Paris 2011: Leasing companies plot course for coming boom
The world’s aircraft leasing industry appears to have weathered the proverbial storm of the global recession and now looks well positioned to exploit aircraft placement opportunities in markets such as China, in particular. However, such opportunities won’t come without their challenges, according to some of the leasing company bosses who appeared at this spring’s International Society of Transport Aircraft Traders (ISTAT) conference.
Air Lease Corp. chief Steven Udvar-Hazy, for one, cited multiple projections for production of 100-seat and larger jets over the next five years of 5,000 units, 40 percent of which, he said, will involve operating leases representing $100 billion worth of financing. “Seven or eight of the operating lessors will have to do the heavy lifting to come up with $100 billion worth of aircraft financing…That’s the magnitude we’re facing as the top-tier lessors,” he said. In summary, the next five years will present tremendous opportunity for those lessors, said Hazy, but also a daunting challenge in terms of management, resources and access to capital markets.
Steven Townend, the deputy managing director and chief commercial officer of BOC Aviation, the largest leasing company in Asia, said although he sees new capital coming from Asian interests such as his own [the Bank of China owns BOC Aviation], the vast number of small leasing companies in the region will dwindle, leaving the market to fewer, yet larger interests. “I think there’s some huge volumes to be dealt with,” said Townend. “I do see new capital coming in, from Asia, from our part of the world, and in five years time I don’t think we’ll be the only major lessor that’s owned by Asian interests. That might be banks or that might be insurance companies as we’ve seen in other parts of the world.”
Looking Toward Asia
Hazy said that the world’s lessors will have to look more toward Asia and educate institutions that run “hot and cold depending on the cycle we’re in.” The Air Lease boss stressed the importance of demonstrating that lessors have proved themselves much more stable and able to generate consistent profits through multiple cycles than have the airlines. “Whereas our airline customers have had tremendous volatility in their earnings, we have a much more stable, a much more predictable business model as long as we select the right assets.”
Townend concurred with Hazy’s assessment of the airlines, again emphasizing the differences between the model used by the leasing companies and that of the world’s air carriers. “The biggest costs to the airline industry has tended to be labor and fuel,” said Townend. “For any of us it’s really the cost of your aircraft and the cost of your funding, and the key for anybody to be successful and come through will be do get both of those down as far as they can.”
Recently, however, the airlines appear to have found their stride, making decent profits for the first time in years due largely to their ability to “rightsize” and consolidate. To CIT Group president Jeffrey Knittel, that begs the question of whether or not lessors need to follow suit. “Size is important for those lessors that are buying from the OEMs,” said Hazy, who added that scale might not prove as important to those more engaged in sale-leasebacks.
“It’s a very transparent transaction because the lessor is buying from the airline, the airline knows what the cost is; it’s simply a money-over-money type transaction,” Hazy said of sale-leasebacks. “So scale there may not be as important…But for those of us who are massive buyers of new aircraft–and in my career it’s now pushing 2,000 new aircraft from the major manufacturers–scale is really important, not only in terms of financial strength but in the ability to cater to lots of different customers in different circumstances.”
Leasing companies and airlines alike certainly needed to adjust to varying, yet mostly unpleasant circumstances while weathering the last economic downturn, during which “massive” purchases of aircraft became a rarity. Still, both sectors emerged in relatively strong condition.
GECAS president and CEO Norman Liu praised the aviation business at large for its “incredible” resilience following the events of Sept. 11, 2001, the SARS epidemic and the Iraq War, all events that perhaps might have helped prepare the industry for the recession. “People just know how to work through things,” he said. “It’s a testament to everyone in the business.
“After 9/11 I was surprised [by the industry’s rebound],” he said. “This time I wasn’t surprised as much because there’s one thing that’s going on that’s been a constant, which is emerging markets growth.”
Hazy called globalization “a stabilizing force,” but also credited lease management teams with learning how to navigate crises better by working on fleet solutions rather than simply placing aircraft. “Overall, I think we emerged better than the airlines because we were tested by fire.”
Still, Knittel argued that the airlines, too, actually emerged from this latest recession in better shape than they had in past downturns. Townend agreed, but he pointed to the preceding fuel price hikes as the reason. “I think that what happened this time around was because we had that huge fuel spike first, particularly here in the U.S., people had already reacted,” said Townend. “They already pulled capacity out; they already cut all their costs, and they probably were therefore in much better shape to deal with the downturn.”