In the five months since CAPA last interviewed Pembroke Group CCO Kieran Corr, a great deal has occurred within the global aircraft leasing industry. In this exclusive CAPA interview, Mr Corr sheds some light on the hot issues in the industry including his views on regional jets, emerging leasing hubs, and the long-haul low cost business model. The Pembroke Group, which sees strong value in Asia, will continue its current strategy, focussing on strengthening relationships with clients in the region, as well as Africa and the Middle East. Mr Corr has tipped the lessor's fleet is likely to expand to include the A320neo, B737 MAX, A350 and B787 families.
How do low cost, long-haul carriers fit into the leasing market? Pembroke leases to a few LCCs already – do long-haul LCCs show the same qualities as short-haul? Is the risk factor higher with long-haul LCCs? Will this model survive?
Operating lessors focus on a number of risk factors when assessing new cross-border leasing opportunities, including (i) asset/residual risk; (ii) jurisdictional risk; and (iii) credit risk. A good proportion of new long-haul LCCs operate liquid aircraft types (medium sized twin-aisle aircraft with wide operator bases) and are based in lower risk jurisdictions such as Australia, Singapore and Malaysia. Lessors have a varied appetite for credit risk and while some start-up long haul LCCs may have relatively low equity bases, they have significant equity promoters sponsoring the airlines.
There are increased remarketing risks and transition costs when leasing to long-haul LCCs, as the carriers typically operate the aircraft in high-density configurations and much of the demand for the aircraft types (in default situations) may come from premium carriers that will typically seek dual-class interior configurations and higher galley specifications. The more recently launched long-haul LCCs are taking new aircraft and focussing on regional routes, unlike their predecessors who typically operated older used equipment and concentrated on trunk routes and the holiday charter business.
The long-haul LCC model has stimulated traffic demand in Asia. This traffic growth is due to rising incomes and increasingly liberalised aviation markets. It is too early to judge the robustness of this business model but indications to date suggest there is a market and the long-haul LCCs complement the existing premium carrier offerings.
Are regional aircraft models on their way out? Is Pembroke planning to phase out its regional aircraft, or do you think value in the market will remain?
We continue to see strong demand for certain regional aircraft for shorter sector lengths, route development and where airport infrastructure or traffic flows do not support larger aircraft. The biggest challenge with regional aircraft is to assess residual and remarketing risk with the increased number of manufacturers entering this market.
We have a client-led strategy and to the extent that our airline clients require financing for the expansion of their regional fleets, we will continue to offer commercial debt and export financing to meet their requirements. I believe that we will be more cautious acquiring regional aircraft for our own account in the near term until we have a clearer view on the future of each of the regional aircraft types.
Boeing has forecast 43% of large aircraft deliveries will go to Asia. Given this projection and the fact Asia is a strong market for Pembroke, will you be looking more at larger aircraft? How do you decide which aircraft types to next acquire?
We will continue to deepen relationships with our airline clients in Asia, Africa and the Middle East. With the expected growth in air traffic and aircraft demand in Asia, we see significant opportunities in this region. In growing our operating lease fleet, we focus on acquiring in production single-aisle and medium sized twin-aisle aircraft. We rigorously monitor and control our concentration to each particular aircraft type and stagger lease maturities to mitigate remarketing and residual risk.
To date, the smaller aircraft acquired include B737NG and A320 family aircraft and A330 and B777 family aircraft at the upper end. I expect that this will expand to include A320neo, B737 MAX, A350 and B787 families in the near to medium term.
We are willing to evaluate a wider variety of aircraft types for our commercial debt portfolio to meet our clients’ needs. The airlines will select the aircraft types based on their operating economics and route structures. We look to the underlying airline credit with the added comfort that the deals are asset backed.
How are you expanding in the BRIC countries? Do these pose any specific challenges that are different to other markets? Do you see any threat to BRIC growth?
Standard Chartered has a presence and a strong track record in Brazil, India and China. In each of these countries we have relationships with airline clients. We will continue to provide financing solutions to fund their fleet development. China and India, in particular, are big growth markets purely by virtue of the number of aircraft the carriers have on order backlog with the airframe manufacturers. We will continue to deepen our relationships with the Indian and Chinese airlines not only by providing financing solutions for their new aircraft deliveries, but by also helping these airlines to access banking, capital and the public debt and equity markets and assisting with their international expansion.
