With 22 aircraft on lease to Asian carriers, Pembroke Group CCO Kieran Corr believes there is strong value in the region and has agreed to acquire a further 11 aircraft in sale and leaseback transactions with Asian carriers. In this exclusive CAPA interview, the CCO discusses the company’s strong growth in fleet in 2010, the outlook for B777-200s, and the LCC sector.
Pembroke experienced a big jump in fleet size and value in 2010, what is the biggest factor you can attribute this to?
Aviation is among the fastest-growing industries in Standard Chartered’s footprint. With the increasing demand by airline clients in Asia, Africa and the Middle East for financial solutions, Standard Chartered acquired Pembroke Group in 2007 to broaden the bank’s product offerings. Pembroke added new capabilities, such as operating lease, to the bank’s existing aviation product range. With access to capital from a well capitalized and liquid bank such as Standard Chartered, it enabled Pembroke to significantly expand its aviation portfolio.
During 2010, we acquired aircraft in the secondary market and completed sale and leaseback transactions with Garuda Indonesia and Gulf Air (Bahrain). In parallel, our Aviation Finance team continued to develop our debt portfolio. Certain of these transactions, such as the Tiger Airways multi currency predelivery financing and the debt financing for Qatar Aviation Lease Company have been recognised by the trade press as innovative structures and demonstrated Standard Chartered’s capacity to tailor solutions for its airline clients.
With only seven of your customers coming from the LCC market, do you see this as a valuable sector to pursue?
We are client focused and our customer base reflects the market in the bank’s footprint. We continue to deepen our relationship with full service carriers and LCCs in the Asia, Africa and Middle East markets.
LCCs have grown rapidly in many of our franchise markets (particularly in Asia) due to rising incomes and increasingly liberalised aviation markets. LCCs have proved to be resilient in a market downturn as they cater for the price-sensitive mass market. We are pleased to include many leading LCCs, including Air Arabia, Cebu and Tiger Airways in our client base.
Pembroke’s recent deals suggest the Asian market is very valuable to the company strategically. Will you continue to target this market? Why/why not?
Asia is a key growth market for the aerospace industry. With many of our Asian clients having orders with the airframe manufacturers and seeking financing solutions to fund such acquisitions, we will continue to build our lease and debt portfolio with Asian clients in the coming years. In addition, many of the new entrants to the operating lease sector are Asian entities and we target to develop relationships and trade assets with such parties.
Do you see Pembroke targeting the North American market in the future, considering the high proportion of older aircraft in the region?
Our focus is on the origination of aircraft acquisition and financing opportunities with existing airline clients in Asia, Africa and the Middle East. To extent that North American clients are doing business in these markets, we are pleased to support such activities.
When remarketing aircraft from our owned and managed aircraft portfolio, we continue to market aircraft on a global basis. Similarly, we continue to provide lease management and remarketing services to third party clients globally.
Do you agree with ILFC’s comments that the A321neo could potentially replace the B757? Why or why not?
In my view, there is a market for most aircraft types. While the A321neo is expected to benefit from lower operating costs through lower fuel burn and maintenance costs, the B757 type will benefit from lower capital costs. With increasing fuel costs and the increased focus on environmental issues, I suspect that the ageing B757 fleet will be replaced with newer product offerings of similar size aircraft, such as the A321neo and B737-900ER, in many markets.
Can you comment on the idea of the B787-10 being a candidate to replace the A340-300 or B777-200?
Until the B787-8/-9s are in service and have demonstrated their operating costs, it is difficult to comment on the later derivative such as the B787-10. As an owner of B777-200s, we see a long life ahead for this aircraft type with limited near term availability and increased demand from carriers globally.
Do you see consolidation as a big part of the aircraft leasing industry’s future?
We have seen limited consolidation among leasing companies in recent years. We have witnessed new equity providers (such as banks, hedge funds, private equity funds, sovereign wealth funds) entering the market and evaluating the sector. The access to this new capital has allowed certain industry players to significantly expand their portfolios. Most expansion has been achieved through organic growth by the larger leasing companies than consolidation with other parties. I expect that this trend will continue.
2009/2010 saw the increased participation of export credit agencies (ECAs) in financing aircraft. What is your take on the current state of the aircraft financing market, the players in it, and the impact of the OECD’s Aviation Sector Understanding (ASU)?
There has been an unprecedented level of export financing in recent years that has allowed many airlines to take delivery of aircraft notwithstanding the turbulent financial and capital markets. The market should normalise in the near term, with the airlines diversifying their funds by accessing the banking, capital and public debt markets. The new ASU rules should result in greater activity in the commercial markets.
I expect that aviation finance houses such as Standard Chartered will play a larger role in the future by virtue of their ability to offer varied product offerings to their clients (operating lease, conventional debt, Islamic lease, export financing, predelivery financings, remarketing services, etc).
Do you see the industry’s recovery leading to an increase in demand for leasing companies?
Operating lease has many benefits for airlines – fleet flexibility, 100% funding, transfer of residual risk, etc. Operating leasing has an ever increasing share of the financing market. This trend should continue, although we may see some shift from west to east, with many Asian and Middle East entities playing a greater role in the operating lease market.
Have your clients’ needs changed much over the past 12 months? Are you noticing any emerging trends in terms of aircraft demand?
Airline clients are seeking their banking partners to provide comprehensive financing solutions rather than just being a provider of aircraft. Speed, flexibility, certainty of funding, capacity to transact in multi currencies coupled with a track record of delivery are now the secret of success.