Offloading capacity in a nervous market
Global economic factors, including higher fuel costs and varying tax and legislative regulation, are mitigating the expansion of aircraft leasing in the Asia-Pacific. Read More »
Topping the list of concerns are contradictory forecasts about the strength of GDP growth worldwide and the impact of U.S. president Trump’s trade and foreign policy rhetoric on consumer sentiment. Many pundits are tipping a global recession by year end.
Additionally, there is over-capacity in the airline industry across the Asia-Pacific. Before the 737 MAX grounding on March 13, aircraft manufacturers were scheduled to deliver more than 800 aircraft to Asia-Pacific airlines this year with almost 80% of those planes destined for four LCC groups.
The forecast increase in capacity will force fares down as airlines compete to fill their planes in a market where consumers’ number one priority when buying an airline ticket is price.
It is a tough operating environment. The region’s airlines, as a rule of thumb, need to achieve a load factor of above 68% before they earn a cent.
All these factors are attracting several airlines in the region to sale and leaseback deals for their new aircraft and encouraging lessors to speedily offload excess capacity at rates with very low margins.
Additionally, all airlines whether full service, LCC or a hybrid, are re-configuring their fleets away from wide bodies as new generation aircraft are fundamentally re-shaping networks. What then can be done with these airplanes, as the A380 has demonstrated, that are losing their appeal to airline network and revenue management planners.
In a study earlier this year, Reuters forecast the aircraft leasing market would record a compound annual growth rate (CAGR) of 4.75% to 2023. The Flight Ascend consultancy said the leased aircraft portfolio increased by 629 airliners, to 8,109, in 2018. One hundred new names have entered the aircraft operating lease sector in the last decade, it added, including several Chinese banks present in both the domestic and international sectors of aircraft leasing.
The 2019 Airline Economics Aviation Industry Leaders report said there are 60 plus leasing companies in China with many of them considered to be unsustainable in the longer term. Consolidation is inevitable, analysts forecast.
“Mainland Chinese banks are very active although they are primarily focusing on their domestic market plus a handful of selected international carriers and lessors,” said NordLB’s Frank Wulf in the Airline Economics Aviation Industry Leaders Report.
“Asian banks outside of China also are fairly active, especially the Japanese who are being very aggressive in pricing in order to win new business.”
Other trends in the sector include rising demand for wet leasing, where several new airlines are customers in this space, and an increasing airline practice of buying aircraft, selling them to banks and then leasing them back, Reuters said.
The Asia-Pacific is the second largest aircraft leasing market in the world after Ireland, which holds close to 50% of the industry’s business. Dublin is “the headquarters” of global leasing.
However, in the Asia-Pacific there is no shortage of banks seeking to support lessor deals. For airlines with the necessary funding, having your aircraft owned by a lessor reduces depreciation costs and reduces tax.
Asia-Pacific lessors do have an issue – a lack of skilled lessors or “soft power’ staff to match the competence levels and industry experience of Dublin and, to a lesser degree, North America.
To overcome this obstacle to expansion Hong Kong and several mainland universities are developing aircraft lessor specific graduate programs in collaboration with recognized global tertiary institutions to equip the Asia-Pacific industry with the skilled workforce necessary to achieve success in the industry.
|Key aircraft leasing trends
• Downturn forecast but mild with industry cycle peaked, but globally airlines are in good shape after a several years of profits
• Global political tensions adding to volatility created by rising oil prices, uncertainty about interest rate trends and foreign currency fluctuations
• Concern increased Asia-Pacific airline presence in the leasing sector is a risk as operating costs rise, especially fuel and interest rates, with weaker carriers vulnerable to downward global macro-economic trends
• Sale and lease back market saturated with too much money chasing too few deals, but more airlines increasingly favour them as a means of increasing working capital
• New lessors continue to enter the market. At the same time, more mergers and acquisitions are forecast for the industry
• Airlines are seeking lease periods as short as six years rather than the past norms of 10-12 years
• Margins are low because of over supply, with banks finding it difficult to make money
• Unsecured debt for weaker carriers an increasing practice