With the large number of aircraft on order backlog, diversity of funding is of increased interest to Chinese and Indian airline clients, so I expect Standard Chartered will play a greater role by virtue of our ability to offer varied product offerings to these clients and access to wider liquidity pools. The impact of the economic slowdown in the US and Europe on the BRIC countries requires monitoring. In addition, the ability of the airport and navigation infrastructure in BRIC countries to cope with the expected growth in air traffic and the availability and retention of trained aviation personnel in these markets needs to be considered.
Do certain regions favour leasing more than others? Are certain aircraft types more suited for leasing?
We see growth in operating leases around the world. You will also see a higher concentration of operating lease with single-aisle and twin-aisle aircraft. I believe that regional aircraft and the larger widebody aircraft types will be more suited to the export financing and commercial debt markets.
What region do you think will show the most growth in aircraft leasing, considering both lessors and their headquarters, and the number of aircraft leased vs owned?
Operating leasing is a global business. The client portfolio diversification should not be impacted or influenced by the location/jurisdiction of the aircraft owner. I expect that operating lessors will continue to diversify their fleets by asset type, jurisdiction and airline credit to mitigate the remarketing and residual risk. Operating lessors need global reach and global networks to redeploy aircraft where there is an economic downturn in particular regions of the world. I expect that there will be a higher level operating lease activity in Asia and the Middle East by virtue of their order backlog positions with the manufacturers. There will continue to be significant operating lease activity in all regions (even where there are small order backlogs) as airlines enter into sale and leaseback transactions on their existing fleets to release equity in the aircraft, transfer residual risk to operating lessors and to assist with their fleet rollover programmes.
Lessors are surging in size and new orders seem to be announced every week. Are we moving towards the day where there will be more aircraft on lease in the sky than there are owned? What is driving this trend?
Operating lessors typically order aircraft speculatively from manufacturers to access near- to medium-term delivery positions and to achieve better pricing by negotiating volume discounts. Most lessors are focussed on single-aisle aircraft and I expect that the operating lease content of this size aircraft will outweigh owned aircraft in the medium term. Higher concentration of owned fleets will be seen in turboprop, regional and larger widebody fleets.
Dublin is the leasing capital of the world. Do you think this will always be the case? Are any other cities suitable to take over this role?
I believe that Ireland will continue to be the leading aviation leasing hub in the world by virtue of its competitive advantages to other locations, including its corporate tax rates, wide double tax treaty network and its professional expertise in cross-border leasing (tax, audit, legal, technical, lease management and remarketing). It is difficult to truly appreciate the expertise built up by Irish-based personnel over the last 30+ years in this sector. It will be difficult to replicate or access this expertise in other locations. The time zone also works well for global businesses where one can focus on Asian clients in the morning, European, Middle Eastern and African clients at midday and American clients in late afternoon. At the same time, there is long-standing leasing concentration in the west coast of the US and emerging strength in certain Asian cities.
Is Pembroke interested in the B737 MAX?
Yes – Boeing has an excellent track record of delivering new products to the market.
We have seen significant interest from our airline clients in the re-engined A320 and B737NG family programmes. With our client-centric strategy, we will continue to support our clients’ financing needs for their A320neo and B737 MAX fleet acquisition programmes. See related CAPA analysis: Price and availability take precedence over efficiency in Airbus A320neo and Boeing B737 MAX battle.
Is the end in sight for the mega lessors? How are the emerging leasing companies affecting the sector?
GECAS and ILFC continue to have a dominant position in the industry by virtue of their size. We have seen the gap closing a little between the mega and medium-sized lessors. I expect this trend to continue, but the gap is still very large and, in the absence of significant consolidation between leasing companies, this position is unlikely to change in the near to medium term.
We see a number of medium-sized lessors growing at higher growth rates than mega lessors. We are already witnessing some of these players emerging from the pack of medium-sized lessors. Other than increased competition, I do not see the emerging leasing companies having a significant affect on the mega lessors. Indeed, the mega lessors may see the emerging lessors as potential customers for aircraft sales.
See CAPA's first interview with Kieran Corr: Pembroke CCO Kieran Corr sees strong value in Asia, leasing industry to shift from west to east
Pembroke fleets data, updated 18-Jul-2011
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