Risky but lucrative business

After 35 years in banking and the aircraft leasing business, managing director and chief executive of BOC Aviation, Robert Martin, is stepping down at the end of the year. As he prepares to hand over the baton to Steven Townend, he talked to associate editor and chief correspondent, Tom Ballantyne, about his assessment of the future Indo-Asia Pacific airline leasing market.

December 1st 2023

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Airlines across the world may be ordering hundreds of new aircraft as pandemic recovery continues but they are not ordering for today because they can get deliveries, said departing BOC Aviation CEO, Robert Martin. Read More » “They are ordering for the future.”

So, with all these aircraft being purchased is it a boom time for the aircraft leasing business? “It depends on which part of the leasing business you are in,” is Martin’s response. “I can tell you for a finance lease business it is very good at the moment. But that is because we fund ourselves with unsecured money and we have the lowest cost to funds in the industry. On the sale and leaseback side people are still taking very low returns, which we just don’t understand. There’s a surplus of funds going into that market.”

The last time BOC did a straightforward sale-leaseback on an aircraft was February 2021, he said. “(That is) because our own market has been so competitive with people putting transactions out there with very low returns. We just can’t do that. We have our own shareholders to care about. So, we started thinking: “OK, we need to prepare for the upturn and develop a product for the upturn. That is what we did. We rolled it out in June this year. We are doing finance leases as opposed to operating leases for a number of our customers,” he said.

“Why now? Because this year in the U.S. they can take a 100% tax writing down allowance on the aircraft they buy and put it on the balance sheet. It is the same in the UK. We have done close to 70 aircraft in less than six months, which is pretty huge for us. It is normally a year’s worth of deliveries.”

For BOC, business is good. Its latest financials, for interim 2023, show a US$262 million profit, a turnaround from a $313 million deficit in the same months in 2022.

One aspect of the business that has exploded is the number of lease extensions that are being done, up from 30% to 90%. “It is not only because the market is tightening but because of the impact engine problems involving both Pratt & Whitney and Rolls-Royce engines are having on carriers,” Martin said.

“The engine issues have delivered a big stimulus to us because people have realized they can have aircraft on the ground. If you talk to IndiGo for example, I think they are going to have 40 aircraft on the ground by the end of the year which won’t operate. Air New Zealand also has a number of them.

“So, what people have been saying is we can’t get additional aircraft. We can’t get additional spare engines which is really the way they should solve this problem. They are looking for serviceable used aircraft, the previous generation of Boeing 737NG and A320CEO. There is no problem with either of these types, particularly if they are CFM-powered. It’s really the Pratt & Whitney and the Rolls engines on their A330s and B787s that are affected. It has tightened the leasing market quite significantly.”

Already, BOC has flag carriers in Asia with leases expiring in 2026 approaching it to discuss lease extensions because they are worried about losing that capacity and not being able to replace it. The company recently extended leases on eight B737s with China Airlines and 12 A321s with EVA Airways. .

Another issue is higher interest rates, which have increased from 1% to 5% in 12 months. Client cost for leasing transactions has more than doubled and in some cases tripled in a year.

“And so, people can’t hold the same lease rates they were doing last year and for these leases they did agree last year they are losing money every day they fund them. It is phenomenal when you think about it. This should not be happening,” Martin said.

As far as the region is concerned, BOC does not consider Asia as one market, but as five distinct markets: Korea and Japan, Greater China and in particular China outbound because it is driven by policy in China, the Indian subcontinent, ASEAN (Southeast Asia), and Australia, New Zealand and the Pacific islands. There are interesting things happening in some of these markets, Martin said.

“The problem in North Asia is the weakness of the Japanese yen, which is deterring Japanese passengers from flying to a lot of tourist destinations worldwide,” Martin said. We are hearing this from all of our customers in Asia. In Korea, of course, it is all about what happens with the Korean-Asiana merger. Which bits are spun off.”

In China, despite the country’s emergence from the pandemic and designating many countries as places where tourists can visit, there is huge pressure on State employees, meaning people who are employed by State-owned banks, State-owned corporates, the government itself, to not holiday outside China, Martin said. “We are hearing from all of our customers – Southeast Asia, Japan and Korea – that China outbound is one of the weakest markets,” he said.

