Originally Posted by
AK26
Your points here are valid and more interesting things to think about than the slop previously posted. Just one comment on the lease cancellations--those were not free. Usually, lease cancellations come with high cash costs, and I suspect that will continue to be the case moving forward.
The recent deal with AerCap was more complex than a simple lease cancellation. Frontier knows that they don't have enough profitable route pairings to take up capacity as much as they had planned for, but also has only been kept afloat due to cash from SLBs. Meanwhile, AerCap would rather not have a customer in financial distress, and simultaneously wants more planes and engines to take advantage of the current pricing environment. So, AerCap allowed Frontier to return 24 planes early in exchange for Frontier "deferring" their 2027-2030 deliveries to 2031-2033, with AerCap stepping in and taking over those slots. With the planes being returned early and an announcement of 48 new engines in their spare engine pool, it seems like AerCap may be parting out the planes and using the engines as spares given the high rates for spares currently. AerCap also has somewhat improved their lessee base--they now have less planes with Frontier and monetized the lease cancellations...in a hypothetical scenario where they had not done that, and Frontier went under later in 2026 or 2027, AerCap would not have a direct claim to the incoming Frontier orders; by preemptively doing this transaction, they reduce their Frontier exposure and secure the valuable 2028-2030 deliveries without paying an SLB premium. And to put some high-level math on it, using Frontier's average gain on SLBs, and discounting back to the present, we get to a present value of the SLBs of about $650M for the 69 planes that Frontier pushed out from 2027-2030. Frontier management sees $90M in annual savings from cancelling those 24 leases, which we can estimate as equivalent to a present value of about $460M for the 8 years of savings, so AerCap got some value here.
The above shows that the transaction is not proof that leasing is better than owning; lease rates are higher than debt costs for any airline that can raise debt (JetBlue is in firmly stressed territory and just raised new debt against their planes at under 7%), and you have more control over the planes, no maintenance reserves, etc. Instead, it is just another benefit of the extraordinarily well timed pandemic neo family order that IndiGo (both Frontier and Wizz) placed. I would also note that with current capacity trends, Frontier probably would have rather deferred 2026 deliveries as well, if not for the cash/SLB issues...they require the SLB cash to continue to operate, and the plan is obviously to try to stabilize the operations before 2027. If that doesn't work, however, 2027 will no longer have the several hundred million dollar cash infusion from SLBs, and the true operating profitability of the airline will become apparent.
I would have to do some digging but I’m pretty sure at the most recent investor conference Jimmy D mentioned specifically that the rejected leases did not incur a cash penalty as would normally be expected. We did also agree to 10 more Aercap leases in the future (2028?) so that could have been part of the reason why. Those future rates could be higher than usual to offset. It was too new to be posted in the 10-Q so more data required.
The lease rejection was even more complex than you describe. Those Aercap leases were mostly 8 year leases that, as recently as early 2025, had been extended to 15 year leases. Then obviously the quick about-face happened in late 2025. As to your point of “not enough profitable route pairings” I disagree. After the rejection announcement I dug a little deeper and noticed that the pilots were flying near their max capacity block hours for the month of March yet the aircraft were only at 80% utilization. In short, we were paying for aircraft we couldn’t fully utilize because we didn’t have the crews to fly them. ULCC and not max utilization lead to pain and suffering which you clearly know and our balance sheet showed. The time it would take to get the company fully staffed for these aircraft would be well over a year and at our loss rate that is an unacceptable timeline. So while I was pretty bummed at first with the rejection I think this was a very clever move on their part. Jimmy seems to be correcting Biffles bad moves.
I also did some modeling with the rejections and the reduced flying on T/W and it made even more sense. They are just too expensive of an aircraft to sit on the ground, ever, vs an older owned one vis-a-vis Allegiant. A credit to your owned aircraft point.
Thankfully for us Jimmy D has acknowledged we need to be profitable without SLB. We here are all ready for that day.