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28 Sep 2020

E190s stave off retirement as carriers clinch cheap lease extensions


The Covid-19 pandemic has extended the operating life of many E190 jets, explains regional jet lessors, many of which were facing a “foul” wave of retirements.

For airlines, this often means clinching “heavily discounted” lease rates, regional lessors admit.

“Much of the E190 fleet that was previously scheduled for phase-out has been given a lifeline as a consequence of the pandemic,” explains James Bennett, director of sales & marketing at AerFin. “Where operators might have been considering up gauging to narrowbodies, they'll now be looking at cash conservation.” Before Covid-19, roughly 200 to 250 E190s were scheduled to be phased out over the next 12 to 24 month period, AerFin’s regional sales manager, Michael Brain, adds.

Ishka understands that several airlines, particularly in Europe, are extending their E190 operations at the expense of previous 737-700 and A319 aircraft, while often delaying the introduction of their E2 or A220 fleets. Many of these discussions are still ongoing and will likely only provide a short-term lease of life to the E190 type, with airlines still committed long-term to fleet renewal plans.


“Heavy” lease extension discounts

Airlines have been taking advantage of pandemic pricing to secure tighter deals when negotiating both E190 lease extensions and purchases. Some leasing sources estimate that lessors will have to halve lease rates from pre-Covid levels to find homes for unplaced E190s but add discounts on E190 lease extensions are much “milder”.

Regional lessors estimate that a midlife E190 aircraft being placed today would fetch lease rates of around $80,000, while lease extensions will provide a boost to $90,000. Pre-Covid, lessors expected lease rates of roughly $140,000. Ongoing lease extensions discussions for around six-year-old E190s are averaging approximately $120,000, Ishka understands, versus $180,000 before the pandemic.

“These discussions can be tough,” one regional leasing source admits. “Airlines will a lot of the time need you to go lower than you can [on lease rates], especially with an asset like the E190 that was already set for big retirements over the next few years.”

In one recent example, US start-up airline Breeze signed a lease term sheet for 15 ex-Air Canada E190s with Nordic Aviation Capital (NAC) on 19th June that “offers significantly better terms”, the airline said, than an original term sheet signed with Azul for an E195 aircraft. The first E190 is set to be delivered to Breeze in August 2020, with the other 14 following within the next eight months. The aircraft have an average age of 12.5 years, according to CAPA Fleets.

Bolstered by falling appraised values, lessees are not only extending leases that are expiring in 2020. “Many airlines are thinking ahead and extending E190 leases well in advance,” explains Richard Jacobs, Chief Commercial Officer at regional jet lessor TrueNoord. “We’ve got lessees with leases that are not expiring until 2023, but they are now planning to keep the airplane for much longer and so see now as a good time to try to secure lease extensions at favourable terms.”

Jacobs describes some airlines as “making convenient use of selective appraised values”. However, the current spate of extensions means that the peak in lease returns that appraisers are still anticipating on is reducing, Jacobs argues. “There has definitely been compression of lease rates, but there is equally still a definite premium on younger assets.”


Alliance’s $79 million E190 swipe

Australian airline Alliance Aviation picked up 14 of COPA Airlines’ 2005 to 2009 vintage E190Ars through, along with six spare CF34 engines, for $111 million ($78.9 million) last month. The Australian Business Review reported that each aircraft was costing Alliance about A$6 million ($4.26 million). Alliance had apparently considered buying the aircraft a year ago, but the price then was said to have been double what they are today.

Sources caution against taking this one transaction as a definitive benchmark for the midlife E190 aircraft market. Ishka understands that COPA Airlines had been struggling to sell the portfolio for a long time. The aircraft were also $1.5 million below half-life condition and would require another $2 million to transition into European specification, some lessors argue, bringing the overall cost of each aircraft to approximately $7.8 million by the time it is ready for service.

The aircraft, purchased through US company Azorra Aviation LCC, will be delivered between September 2020 and April 2021. The airline has an option to buy five more aircraft, a full flight simulator and training equipment. COPA Airlines has been depreciating the aircraft rapidly in recent years and had noted in their financial reports that they planned to sell the aircraft.


The Ishka View

Covid-19 has provided extra years of life to select older assets as airlines delay upgauging plans. Airlines do not want the higher operating costs and lease rates of new technology aircraft, especially with traffic still depressed. This is a similar story to the 757 freighter (see Insight: ‘Covid-19 gives lease of life for sunsetting 757 freighter’), which looks set to enjoy another two to three years of operation as the Covid-19 pandemic flooded the conversion market with fresh feedstock.

This is a short-term boon for the E190, but a welcome one nonetheless for lessors keen to maintain rent collections where possible – even at sometimes sharp discounts. While some airlines are delaying A220 and E190-E2 aircraft phase-ins during the crisis, these long-term fleet renewal plans will ultimately come to fruition and these E190s will find themselves up for retirement once more.

The trend is also not universal. Many airlines are continuing to announce further cuts to their aging E190 fleets, including wholesale retirements that outstrip the news of new E190 operations (such as from BA CityFlyer, Amaszonas Uruguay and UVT Aero). Air Canada shunned its E190s in June 2020 to make room for fresh A220-300s in its fleet (although those aircraft have found a home with Breeze), while China Southern has shed an E190 aircraft a month in April, May and June. Mandarian Airlines will also retire its E190 fleet over the course of the next three years, as will American Airlines by 2020’s end.