China-based lessors and Chinese airlines will form a vitally important part of the global airliner-leasing market in 2018, though the commercial-aircraft lessors as a group will not grow substantially this year, according to aviation technical and market consulting firm IBA Group.
IBA Group chief intelligence officer Stuart Hatcher told AIN that Chinese airlines and lessors will account for about 40 percent of all lease extensions taking place this year. Most of the extensions will involve aircraft less than 10 years old and many will span six to eight years, while airlines “try to tie in lower [lease] rates,” he added.
Many aircraft on which operators will extend leases this year originally went on lease to their existing operators as new aircraft in 2011-2012, when, said Hatcher, “0.7 percent [of total aircraft price or appraised value] was a good [rental] rate” per month. Now, however, if lessors placed those aircraft with different operators, they could charge rates of 0.9 percent or more of appraised fair market value per month.
But while that implies that lessors could profit more by having the original operators return aircraft from leases expiring in 2018 and then renting the airliners to other carriers, leasing companies must take into account other financial considerations that, in many cases, make extensions of leases to original operators more economically compelling to lessors than will new leases to different airlines, according to Hatcher.
In extending leases rather than finding new placements, lessors avoid the costs of remarketing their aircraft, as well as foregoing the risks of having to spend heavily on cabin-interior reconfigurations and aircraft downtime as they perform maintenance to meet the requirements of new lessees, he said.
Smaller Chinese and Asia-Pacific-based lessors, many of them new participants, have affected the airliner leasing and trading market in another important way: they are becoming the biggest investors in new-aircraft sale/leaseback deals in what many participants see as an overheating market, said Hatcher. Monthly lease rates on new aircraft have fallen from averages of 0.6 percent or above to “the lower end of the 0.5s,” even as new-aircraft sale/leaseback market prices have reached their highest levels in years.
“We’re stretching to see how people are making money,” said Hatcher. In the market conditions now prevailing, IBA Group expects the biggest lessors “to drop away completely” from investing in aircraft sale/leaseback transactions, investing instead on ordering new aircraft direct from manufacturers and selling from their portfolios some existing aircraft with leases attached.
Meanwhile, smaller but long-established leasing companies that don’t control the resources to order new aircraft will hunker down by foregoing new sale/leaseback transactions entirely or picking deals very carefully, or else turn their attention to investing in debt securities issues collateralized by portfolios of leased airliners—“asset-backed securitizations,” of which IBA Group expects to see 15 to 20 new offerings this year.
However, a number of new participants, some of them Chinese or Japanese financial firms, “have investors who want market share” and will pay “big prices” for sale/leasebacks to become sizable players in the new-aircraft leasing business quickly, according to Hatcher. “A pricing play and a market-share play may work for them, if they have a negative interest rate [investment environment] and they can hold [tax-advantaged] operating leases in other countries,” he said. “That holds their money and they can dollar-denominate their own currencies.”
This year Chinese investors might play another pivotal role in the aircraft leasing and trading market—as buyers, as sellers, or as both. “There is some big M&A stuff coming down the pipe” involving at least one giant leasing company, said Hatcher. “Some arrangers and investment banks are preparing for a big sale. If they want the best price possible, now is the time to do it… they would have to announce soon to take advantage of the market.”
Aircraft traders think the lessor M&A activity will come from either of two sources: the divestment or spin-off by GE of GE Commercial Aircraft Services, the largest aircraft lessor in the world; or a financial restructuring by China’s HNA Group, which owns Avolon, now the world’s third-largest aircraft leasing company. That could see HNA divesting Avolon or the CIT Group leased-aircraft portfolio that Avolon purchased in 2017. If GECAS or Avolon goes on the auction block, in whole or in part, IBA Group thinks Chinese and other Asia-Pacific institutional investors will be prominent bidders.