Oil prices will fuel demand for leasing of young aircraft: BOC Aviation
Robert Martin, Managing Director and CEO of BOC Aviation, explains the rationale behind his company's widebody orders and the effect the industry's recovery has had on demand for leasing companies. In this exclusive CAPA interview, Mr Martin discusses the A320 and A321neo, as well as offering valuable insight into the industry.
BOC Aviation’s fleet order comprises of 40.7% widebody aircraft, which is different from BOC’s closest competitors who seem to be ordering more narrowbodies. Can you comment on the reason behind this strategy?
We recently ordered 30 Airbus A320-family aircraft in addition to the eight Boeing B777-300ER aircraft which have been already been placed on long-term leases with Thai Airways. Our widebody aircraft tend to be placed with major flag carriers who do not operate single-aisle aircraft as this brings positive diversification to our fleet. We also have five A330 freighters scheduled to be delivered over the next two years and they will be operated by Yangtze River Express Airlines, a subsidiary of the Hainan Group.
Do you think the B747-8 will be more successful as a freighter or passenger aircraft? Is BOC interested in this aircraft? Does BOC plan to expand its freight fleet?
For new widebody aircraft types, we tend to take a wait-and-see approach until they are delivered.
Do you agree with ILFC’s comments that the A321neo could potentially replace the B757? Why or why not?
We believe the A320neo family will be replacing older aircraft types such as the MD80s, 757s, 737 Classics and the older A320s with A1 engines. The A321neo is aimed at replacing the 757.
Would you be less or more inclined to finance an A320 in the face of a neo?
The A320neo is expected to enter into service in 2015, the A321neo in late 2016, and they will replace the older aircraft types mentioned earlier. There are about 1000 of each of these older aircraft types in the system right now and based on an assumed monthly production rate of 40 aircraft for the neo, it will take over half a decade for the replacement cycle to complete. We therefore do not expect any significant impact on the residual values of the existing A320 aircraft for some time and will continue to do PLBs on this aircraft type if there are attractive opportunities.
Can you comment on the idea of the B787-10 being a candidate to replace the A340-300 or B777-200?
We can’t comment as the 787-10 is an aircraft that has yet to be fully defined by Boeing.
Do you see the C Series and the COMAC 919 becoming serious contenders in the narrowbody market? Is BOC interested?
Both Bombardier and COMAC are serious about breaking the duopoly currently held by Airbus and Boeing. They have already partnered each other in a long-term strategic cooperation agreement to leverage on each other’s strengths specifically to push forward the C-series and C919 aircraft. We are definitely interested to see how the two aircraft types develop and airlines’ reaction to them.
Do you see consolidation as a big part of the aircraft leasing industry’s future?
No. In the last few years, there were some small scale consolidations such as Aercap’s acquisition of Genesis Lease. Yet there have also been successful new start-ups such as Air Lease Corp, Avolon and Jackson Square. Aircraft leasing is a capital intensive business and the market structure depends very much on the availability of bank debt and equity.
2009/10 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)?
During the global economic crisis in 2008/09, many traditional aircraft financing banks withdrew from the market. Many of them have now returned as economic conditions have improved and the EETC market has also become active. Although we do not see the German banks as active as before, it is not a major concern as they have been more than replaced by new Asian players. The new ASU that came into effect in February this year is likely to reduce the demand for financing via ECAs due to the higher pricing.
Do you see the industry’s recovery leading to an increase in demand for leasing companies?
Definitely. The current high fuel price has accelerated refleeting decisions, especially in North America. With the two leading aircraft manufacturers presently facing a backlog equivalent to seven years of production, airlines will be looking to operate younger and more fuel-efficient aircraft and will be drawn towards leasing.
Have your clients’ capital needs changed much over the 12 months?
2010 was the most profitable year in airline history and airlines entered this year with strong cash balances. Coupled with an improved funding environment, there was significantly more competition for PLBs. Increased production over the next three years will increase demand for capital from players such as BOC Aviation.