Tough residual value decisions for operating lessors

The Gulfstream G500 and G600 flying in formation.

It is amazing how demanding the industry has become. In the last two weeks OEMs have launched three aircraft – Gulfstream’s G500 and G600 and Bombardier’s Challenger 650 – and yet many of the delegates said that they expected more announcements at NBAA 2014 this week.

The last five years have been the toughest the industry has ever faced, yet all of the major aircraft manufacturers have invested in new models. Textron Aviation now has 21 aircraft in production. And there are four different aircraft called the 650. (There is probably the opportunity for an unscrupulous broker to make a killing with some confused buyers here.)

This diversity of aircraft types is great for buyers looking to fill specific missions but it causes headaches for financiers calculating residual values. At NBAA this year one of the most experienced aircraft finance bankers in the industry said that it has never been harder to forecast residual values than now. Another industry veteran admitted: “It is very hard to write a lease for an aircraft when you don’t know if the manufacturer will launch two or three sister-ships or versions during this time.”

“It is very hard to write a lease for an aircraft when you don’t know if the manufacturer will launch two or three sister-ships or versions during this time.”

There is no reason why it will get easier. Manufacturers are committed to new models and versions. As the market gets stronger it is worth remembering two lessons from the last five years. One, it is impossible to predict the state of the economy in five years’ time – and this is the biggest driver of residual value. Two, it is difficult to predict which new aircraft will be launched. Lessors deserve more credit than they get.