Credit-squeezed Carriers Increasingly Turn To Leasing | Aviation ...

Fuel efficiency and its effect on the useful life of aging aircraft is a dominant factor in the thinking of aircraft leasing companies, which are increasingly helping credit-squeezed carriers to refresh their fleets. Their presence in the market for airliner acquisition has continued to grow in the last two decades, with operating leases now thought to account for almost 40 percent of total deals today. Boeing notes that the new commercial aircraft market was $77 billion in 2011 and forecasts it will be $95 billion this year and $106 billion next?year.

Two major rivals?GE Capital Aviation Services (Gecas) and International Lease Finance Corp (ILFC)?dominate several smaller players in the leasing sector. Between them the companies own almost 2,800 airplanes worth $62 billion. But now Japan?s Sumitomo Mitsui Bank (SMBC) hopes to give them a run for their money, having beaten (on October 15)?30 other bidders in a competition to acquire RBS Aviation Capital. Its new SMBC Aviation division intends to merge two other leasing companies owned by its shareholders to challenge for the number-three position in the leasing sector, controlling around 331?aircraft.

Estimating the size of the world leasing market is an inexact science. Soon, ILFC expects half the world fleet will be leased. Dick Forsberg, head of strategy at Ireland-based Avolon Aerospace, puts the total value of the global leased jet fleet at around $220 billion, growing to more than $300 billion in 2015. Some 40 percent of new-delivery funding will total $120 billion, less perhaps $15 billion in disposals and retrials, he thinks. Lessors fund a quarter of that through their balance sheets, and the rest via debt, export credit agencies and capital?markets.

Lessors have grown in importance to OEMs suffering the downturn and airlines with less-than-perfect credit ratings. If airlines find it difficult to borrow from banks, they turn to lessors for finance with predetermined monthly outflows at competitive rates, as well as sale and leaseback options. Residual-value risk is also reduced for lessees. ?The key strengths of the lessors are that they provide liquidity to weaker credits, make metal available from their order books when manufacturers have sold out, and give airlines flexibility in terms of their financing mix,? said?Forsberg.

Gecas and ILFC continue to dominate the widebody and narrowbody markets, with the most valuable segment being the tussle between the Airbus A320neo, expected to enter service in 2015, and the Boeing 737 Max, due in 2017. ?We expect Boeing to convert a large number of the 350-plus letters of intent it holds on the Max to firm orders in the next 12 months,? said Rob Morris, senior aviation analyst at Ascend. ?By contrast we don?t [see] as much new order activity at Airbus as it is holding?firm orders for?close to?1,500 A320neos?already.?

?There are more than 11,000 narrowbody aircraft passenger aircraft in operation around the world today, and based on current growth rates, most will be flying for many years to come,? said Dan Whitney, Gecas director of global communications. ?Generally, airline customers are looking for newer, more fuel-efficient aircraft. But age is relative. We are leasing 12 Boeing 737-500s to Sriwijaya in 2012 and early 2013 to help them build their fleet. Passenger demand for air travel is growing in double digits in Indonesia, and these aircraft will provide immediate lift for the?airline.?

At the same time, others see more activity in the large-aircraft segment of the market. ?The coming year will be focused primarily on developments around the 300- to 400-seat market and in particular the decision by Boeing to launch [or otherwise] the 787-10 and 777-X family,? said Colin Bole, head of?ILFC?s?Europe, Middle East & Africa business. ?In parallel Airbus will be trying to affirm its strategy around the A350, particularly with the A350-1000 at the upper end of the range as an alternative to the 777-300ER and competitor against the?777-X.?

Diversification of funding sources remains a priority for leading Middle East carrier Emirates Airline, which manages 50 percent of its fleet under operating leases. Its current fleet age stands at 6.4 years and Emirates will be gradually phasing out about 70 aircraft?A330s, A340-300/500s and 777s?over the next five years. Most will have been released by around 2017, although one or two will be retained longer, according to the company. ?[Average] fleet age will gradually reduce to around 5.1 years in 2017, further improving the already industry-leading fuel efficiency of the Emirates fleet,? said Brian Jeffrey, senior vice president for corporate?treasury.

Airlines? preference for newer aircraft could be bad news for many in the industry, said Ascend?s Morris. The average age at which aircraft are being permanently retired appears to be reducing; in 2012 aircraft scrapped to date had an average age around 26 years, and if the period in storage before scrapping is factored in, the average economic age was actually 23.7 years. ?More than half the aircraft scrapped this year are less than 25 years old and 10 percent of them are actually less than 15 years old,? said Morris. ?Compare that to 2008, when the average scrapping age was 31.5 years?This is potentially bad news for investors?seeking returns over the whole life of the aircraft and who may need to revisit their investment models and reduce the period over which they depreciate their?aircraft.?

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Source: http://www.ainonline.com/aviation-news/2012-10-19/credit-squeezed-carriers-increasingly-turn-leasing

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