ASEAN countries are being hit hard because Chinese traffic has not come back. “But one development is that if you fly to China yields are phenomenal, Meaning very expensive. Let me tell you, my travel budget feels it. To me, that is the biggest issue that has to be resolved because a lot of planning on the size of airline fleets is dependent on China traffic coming back,” Martin said.

In India, whose airlines have placed massive orders for new planes, Martin agrees there is no reason it can’t grow to the same level as China in terms of passenger demand. “The big difference between the two is China has a very strong banking system, India does not. India’s banks are, relatively, quite weak. This could constrain growth at some point. Not yet. But it could constrain growth in the future,” he said.

His view on those massive aircraft orders? “The first thing is, India is starting from a very low base. The second thing is the strong airlines in India, those who can attract financing, will be fine. The others are going to struggle because of this weak banking system in India. I think we will see a bifurcated market where the bigger Tata, Air India, Vistara group with India Express in there as well and IndiGo being the other, and the rest will have to fight for what is left in the market. A lot of them have been playing the game where they take gains from sale lease-backs. If there was a manufacturer slowdown of deliveries – or worse a stoppage of deliveries – those weaker airlines could be hit very hard,” he said.

Martin said airlines dealing with the impact of the Ukraine conflict have settled into a situation where carriers that can overfly Russia, particularly from China and India, do and those who can’t use more fuel and aircraft that can fly more hours to their destinations.

“Then let’s go to the Middle East and what’s going on in Israel and Palestine. Well, Palestine does not have aircraft. Israel is affected and not just the airlines. Remember there is a big freighter conversion facility, IAI (Israel Aerospace Industries), in Israel,” he said.

“There’s a lot of MRO capacity there. I thought we had no exposure to Israel until I realized we have an engine in one of the shops there. This normally is not the type of thing you check, but when things happen you tend to be more careful.

“The insurance market has pulled back from Israel. We had a couple of near misses (from Hamas rockets) three weekends ago - on a British Airways plane going to Tel Aviv and then a Dutch MRTT (Multi Role Tanker Transport), the A330 in the military. If they had hit one of those Europe could not have ignored it. On top of that, we cannot underestimate the risk of terrorism in the rest of the world.”

Half of BOC’s leasing business is with airlines in Asia and the Middle East. The remaining 50% casts a wide global net. The lessor has a fleet of 681 aircraft owned, managed and on order. Its owned and managed fleet is leased to 93 airlines in 44 countries and regions worldwide. It has an order book of 213 aircraft scheduled for deliveries to close of 2029.

Founded as Singapore Aircraft Leasing Enterprise (SALE) in 1993, the Bank of China bought the lessor in 2007 and renamed it BOC Aviation. Martin, now 58, joined the company in January 1998 and was appointed as a director and the managing director in July 1998. He has doubled BOC’s business, on average, every seven years. He has more than 35 years of experience in the aircraft and leasing business, having previously worked at Bank of America, the Long-Term Credit Bank of Japan and HSBC Investment Bank (Asia) Ltd. He graduated from Cambridge University with a Master of Arts degree in Economics.

BOC Aviation heir apparent Steven Townend For Steven Townend, the new managing director and CEO of BOC the task ahead of him is to steer the lessor’s Vision 2030 to fruition. “We want to be one of the top five leasing companies in the world,” he told Orient Aviation. “Why do you want that scale? You want to be able to buy the right aircraft at the right time at the right price from Airbus and Boeing,” he said. “You have to be one of the biggest guys to do that. Funding costs for any lessor are hugely important. You need that scale to maintain investment grade credit ratings. It also enables you to do the bigger deals with the bigger airlines. It does not matter if it’s American Airlines or Air China. They do not want to do deals for one or two aircraft. They want to do deals for 10 or 20.” Townend said BOC has $23 billion in assets and is in the top five of the world’s lessors. “We look forward to the end of the decade to be certain of staying in the top five. We probably need to take that from about $23 billion to $40 billion,” he said. Townend, at present BOC Aviation’s deputy managing director and chief financial officer, will succeed Robert Martin as the lessor’s CEO on January 1. Aged 54, he has accumulated more than 31 years of banking and leasing experience after graduating from Loughborough University in the UK with a Bachelor of Science (Honours) in Banking and Finance. He started his career in aviation banking in 1991 when he joined Natwest. He moved to BOC and then to Singapore in 2004 as global chief commercial officer. He was appointed CFO of the lessor in October 2020.