China agressively expands its lessor business

New and recently established Asian lessors are stepping up aircraft orders and negotiating to buy out established leasing companies as more airlines chose to lease rather than buy aircraft.

by CHIEF CORRESPONDENT, TOM BALLANTYNE  

October 1st 2014

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International aircraft lessors are being challenged for a greater piece of the global leasing pie by the financial giants of Greater China and their Japanese peers. Read More »

Tadas Goberis, chief executive of AviaAM Leasing: Emerging market aircraft lessors lack experience in managing the risk and operational factors of a lessor’s fleet portfolio

Last month, the aircraft lessors were focusing on the plans of Asia’s richest man, Li Ka Shing, after it was revealed that the tycoon’s flagship company, Cheung Kong Holdings, was one of the bidders for the sale of 100 Awas Aviation Capital jets.

Discussions are reported also to be well underway between Li’s executive team and Japan’s MC Aviation Partners, the leasing arm of Japan’s Mitsubishi group, to form a joint venture lessor.

At press time, other buyers reported to be interested in the Awas portfolio were SMBC Aviation Capital Group and Orix Corporation from Japan, the HNA Group’s Hong Kong Aviation Capital and Dublin-based Macquarie AirFinance.

Li’s potential emergence as an investor in aircraft leasing is not the only sign that Chinese interests are enthusiastic about the profits airplane leasing offers.

Although there has been no official confirmation of the deal, it was widely reported that the China Investment Corporation (CIC) has teamed up with Aviation Industry Corporation of China (AVIC), a state-owned aerospace and defence company, to buy another Irish-based lessor, Avolon, also for a reported US$5 billion.

Should all these deals successful, 2014 will be a landmark year in global aviation finance as Chinese banks increasingly focus on the leasing sector, said Tadas Goberis, chief executive of Warsaw-based AviaAM Leasing.

He pointed out that since China’s financial regulator, the China Banking Regulatory Commission (CBRC), promulgated the Regulations on Financial Leasing Companies in 2007, which allowed banks to enter the financial leasing industry. Chinese financial institutions have been actively developing their aviation leasing activities. Domestically, they now control 75%-80% of the aircraft leasing market.

ICBC Leasing, a subsidiary of the Industrial and Commercial Bank of China (ICBC), has enlarged its fleet six times, to some 380 aircraft, since it went into business. Meanwhile, the leasing subsidiaries of the remaining Chinese “Big four” banks; CCB Financial Leasing Corporation (China Construction Bank), ABC Financial Leasing Co. (Agricultural Bank of China) and BOC Aviation (Bank of China), as well as CDB Leasing Company, China Aircraft Leasing and several smaller lessors are seeking growth opportunities beyond Mainland China.

Said Goberis: “the local banks domestic dominance of the sector evolved naturally from the strict market regulation of the past, especially since major aircraft lessors and lessees is government-owned.

“However, the success of China air travel has presented Chinese leasing companies with opportunities to expand and they are backed by the government. Since the authorities announced last year they wanted to see more budget carriers launched, we might see a demand for extra aircraft, which should mean more business for lessors.”

While the 2007 regulatory changes cleared the way for Chinese banks to form leasing subsidiaries, the real spur for expansion happened in 2010 when the CBRC allowed financial leasing companies to establish subsidiaries in tariff-free zones.

Until then, only airlines were permitted to import aircraft on a tariff-free basis. The revised regulations allowed lessors to set up subsidiaries in the tariff-free zones which put Chinese lessors on an equal footing with foreign financial leasing companies.

China’s aircraft lessors are taking full advantage of their new competitive position. ICBC has announced it will deliver more than 300 airliners to customers by 2017. At the recent Farnborough Air Show, Hong Kong Aviation Capital signed a deal, estimated at $7.76 billion, for 70 A320neos, its first direct order with a manufacturer.

Last month, it also signed a Memorandum of Understanding (MoU) with IndiGo, which will provide US$2.6 billion for 30 new A320s for the Indian carrier. IndiGo, the biggest airline by market share on the subcontinent, has three funding option under the MoU: sale and leaseback, a financial lease or a commercial loan. To date, most of IndiGo’s fleet expansion has been done on a sale and leaseback basis.

At the same time, another Chinese lessor, BOC Aviation, owned by the Bank of China but based in Singapore, ordered 43 A320 family aircraft, adding to the 38 A320ceos it has purchased in the last 18 months. In August, it ordered 80 B737 series aircraft, for delivery from 2016 to 2021.

BOC is a leader among Chinese-owned lessors, with its global customer base, its healthy interim net profit of $163 million, to June 30 and its 250 plus fleet.

Said BOC’s managing director and CEO, Robert Martin. “The focus is on building a pipeline of orders to meet our customers’ needs, we demonstrated when we announced our 43-strong order of A320 family aircraft in July.”

Indications that other Chinese lessors and financial interests are determined to make a splash in the wider global business include the failed bid for International Lease Finance Corp. (ILFC), which was owned by U.S insurance company, AIG, by a Chinese consortium in 2012. ILFC was ultimately sold to AerCap Holdings last December. Clearly, that setback did nothing to weaken the China’s appetite for aircraft leasing, that, according to Boeing, will require funding of $112 billion this year.

With the percentage of airline fleets that are leased continuing to rise and with China alone expected to take more than 6,000 new aircraft over the next two decades, it is little surprise that Chinese investors are determined not to miss out on the bounty as airlines shed fuel hungry planes to cut costs.

AviaAM’s senior project manager, Tomas Sidlauskas, pointed out to Orient Aviation, that the aircraft lessor/investment sector provides an average return of 10%-15% against an optimistic 4%-5% for airlines – in a good year.

But there are challenges for the up and coming Chinese lessors, said Goberis. “The majority of non-aviation investors and commercial banks, which are expected to fund almost half of this year’s deliveries, don’t possess sufficient skills to effectively manage the potential risks, including those related to aircraft operation, maintenance, registration and insurance, asset condition and its resources’ control.

“Certain financial players from Europe (and also Japan) have accumulated significant experience in aircraft financing. However, the majority of financiers from the Asia-Pacific, particularly China, have been in the business for a short period of time and lack experience.

“As a result, the lessors and investors from emerging countries are exploring three-party deals between lessors, lessees and mediators with expertise in aircraft management. The mediators act as an advisor in creating and if required, managing the aircraft portfolio on behalf of the other partners.”

It is assumed the Cheung Kong Holdings/MC Aviation Partners – the Japanese company has 20 years of experience in the field – is aimed at tapping into such expertise. MC Aviation owns and manages about 100 mostly-narrow body jets . It has been reported that Cheung Kong also has approached other aircraft lessors with a view to buying blocks of 20 aircraft. If he succeeds in pinning down AWAS, he will achieve his goal in fell swoop.