State of the Market; Global aircraft leasing continues its international shift from west to east
Aviation leasing continues to see a favourable outlook, growing rapidly in both size and importance. The sector is enjoying a combination of easily available funding at low interest rates and strong lease yields, while it's airline customers benefit from record profits, lower fuel costs and strong air travel demand.
- Aviation leasing is experiencing rapid growth and is becoming increasingly important in the industry.
- Leasing companies are benefiting from easily available funding, low interest rates, and strong lease yields.
- Middle East and Asian interests are playing a significant role in the aviation leasing sector.
- Lessors are expected to support a significant percentage of new aircraft deliveries, with around 40% in 2017 and increasing to 50% by 2021.
- Capital markets and bank debt will account for approximately 75% of lessor financing requirements, with new funding sources from Asian markets and innovative financing structures emerging.
- Mergers and acquisitions have reshaped the industry, with companies like AerCap and HNA Group becoming major players in the aviation leasing market.
In this environment, leasing companies have been able to enhance their role in the supply chain, in both primary and secondary markets. Meanwhile, Middle East and Asian interests are fast taking on more important roles in the sector.
Boeing projects USD126 billion in financing will be needed in 2017 to support the delivery of new aircraft to customers. As world markets have expanded and orders boomed, financing needs have more than doubled over the space of the past six years.
According to Avolon, lessors will directly support around 40% of the 1,800 large commercial aircraft deliveries scheduled for 2017, building to 50% by around 2021. About 55% of their acquisitions will be direct purchases from OEMs, and another 45% will be sale and leasebacks.
Annual aircraft financing requirement
Lessor share of delivery financing
Lessors will also continue to grow through opportunistic secondary market purchases, mostly acquiring in-demand and in-production narrowbody aircraft and older widebodies.
Capital markets and bank debt are expected to account for roughly 75% of upcoming lessor financing requirements. New funding sources, particularly from Asian markets, and the use of innovative financing structures will continue, while the use of export credit financing is expected to sink to record lows.
As leasing companies continue to place large orders for new aircraft, as well as make sales and leasebacks and purchases in the secondary market, their share of the overall global fleet should continue to grow. New industry entry continues, with the market proving attractive to established banks, large conglomerates and private equity all showing activity.
Even as the industry enjoys this growth, it has been undergoing a major shake-up that will continue to play out through 2017 and beyond. Aircraft leasing is an industry where size matters, and a set of recent mergers and acquisitions has vaulted several companies into the industry's upper reaches.
US based GECAS has long reigned as the industry's largest player, with a portfolio of over 1,450 owned and managed aircraft valued at more than USD35 billion. However, GECAS' position as the industry's dominant player is no longer unassailable. The company has disposed of more than USD3 billion in older aircraft since 2015, while smaller rivals expanded size and value rapidly.
In 2014, the mid-sized AerCap purchased the much larger ILFC for USD5.4 billion, with backing from Abu Dhabi based Waha Capital as its largest shareholder.
The merged entity has created a new industry powerhouse and, since the deal went through, AerCap has added better than 250 aircraft to its portfolio, taking it to around 120. While its fleet still lags GECAS in raw size, it includes the industry's largest widebody portfolio.
Sources of bank financing for commercial aircraft financing
Largest 10 leasing firms (by fleet) 2015-2016
In terms of book value, revenue and leasing activity, AerCap has pulled level with GECAS.
China enters the international market, led by big spending HNA Group. Aggressive international acquisition by Asian lessors, particularly from China, has also been reshaping the industry.
Chinese state-backed and private lessors spent the last decade growing their share of the domestic aircraft leasing market to almost 50% and have now set their sights on the even larger global leasing market.
Lacking the installed managerial knowledge and globally diversified customer bases of their Western counterparts, but with plentiful financial resources, Chinese lessors have sought to buy their way into the international leasing business.
The ordering spree has been led by Chinese transport and finance conglomerate HNA Group.
Its Bohai Leasing arm acquired Dublin based Avolon for USD2.6 billion in 2015. In 2016, it signed a USD10 billion deal for CIT Group's leasing business, once the world's third largest lessor. In addition it integrated its own Hong Kong Aviation Capital leasing unit into Avolon and acquired a USD2 billion portfolio of 45 aircraft from GECAS.
Once the CIT deal closes - expected during 2Q2017 - the business will increase its portfolio to around 560 aircraft, making it the world's third largest lessor. The combined lessor will also control orders for another 350 aircraft.
The merged Avolon entity is China's first aviation leasing giant, and its objective is to become the world's largest leasing company. According to Avolon CEO Domhnal Slattery the CIT deal is "not the summit of our ambition", leaving scope for future acquisitions. The HNA Group also wholly or partially owns 25 airlines controlling better than 1,250 aircraft between them, leaving more room for rapid growth.
Chinese lessor fleets and domestic market share
NAC FLEET GROWTH 2011 TO 2017
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Other Asian and Chinese players are also shaking up the international aircraft leasing scene with acquisitions. Hong Kong in particular has been a hotbed of activity, with the local government looking to introduce a new leasing friendly tax regime to make the island a globally competitive centre for the sector.
Hong Kong billionaire Li Ka-shing entered several leasing JVs in 2015 and 2016, purchasing better than 100 aircraft in a series of deals. Businesses tied to his conglomerate are reportedly among those interested in acquiring AWAS and its portfolio of better than 200 aircraft. Other Chinese and Asian lessors, including Ping An Leasing, are also reportedly interested in AWAS, which owners Terra Firma Capital is expected to sell in 2017.
The Hong Kong stock exchange listed BOC Aviation, backed by the Bank of China, in 2016 underwent a USD1.1 billion IPO, the largest ever for an aircraft leasing company. After portfolio downsizing last year, it plans to go back aggressively on the growth path, taking delivery of 71 aircraft for 2017.
NAC leads the charge of the specialty lessors. The industry is also witnessing a trend towards the development of large regional aircraft niche lessors. Denmark based Nordic Aviation Capital (NAC) has historically focused on turboprops, but has undergone a rapid expansion into the regional jet market.
Since mid-2015, NAC acquired regional jet leasing specialists Aldus Aviation and Jetscape Aviation Group and made Embraer E-Jet and ATR turboprop purchase deals with multiple carriers and lessors. The deals expand its portfolio from 235 aircraft to nearly 400 aircraft as of the end of 2016, turning it into the fifth largest lessor by fleet size.
Smaller firms, such as Elix Aviation Capital, Avmax and Aviation, are also rapidly expanding their portfolios in the regional aircraft leasing market.
Industry re-ordering reflects underlying global trends. The leasing industry is transforming from a western hemisphere-dominated industry towards a profile more balanced towards Asia. This reflects broader shifts in global economic power, along with shifts in the financing and the airline industry, where Asia and the Middle East are becoming ever more important. New players are tapping new sources of financing and progressively disturbing what had become an established order.