In 2009, the total aircraft fleet held by leasing companies accounted for more than 31 percent of the world’s active fleet. The aircraft fleet of all leasing companies grew 7.34 percent from 5,757 aircraft in 2008 to 6,180 aircraft in 2009.
The lack of available capital for the procurement of new aircraft and falling interest rates are two major factors triggering growth in the world aircraft leasing market. Frost & Sullivan estimates that the aircraft leasing industry is poised for growth within the next 4-5 years.
New analysis from Frost & Sullivan (http://www.financialservices.frost.com), World Aircraft Leasing Market - Market Outlook and Investment Analysis, reveals that at a compound annual growth rate (CAGR) of 5.76 percent, the total number of aircraft owned by the leasing firms is expected to increase from 6,180 aircraft in 2009 to reach 8,646 aircraft in 2015.
The narrow-body aircraft segment is expected to grow at a faster rate than the other two segments (Wide-Body Aircraft and Regional jets) during the forecast period. Leasing firms prefer narrow-body aircraft due to the flexibility and liquidity of the aircraft type. More than 65 percent of the aircraft ordered by leasing firms are narrow-body types. As airlines find it difficult to finance fleet expansion due to scarcity of funds, the growing trend is to lease an aircraft rather than buying it. The penetration of the leasing industry is expected to increase from the current levels of 31.53 percent.
On average, Europe and Asia Pacific rely more on leasing companies compared to their North American counterparts. One of the reasons for this is the lesser number of very large market participants in Europe and Asia Pacific compared to North America.
Frost & Sullivan Financial Analyst R. Madusudanan says. “The aircraft leasing industry in the North American region has matured and is expected to grow at a modest rate of 4.3 percent annually from 2004 to 2008. The majority of the growth in the aircraft leasing industry is driven by the emerging low cost carriers in the Asia Pacific region and the recovery of the airline industry in Europe. India, China, and Russia are estimated to play a major role in the growth of the aircraft leasing industry”.
Asia Pacific’s airline industry has particularly gained due to the open skies policies adopted by China and India over 2003-2005. India and China offer a tremendous opportunity for the airline industry. Over 2003-2005 about five new airlines have been registered in India alone.
“While the Asia Pacific region accounts for 16.9 percent of aircraft with airlines in the world, it accounts for 21.0 percent of the global aircraft leasing portfolio. Historically, the Asia Pacific region has been home for lesser numbers of business aircraft compared to commercial aircraft. The majority of the aircraft leasing portfolio consists of commercial aircraft, that comprise 94.0 percent of total leasing portfolio,” states Madusudanan.
“The commercial aviation industry is witnessing a golden era in the Asia Pacific region with lenient regulations, emergence of low-cost carriers, and a general boom in the economy led by offshoring of services and manufacturing industries” Madusudanan elaborates. “The aircraft leasing industry in the Asia Pacific region was worth $24.24 billion in 2004. This region is the fastest growing region in the world with a CAGR of 8.2 percent between 2004 and 2008”.
The aircraft leasing industry is highly dependant on the fortunes of the airline industry. The airline industry is cyclical, sensitive to economic trends, and highly competitive. Between 2001 and 2003, lease margins declined due to terrorist attacks followed by airline bankruptcies and worldwide health concerns such as SARS. However, recovery began worldwide since 2004, and after 2005, aircraft leasing companies were able to raise leasing rates.
The aircraft leasing industry was negatively affected in 2009 by the financial crisis and the slump in aviation traffic. The number of parked aircrafts increased, which led to a reduction in market values and lease rentals. In spite of falling lease rentals, the leasing companies were able to maintain high levels of profitability on account of falling interest rates.
Most of the leasing companies which were for sale were not distressed assets and were up on block as a result of their parent’s poor financial health. “Banks from China and sovereign wealth funds from the Middle East have shown interest in purchasing the aircraft of leasing companies. The assets of aircraft lessors are likely to stimulate interest among asset management companies that are scouting around for stable incomes over the long term,” Madusudanan explains.
“Sale and lease back” transactions enables the lessors to buy aircrafts at competitive prices and increases the Internal Rate of Returns of the lessors. Airlines are facing a dearth of liquidity coupled with the frozen credit markets; sale-and-leaseback transactions can be used to improve liquidity position and strengthen the balance sheet.
The falling interest expenses have helped the aircraft lessors to maintain their healthy levels of profitability. With airlines unable to raise enough capital to buy aircrafts, the airlines would be forced to lease the aircraft rather than own them. There has been a huge growth in LCCs in emerging economies. As LCCs lease most of their fleet, this segment offers significant opportunities for leasing companies.
Lessors from The Middle East countries and China have witnessed fast growth in the recent past. Lessors from these regions are expected to provide the market with the much needed liquidity and fill the funding gap arising from the credit crisis. There are issues pertaining to regulations, cross-border financing, and complicated tax structure. As proper regulations relating to the flow of capital are in place, leasing companies from these two regions are likely to expand at a faster pace in the global market.
“Improving mortgage/securitization market and increasing liquidity in the credit market are likely to contribute to market recovery in 2010 and 2011. As the leasing cycle has already bottomed out, the market is poised for growth, with attractive returns. Hence, many new participants are likely to enter the market. The rentals and market values of the aircraft are expected to start rising after Q1’ 2011. Better fleet utilization and stronger deals with good underlying credit are likely to be the major factors for sustaining profitability in the long term” surmises Madusudanan.