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Airline industry growth prospects, LCCs and Latin America - CIT's Jeff Knittel talks to CAPA

8-Apr-2011

Jeff Knittel, President of Transportation Finance at CIT, sees the aviation market improving for 2011 as core economic growth continues to drive traffic. In this exclusive CAPA interview, Mr Knittel talks about industry growth opportunities, LCCs and the South American market.

What is your assessment of the outlook for the global economic conditions and aviation industry performance in 2011?

Generally, we see the market improving. Events in Japan and the Middle East are exerting a level of uncertainty to that view, and higher fuel prices aren’t very helpful, but core economic growth is what drives traffic and at this point we don’t see these events having a major impact on a global basis.

As a lessor, what are the main issues you consider when acquiring aircraft?

We’re looking for fuel efficient and technologically advanced aircraft that will deliver operational flexibility to our customers. Our experience has been that aircraft that are attractive to a broad customer base and that have good operating economics prove to be the aircraft with the best returns.

Has there been a change in CIT's strategic focus in terms of narrowbodies vs widebodies?

Currently, our fleet consists of 27% widebody aircraft. As of December 31, 2010, our backlog was 111 aircraft made up of 29 widebody aircraft and 82 narrowbody aircraft. Additionally our widebody aircraft are spread further out than our narrowbody aircraft so that in any given year the percentage is near the current split. Furthermore we’re active in the sale-leaseback market in which we see opportunities primarily for narrow-body aircraft. These don’t show up in our backlog figures.

What is the future of the LCC model and how will the sector’s evolution affect lessors?

We think the LCC model will continue to evolve into a more ancillary revenue model. Most LCCs operate on short hauls and generate a lot of passengers per aircraft per day. With lots of short haul passengers, airlines can sell an array of unbundled services to a much larger pool of potential passengers than the long haul operators can. Nonetheless, other than the largest LCCs, the sector will always be looking for ways to conserve capital, and this really is where lessors bring real value to airlines.

What risks or benefits has CIT found in leasing to LCCs?

We find LCCs very beneficial. While we do see a somewhat higher level of risk associated with LCCs than with large established carriers, we also have enough experience with LCCs that we can structure leases in a way that benefits both the operator and mitigates those risks to us.

How are you capitalising on your recent findings (CIT/Forbes Insight Study) that the emerging markets have the greatest opportunity for growth?

We’ve made a heavy commitment to emerging markets for quite sometime and this confirms that we’ve been pursuing the right strategy. For example in 2005, we had 78 aircraft in emerging market regions.  As of the end of last year we increased this significantly. In addition to aircraft leasing, we’re pursuing opportunities to work with partners in emerging markets on aircraft finance structures that optimise regional benefits.

You have a fair few clients in the South American market, with 36 aircraft placed in the region. Can you comment on the current conditions in that market?

According to our most recent 10-K filing, as of December 31, 2010 we had 36 aircraft in our Latin America region (which includes South America, Central America and the Caribbean) with 12 airlines and we will be deploying additional aircraft in the region this year.  We’ve been impressed with the development of the airline industry in Latin America over the past several years.  Carriers in the region are recognized as some of the best carriers in the world and we’re pleased that many of them are our customers. Generally speaking, we view the Latin American market to be promising.

Western Europe accounts for over 22% of your fleet in service and is your biggest market. Do you see this proportion changing over time?

Perhaps a little, but Europe is a strong market for us and is generally a good operating lease market. We also like to diversify our regional exposures so Europe is likely to remain a very significant part of our portfolio for quite some time.

Do you see the C Series and the COMAC 919 becoming serious contenders in the narrow-body market? Would CIT be interested?

Our view is that both of these aircraft have the characteristics and backing needed to make them successful. With a need for around 22,000 narrow body aircraft - including about 3,000 in China - over the next 20 years to accommodate growth and replacement (according to Boeing forecast) there is likely to be room for other manufacturers in the narrowbody space. We continue to monitor developments and opportunities with these two aircraft.

Why is CIT, and many of its competitors, completely phasing out regional/commuter aircraft?

I think this is largely true of aircraft that have 50 or fewer seats because the economics just didn’t work for us. But we’re getting more interested in the larger 70-100 seat regional aircraft. For example we’re going to acquire a few 100 seat regional aircraft through the sale leaseback market this year and are studying acquisition of more. In addition, with rising fuel costs, the Q400 and ATR72 become an interesting aircraft to have another look at.

CIT Aerospace recently completed an order for Boeing aircraft – the largest order placed by a leasing company for the B737-900ER. Where will these aircraft be going?

Like other stretched aircraft, we expect that existing operators of other Boeing 737NG aircraft will be strong customers for these aircraft given their superior economics and great operating performance. Ideally we’d like to see the aircraft distributed evenly around the world.

The average age for CIT Aerospace is approximately 8 years younger than the world average. Is CIT’s growth centered largely around acquiring newer aircraft?

Airlines like younger aircraft – the average age of our fleet is five years - and we find it easier to place these newer, more fuel efficient aircraft and keep them on lease. Over the years we’ve developed an efficient and effective new aircraft acquisition and execution platform that helps us manage our business better by having a strong order book rather than relying entirely on the secondary market for our growth. One part of keeping the age down is selling our older aircraft. Last year we sold almost as many aircraft as we took delivery of. 


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