Aircraft Lessors Look To Bulk Up in Wake of Covid

 - July 12, 2021, 1:05 PM
Gecas and AerCap dominate the commercial aircraft leasing business in fleet size, each carrying a portfolio of more than 1,000 airplanes. (Source: Statista)

The proposed $30 billion merger of aircraft leasing giants Gecas and AerCap and the likely further consolidation of lessors in the wake of Covid-19 does not seem to worry airlines and aircraft manufacturers, at least not publicly. 

“My first observation on the lessors is that they have remained very strong over the last year,” Airbus CEO Guillaume Faury told analysts during the company’s first-quarter earnings conference call. “They've been instrumental in enabling that industry to keep moving forward in a very, very challenging situation. It relies on the stability of the financial system. There's no financial crisis, and that's very important for us." Faury acknowledged that Airbus considers the consolidation of some lessors important. “There are pros and cons in these situations. But overall, I would say, we're fine with it,” he stressed.

Willie Walsh, director-general of the International Air Transport Association, also dismissed concerns about too much consolidation and the potential risk of anti-competitive behavior in the leasing sector. “It is still a pretty fragmented industry,” he said, speaking to media during a recent briefing on the impact of the pandemic on the global aviation industry. Even the combination of Gecas and Ireland’s AerCap—the largest aircraft lessors in the world by portfolio value, with a combined fleet of more than 2,000 airplanes and an additional 500 on order—does not represent a significant percentage of the supply from the lessors, he asserted.

“I think generally the leasing sector is competitive,” said Walsh. “There are lots of options out there for most if not all airlines. In fact, it would be fair to say that in many cases lessors have been part of the solution to the cash crisis that airlines have faced through 2020 because you have seen a lot of sale and leaseback activity. And in most cases, these have been from my personal experience [as former CEO of International Airlines Group] at rates that I would have considered normal or near-normal. I have no concern about the leasing industry at this stage.”

According to Cirium data, the combined fleet resulting from the proposed AerCap-Gecas combination will account for about 16 percent of the global passenger jet leasing portfolio and 15 percent by value. With a lessee base of 266 airline customers, the combined entity would be providing aircraft to more than a quarter of the world’s airlines.

“The lessor market is not yet too concentrated and still fragmented compared to other industries,” noted David Yu, finance professor at New York University in Shanghai and chairman of China Aviation Valuation Advisors, an aviation-focused valuation advisory firm in China and Asia. The top 10 aviation lessors control a market share of less than 40 percent while the concentration of the top 10 in other industries could reach 80 or even 90 percent.

Yu expects the aircraft leasing segment will see an increase in M&A activity, due in part to Covid. “Over the last 10 years, the top 10 lessors’ average and the minimum size by value to get on the list have increased significantly, and the pandemic will accelerate this trend,” he said, pointing to the need of most lessors to restructure their leases.

Lessors have supported cash-strapped airlines with rent concessions or short-term delivery deferrals. “One of the major reasons for that is that their banks have been very supportive of them,” Yu explained. “It is not about niceness; it is all about business…Who were they going to remarket the mortgaged aircraft to?" Hence, he added, lessors and banks have shown reluctance to initiate aircraft repossessions. “But there is a critical point,” he said, warning that a lot of portfolio restructuring deals have begun and banks have starting to pull aircraft from delinquent operators. “It is starting, not with a big boom but a progression.”

Alton Aviation Consultancy identified more than 900 passenger aircraft operated last year by “high risk” airlines—defined as operators carrying liquidity of two months or less and no government ownership. They acquired the majority of the 900 airplanes, most less than 10 years old, via lease. “Lessors have supported struggling airlines with concessions; now some need a structured plan to weather the crisis themselves,” the Alton consultants remarked. They expect to see increased portfolio consolidation, with well-capitalized lessors acquiring assets or full portfolios from smaller players and investors that are looking to rationalize their holdings or forced to sell.

SMBC Aviation Capital chief executive Peter Barrett recently indicated that the company, one of the world's largest lessors with 496 owned or managed aircraft, would likely receive offers to take part in consolidation as one of the best-capitalized firms in the industry. “[If any opportunities] present value and fit into our strategy, we'll certainly have a look at them,” he told Reuters, adding that he believes that the events of the last 18 months will "probably accelerate” the sector’s consolidation.

“Some lessors would want to sell because there is no other path while others want to bulk up,” confirmed Yu. He said a handful of lessors already are unofficially for sale. 

According to Yu, the aircraft manufacturers should “definitely” heed warnings about too much concentration of the aircraft leasing industry because they will face increasing competition from lessors to place aircraft with airline customers. Lessors typically represent 15 to 20 percent of the OEMs’ order books, but that figure becomes even bigger when adding the recent spike in purchase and leaseback transactions. “From an airline’s perspective, this might be a good thing,” he concluded.