Some industry sources are dubious of ramped up production targets set by the original equipment manufacturers, and say they are unrealistic.

Boeing is preparing to increase its narrowbody production to 57 units a month from 42, starting in 2018, while Airbus is looking to increase its monthly rate from 42 aircraft to 60.

Aengus Kelly, chief executive officer of AerCap, takes a different view.  “I think what will be realistic is what the market will absorb,” Kelly says in an interview with Airfinance Journal. “If the market cannot take the 60, they will not be built. Boeing and Airbus can regulate supply into the market on a controlled or uncontrolled basis.”

Supplying the market on a controlled basis is what the OEMs have always done in the past, Kelly says.

“Boeing and Airbus know what the real picture is,” he says. “Airlines over-order and go back to Boeing and Airbus and say ‘I can’t take 20 airplanes this year, I can take 12’. Boeing and Airbus will say they’ll take 14. You’ll increase the pricing of your other stuff, your escalation will increase, and we’ll defer some. That’s generally what happened in the past and that will obviously regulate the supply to what the market can absorb.”

Regulating aircraft production the alternative way - or via an “uncontrolled fashion” - Kelly says, is something Airbus and Boeing have not done before.

In that case, the OEMs would say to the airline that they have to take all the aircraft they have ordered when they cannot afford to finance them. This puts the airline in bankruptcy and the order gets cancelled and supply gets regulated.

Kelly does not see the big two manufacturers dealing with aircraft production in “an uncontrolled” fashion any time soon. “Boeing and Airbus will stuff as many aircraft as they can into the market but they will not cannibalise their own customer base by sticking them into bankruptcy. They’ve never done that and you see that time and time again, look at Gol, Virgin America and Air Asia for example.”

Backing the stretch

Being one of the “big two” big leasing companies by fleet size, AerCap is constantly reviewing the new programmes on offer from Airbus and Boeing. The US OEM has been making a lot of headlines recently, with discussions about a stretch 737 Max and a possible replacement for the 757.

Kelly says he would be interested in investing in a stretched Max but is less interested in a 757 replacement to compete against the Airbus A321neo. “We would invest in a Max stretch; I think that airplane has a future,” he says. “The middle of the market airplane they are proposing is more challenging. If it’s supposed to replace a 757 – 37% of the 757s in the world are AOG – so most people don’t want them.”

“There’s a scarcity factor for those who do want them because so many of them are mothballed because it’s too expensive to reactivate them, it’s been a bad investor’s airplane over the years. Nobody made money on 757s, really.”

Kelly adds that the only reason people are making any money on 757s now is due to the bankruptcies in the USA over the last 20 years, where there have been significant writedowns taken on those assets.

“Anyone who bought one new has probably lost a fair chunk of change,” he adds. “Because they were very expensive assets at the time and I think that will be the challenge with any new plane Boeing builds.”

Like with any new passenger aircraft, the timing of its availability will also be crucial. “If you build a new airplane, if you’re a day late, you’re a dollar short. It may not come for a decade. It’s also a high risk airplane to buy as evidenced by the performance of the 757, which has been poor in terms of people who own that airplane from start and is shown by the fact that 37% that are AOG today.

 “The derivative of the Max is one which can enter into service more rapidly; you do not have to convert the customer base into a new aircraft type, which is much more challenging. You’re taking an existing customer base that’s already there. It’s much harder to create new customers than keep an existing customer.

AerCap has all of its liquidity lined up for the next 18 months, carrying more than $9 billion of liquidity at any given time. The lessor’s financing is a mixture of secured and unsecured debt – approximately a third of it is in the secured market and about two thirds is in the unsecured markets, predominately from the US capital markets.

A DIY Job

Following the UK’s decision at the end of June to leave the EU, Kelly says he has not experienced a significant slowdown in capital markets deals. “I’ve not seen a huge impact on the US capital markets. The spreads blew out for a few weeks by 20 basis points and came back in.”

“The referendum result does not have a positive impact on our business, but one country goes into the tank every year – and this one’s a DIY job. When you look recently, it’s been Russia and Brazil; before that it was Mexico and India. The US airline market has also been in the tank for most of the last 25 years. Don’t get me wrong, the UK is an important market, but the fact that it goes down isn’t going to change the global picture.”

But Kelly does not think Brexit is a positive for anyone, including Ireland, where most of the leasing community is based. “The UK is our biggest trading partner and is a very important ally for Ireland. So I’m sure it’s a negative impact for Ireland overall but as far as my business goes, I’m running a global aircraft leasing business. It’ll have some impact but it’s not going to be a material impact on global demand for air travel.”

Exiting the regional space

The lessor has approximately 1,640 owned, managed and on order aircraft in its portfolio. AerCap has 152 A320neo, 100 737 Max 8s, 48 A321neo, 39 787-9s, 25 E190 E2s, 25 Embraer E195 E2s and 15 A350-900s on order, according to Airfinance Journal's Fleets.

Not only does AerCap have a lot of aircraft on order, but it also sells a lot of aircraft too. It sells nearly 100 a year on average. In May, the lessor exited the regional market, selling four CRJs to US lessor Castlelake. Kelly says he wants the AerCap portfolio to be focused around the 737, the A320, A330 and 777 and transitioning into the Neo, the Max, the A350, the 787.

Asked why he chose to exit the regional market, he says: “We just felt there was a good bid on the asset. The regional jet market as a lot of successful niche players, experts in the market. It’s a very small business for us and wasn’t something that was worth the effort it was taking up to just have a handful of airplanes in it.”

The Embraer E2s, which start delivering in 2018, could mark the lessor’s return to the regional market.