Special Reports: Aircraft Leasing
Asia’s tycoons succumb to leasing’s financial allure
Asia-Pacific airlines’ rapidly expanding fleet is attracting a new breed of investors to the lucrative sector.
November 1st 2015
Several regional conglomerates are following the lead of China and establishing aircraft lessor subsidiaries that are cashing in on the Asia-Pacific’s huge future airline growth. Read More »
Leaders of the new pack, excluding booming China, include the conglomerate owned by Asia’s richest tycoon, Li Ka-shing, and fellow Hong Kong companies, New World Development and Chow Tai Fook.
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| Li Ka-shing, Hong Kong’s richest tycoon jumps on aircraft leasing bandwagon |
In China itself, two leading lessors have announced initial public offerings (IPO) in Hong Kong and an HNA group subsidiary, Bohai Leasing, expects to sign off the US$7.6 billion deal to buy Dublin-headquartered lessor, Avolon, early next year.
The Bank of China announced last month it had received board approval to list its subsidiary, Singapore-based BOC Aviation, in Hong Kong, in an IPO that could add US$6-$8 billion to the lessor’s coffers.
The BOC announcement followed the China Development Bank’s decision, also revealed last month, to list its aircraft leasing subsidiary, CDB Leasing, in Hong Kong in the first half of 2016.
The Bohai-Avolon deal had been months in the making, so the announcement in September that the aircraft leasing unit of the China’s HNA Group had signed a definitive agreement to buy Avolon was no surprise. There is no doubt the buy in will be a milestone in the lessor’s quest to join the big boys in the $200 billion-a-year global aircraft leasing business.
Avolon has an owned, managed and committed fleet of 260 aircraft made up of 143 self-owned, nine managed and 108 obtained through signed purchase agreements. The aircraft range from A320s and B737s to B777s and B787s. Together with Bohai’s 74 airliners, the purchase will place the Chinese company among the top 10 aircraft lessors in the world.
“The acquisition of Avolon will bring lucrative financial returns as well as enhance Bohai Leasing’s bargaining power and influence in the global aviation industry,” a HNA statement said.
“It will benefit from greater economies of scale and synergies through the interaction with the platforms under the HNA Group. It will reduce the cost of aviation business and enhance profit levels. This acquisition will boost the development of the China aircraft leasing market through the integration of advanced aircraft asset management, improvement of risk management and the added resources of Avolon. It is a significant advance in the professional standards of China’s aviation leasing industry.” The group owns Hainan Airlines, China’s fourth largest carrier.
Bohai is among a growing list of Chinese lessors that are aggressively expanding their portfolios. BOC Aviation has 256 aircraft and 195 on order, with deliveries scheduled to 2021.
Two other China-funded companies are among the top 15 global aircraft leasing companies; ICBC Leasing and China Development Bank Leasing (CBD). And none of them is standing still. A recent order from China for 300 Boeing jets, worth $38 billion, included 60 single-aisle aircraft for ICBC and CDB.
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| 'A trend is emerging where more and more large Asian investors are becoming involved in this market, starting with Hong Kong’s Cheung Kong, NWS Holdings and Chow Tai Fook followed by Bohai Leasing’s expansion with Avolon' |
| Robert Martin Chief executive BOC Aviation |
But the combination of Bohai-Avolon, said consultancy CAPA will create “a major new player” in the global leasing market. “Along with greater economies of scale and synergies under the HNA Group, the Irish company’s management experience and broad market exposure complement HNA Group’s financing muscle and its expansion ambitions for China and globally,” it said.
The deal is more evidence that China’s aircraft leasing focus is shifting from the domestic sector to the international arena. Benefiting from the comparatively tight local regulatory regime, as well as the somewhat cosy relationship with Chinese state-owned corporations, bank-backed leasing companies have quickly pegged out stakes in the market in concert with Chinese airlines.
Between 2007 and 2013, the Chinese-controlled share of the domestic leasing market climbed from 7% to nearly 40%. Aircraft leased by lessors to Chinese carriers has doubled in the past decade and now stands at around 1000 aircraft.
“There are a few exceptions to this domestic focus, chief among them BOC Aviation and IBCB Leasing. These companies have a significant presence in the global leasing market, with both counted among the ten largest aircraft lessors globally by fleet size and value. The arrival of Bohai/Avolon will dramatically alter that,” said CAPA.
Coupled with the expansion of international leasing, the finance market for investment in aircraft in the Asia-Pacific is growing stronger. It is predicted that larger numbers of Asian investors, seeking yields at a time of currency devaluation, will be attracted to the U.S. dollar-based business of aircraft leasing.
Companies can earn between 8% and 10% interest on leased aircraft. Leasing prices fell around 20% in the two financial crises in 2001 and 2009, but long-duration aircraft leasing terms still offer steady cash flow. More importantly, aircraft lessors can borrow up to 80% of an aircraft’s value from banks by using the planes as collateral.
Robert Martin, chief executive of BOC Aviation, said a trend is emerging where “more and more large Asian investors are becoming involved in this market, starting with Hong Kong’s Cheung Kong, NWS Holding and Chow Tai Fook, followed by Bohai Leasing’s bid to acquire Avolon Holdings.”
