Lessors will be relieved that A320 monthly lease rates appear to be recovering. Leasing firms claim that A320 monthly lease rentals rates had increased by 10% since the start of the year.

This may be true but it has risen from a historical low. The reality is that A320 lease rates today are still well below base lease levels.

There are several reasons why leases for A320s have been depressed. One is that the aircraft is a victim of its own success. The A320 is the most commonly operated aircraft type in the world and, as a result, lessors have plenty of them.

When demand in aviation started dropping two years ago and airlines began cutting back expansion plans, many lessors which had ordered aggressively years before were left with a surplus of A320s.

The industry was also hit by several airline bankruptcies in 2010 and 2011. When SpanAir went bust lessors were suddenly forced to remarket the A320s leased to the airline, and this dynamic was repeated in many of the bankruptcies over the past few years.

Unsurprisingly, this had a negative impact on A320 leases for new aircraft that faced cutthroat competition.

Recently lessors have been more bullish about A320 leases, with one saying that the “A320 over supply has worked itself out”.

Base lease rates are determined by the general cost of capital and the price of a new aircraft.

If a lessor acquires an A320 for $42 million, historical interest rates over the past 15 years would imply a base lease rate of about $350,000 to $360,000.

At the start of this year, however, lessors could expect to secure rates well below these base rates. Lessors were reporting leases for new A320s of less than $300,000 a month.

These rates are steadily improving, and lessors state the monthly lease rate now for a new A320 is about $300,000 to $320,000.

This is less drastic than it appears because of the impact of interest rates on base lease rates. Interest rates determine the cost of capital that lessors need to buy the aircraft.

In today’s low interest environment, where three-month Libor is at 0.24%, base lease rates are significantly lower.

Stuart Hatcher, IBA Group’s head of valuations and modelling, notes: “In the current interest rate trend we are probably going to be expecting a good market for this aircraft to be around the $340,000 to $330,000 mark. So we are not actually that far off.”

However, competition is still very intense between lessors. In the low interest rate environment lessors are faced with the dilemma of whether to offer fixed- or floating-rate leases.

Floating rates tend to be much lower than fixed rates but if interest rates do pick up then lessors are less likely to be locked into such low lease rates.

The danger is that if interest rates do not pick up then lessors which chose fixed lease rates of $320,000 or less could be left out of pocket when interest rates rise.

“We have heard of floating rate for these aircraft to be around $260,000 a month, while fixed rate has been close to $300,000 and $320,000. However, if interest rates go up considerably then those fixed-rate leases for A320s will be rubbish, while the floating rates will certainly add another $100K, so you will end up in those mid 300s for a floating rent on those,” explains Hatcher.

While rates have improved for new A320s, locking in decent monthly lease rates for older A320s is still a challenge.

Appraisers state they see monthly lease rates of around $190,000 per month for 10-year old A320s as there is still a surfeit of aircraft out there

Overall, the signs are encouraging for lessors. Lease rates, even for older A320s, are improving slightly, and lessors have managed to secure better return conditions as well.

Several lessors – Fly, ILFC and Avolon – have each boasted that more airlines are extending leases. The market is picking up, but lease terms for the world’s most popular aircraft are still low.

dharris@euromoneyplc.com