MC Aviation Partners: Japan's big lessor with big ambitions

What is the composition on your order backlog? Are any widebody aircraft on order for MCAP?

We currently do not have any order positions placed with the manufacturers. We continue to have open dialogues with both Airbus and Boeing with the aim to place an order in the near future. Our last order positions consisted of two B737-800 delivered in 2010 and leased them to a Japanese operator. A majority of our aircraft have been acquired through sale and leasebacks.

What aircraft types are you focussing on, in terms of acquisition?

Our core assets of investment are the newer B737NG and A320 series. Also, we have an interest in acquiring, on an opportunistic basis, other relatively higher liquid narrowbody and widebody aircraft as semi-core investment assets.

Are you (as a lessor or investor) in favour of or against a re-engined A320 or 737NG product?

We believe the manufacturers must continually think about the eco-system and find new ways to help improve fuel consumption and reduce emissions into the environment. However, we believe the re-engining of the A320 or B737NG will ultimately have an impact on the residual value of the current production aircraft. Our policy is to emphasise asset value in order to maximise profitability and minimise residual risk. We continue to acquire aircraft on an opportunistic basis by carefully analysing market cyclicality and focus on investing in assets with higher liquidity in the market.

In addition, recognising that in today's environment, a 15% improvement in fuel cost by any aircraft will be "game-changing" to the industry. Boeing should clarify their position on developing a replacement to the B737NG, leading to healthy competition between manufacturers.

Can you comment on the idea of the B787-10 being a candidate to replace the A340-300 or B777-200?

B787-10 is expected to be similar in size to the B777-200 and A340-300, but with longer range. Operating cost of B787-10 will be significantly lower than these older aircraft because of new technologies including new generation engines and composite fuselage/wing. Therefore, we believe it is likely that these two older aircraft will be replaced by B787-10.

Last year you seem to have made deals with airlines from all over the world. Is this your plan or are you trying to target a specific market? Will the Asian market always be a priority for MCAP?

In principle, we are focussing on building an aircraft portfolio that is risk diverse and do not target any specific country or region, especially when it comes to remarketing an aircraft. Although most of our current risk exposure is in Japan and India, we have several potential transactions on the table that will allow us to continuously pursue a diversified and marketable portfolio.

Do you see the CSeries and the COMAC 919 becoming serious contenders in the narrowbody market? Would MCAP be interested?

Comac 919 has its own captive market and whether it will be a success on a global parameter will largely depend on how successful it is in such captive market. The Comac 919 must demonstrate to airlines and lessors its reliability, cost efficiency and after-market customer service in order to capture a global interest.

Bombardier has historically produced good aircraft and the CSeries is no exception. There is demand for regional jets in the 100 to 130 passenger market, which can offer much more efficiency than the A320 or B737NG. It is surprising to see that the CSeries hasn't sold as well as it should, but perhaps this is driven by the introduction of the A320neo which has the same engine type and is advertised as having 15% fuel efficiency over the current A320. The A320neo also offers a family of aircraft which will allow commonality across the airlines' fleet.

What lessons did you learn from the recession of 2009?

To manage a sizable, well-diversified portfolio of liquid assets and to conduct a well-balanced Asset Liability Management of the portfolio are essential elements to aircraft lease financing. There are aircraft lessors, including MCAP, who have stable earnings as they strive to manage their operational assets through the down cycle. We believe it is our ability to build a competitive portfolio and manage its long term cash flow, which resulted in a stable return, while in parallel, managing the risk of the lessee. Ultimately, the lesson learned is to continue to seek opportunities during the down cycle and be prepared, both financially and operationally, to move forward in executing the transaction as it comes to fruition.

As a lessor, what are the main issues MCAP considers when acquiring aircraft?

Our first emphasis is on the current and future value of the asset. It is based upon several key economic factors such as performing an IRR analysis and taking into consideration the credit of the lessee. We also look at the contribution derived from the net revenue during the lease term and expected capital gains from future sales.

Do you believe regional and commuter aircraft are on their way out for lessors?

Our parent Mitsubishi Corporation is a major shareholder of Mitsubishi Aircraft Corporation, which is developing the MRJ, the first Japanese regional jet. As a result, we are cautiously monitoring the regional aircraft market with a specific interest. In the past couple of years, we have seen a number of lessors focussing on the regional jets as there is less competition in this area versus the A320 and 737NG.

Do you think the industry's recovery will lead to an increase in demand for lessors?

The airlines return to profitability has led to a stronger demand for new and used aircraft. Airbus and Boeing do not have any near term delivery positions available; therefore, airlines requiring aircraft in near term will rely on the lessors for new positions or used aircraft. In this sense, lessors with delivery positions will definitely have more demand in near term.

Due to the recent changes to the ASU and limited ECA and Exim guarantees in the future, we expect to see an increase in sale and leaseback activities. Airlines may also consider taking current production A320 series and 737NGs under an operating lease basis rather than a purchasing/finance basis as a bridge to the A320neo family and new Boeing narrowbody family.

Do you expect to see more consolidation in the industry?

Given the current business environment, there may be mergers, acquisitions and consolidations among lessors in order to take advantage of the opportunity to develop and enhance their portfolio. In contrast, there may be leasing companies owned by private equity shareholders who may explore the opportunity to dilute their ownership in such company.

Can you share some of MCAP's long term company goals?

We aim to be a top-ranked global lessor with a portfolio over USD5 billion. At present, the size of our portfolio is close to USD3 billion, including purchase commitments. We continue to have strong financial support from our shareholder, Mitsubishi Corporation, and plan to increase our customer base with our team of skilled professionals and strong global network.

How do you see the fuel environment being played out in 2011? Will it be a boon or bust for the industry?

Although we have seen the fuel prices stabilising during the past few weeks, we understand that a slight increase could have a dramatic impact on an airlines bottom line. Whether there will be further increases in fuel prices this year will, in a large part, be based on continuing demand and the events occurring in the Middle East. We recognise the aviation industry is at an upward trend driven by the increase in demand for capacity. All things being equal, we believe the industry will continue to improve during the remainder of the year.