Kuwaiti aircraft lessor Aviation Lease and Finance Company (Alafco) intends to grow its existing fleet via sales and leasebacks. It is progressing with negotiations to place the airliners it has on order, its top official told AIN in an interview in Kuwait prior to the Dubai Air Show. “Our scheduled order book deliveries start in 2017 and run through 2021. We have already started negotiations for placing the aircraft,” said Ahmad Al Zabin, Alafco vice-chairman and CEO.
He indicated new orders were unlikely in the near future. Instead, he plans to acquire up to 10 narrowbody aircraft through 2016 through sale and leaseback, purchasing them and placing them back with operators on lease.
“We do not have plans [to order] additional aircraft direct from manufacturers. We will build the fleet with sale and leasebacks. These are more challenging, and there are so many newcomers to the market that want to try their luck at leasing, due to the low interest-rate environment. We have $500 million to invest [but] finding the right opportunity is a challenge.”
Asian airlines are forecast to continue with strong growth and Alafco is intensifying its pursuit of leasing opportunities there. “We have placed six A350-900XWBs with Thai Airways for 2017-18. We have a solid contract with them and everything is going well,” he said of the 2011 deal.
Alafco’s order pipeline is still awaiting 117 aircraft, consisting of 85 A320neos, 20 B737-8Max and 12 A350-900XWBs. In 2015 the company added four aircraft to its fleet and saw one disposal. As at October 1 this year it had 53 aircraft, 50 owned and 3 managed for investors.
In terms of the leased fleet, five Boeing 737-800s are leased to Turkish Airlines, while Saudia is the largest A320 Alafco lessee with 13 A320 aircraft.
“Asia is the biggest opportunity. We do have operations in Vietnam. We…helped VietJet Air launch its operations with three A320 aircraft on operating lease. They started their operations with our aircraft. The airline is growing with great ambitions and has aircraft on order with Airbus,” he said.
Alafco’s widebody interest will not extend to the Airbus A380, he said. “The A380 is a very specialized aircraft. It doesn’t fit our investment criteria.”
Today, Alafco’s sole African client is Ethiopian Airlines, which leases three 737-800s. “We are also looking at other possibilities in north, central and southern Africa. We hope to increase our presence there. We are very open-minded. Africa is establishing itself right now. We need to see it stabilize. North Africa is settling down after the Arab Spring. In central Africa, there are attempts to start airlines, but without real credibility. Until they gain credibility, everyone will struggle. You need to have the right structure in place. There is a lot to be done,” Al Zabin said.
“We are looking at all of Africa for the right moment for things to stabilize and to start seeing real operations. What we see now is a scrimmage with private start-up intentions that do not appear viable. Until moves are made by states or wealthy private start-ups, nobody is going to take the matter seriously.”
Islamic Finance
Alafco is 100-percent Islamically funded. By statutes of its articles of association, it is Shari’ah-compliant. “We do Murabaha and Ijarah. Murabaha means I buy and sell to you with a mark-up. Ijarah is leasing, where I own the asset and rent it to you,” he said.
Alafco is owned 53 percent by Kuwait Finance House, with Kuwait Airways Corporation owning 11 percent, Kuwait’s Public Institution for Social Security 5 percent and other investors 31 percent.
“History will tell you that the aviation market is adversely affected by some global event at various times, whether it’s wars or SARS or something else. However, the aviation industry is resilient and bounces back and continues its growth trajectory,” Al Zabin said. “When oil prices go down there is an increase in demand for older aircraft,” he added.
Al Zabin said Kuwait Airways was gradually regaining lost ground, after a shake-up instigated by chairman and managing director, Rasha Alroumi, who took over in 2013. “Its fleet renewal program is starting to take effect now. They are replacing their old fleet with new A320 and A330 aircraft [and] they are adjusting their flying schedule.”
Generally, he said, leasing companies are better placed than airlines to get capital from the market. “We play a mediatory role between the financial institutions and the airlines,” he said. “We have not had a need for a credit rating...We have been operating for the last 15 years and never had a problem. Financial institutions look at [our] balance sheet and performance for the last 15 years.”
World growth of aviation and aircraft demand is directly related to GDP growth, Al Zabin noted. “There are other factors, such as fuel prices or interest rates. If there is GDP growth, then there will be growth in aviation. [However] if interest rates go up, then lease rental costs for airlines will increase.”