Sumitomo Seeks Top-three Slot in Growing Lease Market

 - October 22, 2012, 12:00 PM
Gecas and its main rival, ILFC, still dominate the growing airliner leasing market, but new entrants such as Sumitomo Mitsui Bank hope to break the duopoly.

Japan’s Sumitomo Mitsui Bank (SMBC) beat more than 30 other bidders to complete the acquisition of RBS Aviation Capital on October 15, demonstrating the growing importance of leasing in new-airliner acquisitions. The bank’s 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 some 331 aircraft. The market remains dominated by GE Capital Aviation Services (Gecas) and International Lease Finance Corp (ILFC), which between them own almost 2,800 airplanes worth $62 billion.

Estimating the size of the world leasing market is an inexact science. ILFC expects that leased aircraft will soon account for half the world fleet. Dick Forsberg, head of strategy at Ireland-based Avolon Aerospace, said he expects the total value of the global leased jet fleet to grow to more than $300 billion in 2015 from what he estimates amounts to $220 billion today. Some 40 percent of new-delivery funding will total $120 billion, minus perhaps $15 billion in disposals and retrials, he added. Lessors fund a quarter of that portion through their balance sheets, and the rest via debt, export credit agencies and capital markets.

Lessors have grown in importance to OEMs suffering from the economic slump and to 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. Lessees also assume less residual-value risk. “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. The Airbus A320neo, expected to enter service in 2015, and the Boeing 737 Max, due in 2017, account for the most valuable segment. “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.”

Peter Shaw-Smith’s full report on the current state of the airliner leasing market appears here.