Aircraft leasing firms to see strong business this year: analysts

SINGAPORE : Market watchers expect aircraft leasing companies to see strong business this year.

This will be driven by airlines finding it difficult to pay for aircraft orders made in better times.

There are also concerns overcapacity will see more carriers going bust this year, with mature markets bearing the brunt.

There could be some turbulence ahead for global airlines. Industry watchers said there could be more planes being added to the market than passenger demand can catch up - putting pressure on yields and margins.

And with some carriers being cautious about their finances, money may be hard to come by to fund plane orders made in better times.

Some observers believe this will result in more sale and leaseback activities in the airline space this year. Sale and leaseback is where an airline sells the aircraft to a leasing company and rents it back, in order to reduce its cost of investment upfront.

Siva Govindasamy, Asia managing director, Flightglobal, said: "When times were good, business was strong, airlines were taking on a lot of aircraft. But once the economic crisis hit, airlines were unable to take these aircraft on, so what has happened is that they are looking to cut costs.

"Leasing companies come in there. They help airlines to reduce the investment costs needed to take on new aircraft by leasing these aircraft to airlines. So it helps airlines to save money.

"And they could do what is called a sale and leaseback ... It is a good short-term cost saving for the carriers, but over the long term, owning an aircraft makes more sense."

Aircraft lessors like BOC Aviation are eyeing the opportunity. To meet demand and competition, it is hoping to grow its fleet by 20 per cent this year, after taking delivery of 48 aircraft last year, of which 23 were from purchase and leaseback deals closed during the year.

BOC Aviation's total assets exceeded US$5 billion for the first time since it was established 17 years ago. The company recently signed a deal with Air Berlin for the sale and leaseback of three new Boeing 737s.

Robert Martin, managing director and CEO, BOC Aviation, said: "You will see more of them taking leases because they have already placed the orders for aircraft themselves, and with so many planes coming so quickly, they are going to need alternative sources of pre-delivery financing for the pre-delivery deposits and also for the aircraft financing itself.

"We are going to see new players in our industry emerging. It will be a combination of new entrants and existing players. We have some significantly-sized existing players who are opening up their balance sheets again, and we are beginning to see new private equity firms coming into the market, wanting to commit equity. The challenge for them is whether they can find the debt to go with the equity."

Some analysts are concerned that overcapacity will see more airlines going bust.

Chris Tarry, principal, CTAIRA, said: "I fear we will see more airlines fail this year, and that will not be in legacy carriers, it will be among the low-cost segment as well. For the industry overall, a great threat is on the capacity side, and against the background of what seems to be a relatively weak revenue environment, putting more capacity will further depress yields and pressure revenues."

Some industry players believe that overcapacity will peak in March, and will take some time to clear. There is an estimated six years of manufacturing backlog in the production industry.

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• BOC aviation
• leasing
• airlines
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