They can’t help but be encouraged by BOC Aviation. It reported a 5% rise in profit for the first half of this year, to $171 million, on an average cost of debt of 2%, the lowest amongst its peers. Revenue in the six-month period increased 3%, to $535 million. Martin said the firm raised $1.8 billion in unsecured new financing in the first half and that its bond financing this year had risen to $947 million, including bonds issued in Singapore and Australian dollars and yuan, for their arbitrage opportunities.
In June, BOC Aviation extended a $2 billion revolving credit facility with the Bank of China to 2022. The extension, through a restated agreement, replaced two existing revolving credit facilities of $1 billion each, with maturity dates of December 2017 and April 2019.
“With our strong access to debt capital and bank financing markets and the extension of our revolving credit facilities with the Bank of China, we are well positioned to continue our disciplined growth strategy,” Martin said.
He added: “We are receiving an increasing number of inquiries from large family-owned companies and from large Asian corporates looking to invest in leasing. They realize there is good opportunity in this sector compared with property or other local-currency investment options.”
BOC is not fazed by the increased competition. The lessor has placed all its planes with airlines this year, Martin said. For next year, all its Airbus planes have been placed and it is in talks with airlines for a couple of Boeing jets.
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Demand is so strong Martin is seriously considering buying more single-aisle planes to satisfy it. He is looking at B737MAXand A320neos, but said the order “won’t be large” and that there is no timeline for the purchase.
“We have some gaps in 2018, the year when most of the new technology comes in, and we decided to wait. Will we top up? Yes, if the right opportunity arises and if the price is right. It’s all down to the price.”
For lessors such as BOC, Bohai, which also owns Hong Kong Aviation Capital and its 74 aircraft fleet, ICBC and others, China and Asia is not the only game in town, even if it is the world’s largest and fastest growing aviation market. They are playing in a global arena and demand for aircraft in the Middle East and South America is increasing. Boeing estimated 26,730 single-aisle jets, the meat and potatoes of lessors, will be required by the world’s airlines up to 2034, with 35% of them going to low-cost carriers.
In the meantime, the number of Chinese leasing companies is steadily increasing. In November last year, Hong Kong-based multinational conglomerate, the Cheung Kong group, set up a leasing subsidiary, Accipiter, and made available US$2 billion in start-up funds. Owned by Li Ka-shing, one of China’s richest tycoons, Accipiter plans to invest at least $2 billion in acquiring up to 160 aircraft.
Another Irish-based lessor, Goshawk, which was established in 2013, has been bought by NWS Holdings, the investment holding unit of Hong Kong conglomerate, New World Development, and jewelry retailer, Chow Tai Fook Enterprises. The two new investors each hold 40% in the lessor with the remaining 20% held by South African bank, Investec. It has a portfolio of 56 aircraft worth $2.3 billion.
Stanley Hui, the former head of Hong Kong’s airport authority, is the deputy chairman of f NWS Holdings. He recently told Hong Kong media the company “was very confident about the aviation industry’s outlook and demand for aircraft leasing” especially while the oil price was low.
Boeing said the percentage of the world’s fleet under an operating lease has increased to just above 40% in 2014 from approximately 12% in 1990. Global aircraft on operating leases is forecast to reach 50% by 2020. The expansion of budget airlines also bodes well for aircraft lessors.
Cheung Kong’s $2 billion investment in the sector, established by buying an aircraft portfolio with leases attached, is typically how investors entered the market and grew their businesses, said Martin. Acquiring a whole aircraft leasing company was another option, he added.
CAPA predicted China’s aircraft leasing market will expand by better than a third in the next three years, with the leased fleet reaching between 1400-1500 aircraft. “However, even with this rapid growth forecast, China’s bank-backed lessors are increasingly encouraged by the state to diversify internationally,” it said.
“Chinese regulators relaxed leasing rules in 2013 and 2014. As a result, Chinese companies found themselves squeezed by large western leasing firms and the formation of a large number of independent domestic firms. Nearly 500 new leasing firms entered the Chinese financial leasing industry in 2014.”
ICBC Leasing managing director of aviation financing, Lin Feng, said in June the Chinese market alone “cannot support the company’s development ambitions” and that offshore leasing deals “will become increasingly important for us”.
The company, along with Chinese state-bank aligned and independent lessors, is making leasing deals with carriers in the Asia-Pacific and further afield. This year its customers included Himalayan Airways, Garuda Indonesia, TransAero Airlines, Aeroflot, Azul and Turkish Airlines. It has also made aviation financing deals with major international financial institutions, including the Russian State Transport Leasing Company, the Islamic Development Bank Group, the Export-Import Bank of the U.S. and a group of three French banks, BNP, Natixis and CIC.
As Chinese banks internationalize and lessors make more deals outside Mainland China, the Chinese contribution to global aircraft finance will increase. Boeing Finance is projecting. Chinese banks will provide the largest share of commercial bank debt for aircraft financing this year, at 22%.
Financial institutions control 39 leasing companies, with assets of US$228 billion to June 2015, Thomson Reuters reports, with banks in control of 23 of the companies. In developed nations, aircraft lessors supply between 9% and 40% of the market. In China, lessors pentration of the market is 3.1%, analysts calculate.
