Well, I think it is clear that the 777X is really struggling. It is unfortunate that the global pandemic has made this situation even more challenging. Because the international markets have closed down or have been restricted there are far less passengers. The largest widebodies have been hit the most. A380, Boeing 747, some of the high density Boeing 777. The widebody segment that is performing the best is actually the smaller to medium size in terms of passenger carrying capability. It has become much more difficult for the biggest aircraft to do well. And this is part of the problem of the 777X: It is a very large aircraft and it is a very expensive aircraft. Today if you are a large international air carrier you have a tough time filling up aircraft. Over a long period there still will be many many flights going from megahub to megahub. That is what these aircrafts are specialised at. But it is going to take several years for that recovery. And there is an increased focus on point to point flying. The Boeing 787 has met this demand better than the Airbus A380 for example.

But now Boeing builds the bigger aircraft with the 777X.
I think that decision was because Boeing knew the product life of the 747 was ending and the 777-300ER was and is still a very successful widebody out there. But it’s design is 20 plus years old and it needs to be more fuel efficient. So the 777X was more a result of these two factors: The 747 going away combined with having to update and increase the fuel efficiency of the 777 series.

So do you still don’t to want be a 777X customer?
I don’t want to say never. But so far we don’t have a business case for the 777X.

Airbus is not well known for freighter aircraft. It has not been their strength

Aside from a freighter version of the 777X it also looks like we will see an A350F by Airbus. Will this be a success?
The widebody market remains a challenge for both Boeing and Airbus. Just look at the production rates which Airbus has announced. By 2023 going up to 62 a month at the single aisle. Compared to six A350 and two A330 a month. If you have a production facility that is producing A350s and the demand for the passenger version is weak for the moment a natural thing to do would be to try to capture the strength of the freight market and offer the aircraft as freighter.

So it is a logical move that Airbus is considering an A350F.
Yes, but it remains to be seen how many orders they are able to get. Airbus is not well known for freighter aircraft. It has not been their strength. And so it will have to be proven to many customers as to the capabilities of an A350 freighter versus for example a converted 777-300. That is a very powerful airplane with good economics and a much lower cost. Let’s see the loads that can be carried by an A350 freighter. Airlines will for sure be comparing that as against 777 freighters and 777 converted freighters.

The perhaps most interesting question in this business right now: What would be a wise move for Boeing developing a new airplane?
There has been a lot of media speculation. But Boeing’s CEO Dave Calhoun in a recent interview said that Boeing will not be rushed into a new aircraft type. That is an important statement because I think it reflects reality. I think Boeing has to make sure it has its own house in order first. As we speak here today 787 are not delivered. The Max has been recertified but it still has to be recertified in China, Russia and some other countries. They need stability on the production side and there have also been tremendous financial challenges for the Boeing company.

But what advice would you give Boeing about the aircraft itself?
My guidance to Boeing and also to other manufacturers about new aircraft is: You have to have a new clean sheet of paper. And a huge focus of design and development has to be on the environmental side. Not only fuel efficiency but all aspects. Maybe the first airliner that will be produced and designed specifically for the use of sustainable fuel to start off with. Or some form of ancillary power. Maybe – and I am just guessing and speculating here – having hybrid solar panels at the top of the fuselage or at the top of the wing. Boeing is in a great position to take a great leap and to get the next product right. Because it certainly has a very significant challenge in the larger single aisle space that is currently dominated by the A321 Neo and the two variants LR and XLR.

Supersonic? I still fundamentally question the economic viability no matter how sophisticated and technology advanced the aircraft is

Finally, I am interested in your opinion on two potential future technologies: the return of supersonic passenger planes and the propulsion of aircraft by hydrogen.
I admire stretching boundaries and going into new technologies. But I think hydrogen powered commercial aircraft are still a long way off, speaking about the bread and butter single isles. The more near term focus is on sustainable fuels.

And supersonic? United Airlines wants to buy up to 50 jets from Boom.
I believe that technology today will allow supersonic flights over landmasses, the sonic boom can be technology overcome. And I as a business passenger would pay a much higher ticket price. I flew on Concorde several times. It was great. Concorde was indeed not a comfortable airplane by today’s standards. It was a very narrow single aisle, seats were very small, overhead bins were really tiny. But you were only in that airplane for three or four hours maximum. And I think people will still pay for this benefit of saving time. But the attractiveness to an airline remains to be seen. Because in any case it takes a lot of fuel to make an airplane go supersonic. And for this reason I still fundamentally question the economic viability no matter how sophisticated and technology advanced the aircraft is.

*John L. Plueger is Chief Executive Officer, President, and Member of the Board of Directors of Air Lease Corporation. His professional experience includes testifying before the U.S. House of Representatives as an aircraft leasing expert as well as answering European Commission formal inquiries concerning aerospace industry related mergers and acquisitions.