The aircraft leasing business has always been big, at least in terms of value. The current economic scenario is, however, providing its own set of challenges with defaults in payments and airline closures
Quick question: Who is the owner of the largest number of commercial aircrafts in the world? Hint:
It is not an airline. In sheer numbers, it is GE or rather GE Commercial Aviation Services (GECAS), with 1,408 aircraft valued at US$ 33,259 million. In terms of sheer value, GE is number two. Number one on that list is the International Lease Finance Corp (ILFC), a fully owned subsidiary of troubled insurance giant American International Group (AIG), with 1,061 aircraft in its books valued at US $42,236 million.
Welcome to the world of commercial aircraft leasing, an industry that does not often feature in the limelight, but which is facing some turmoil nevertheless.
|Top 10 Leasing Companies (2008)||(value in $ million)|
|1. International Lease Finance Corp||1,061||42,236|
|2. GE Commercial Aviation Services||1,408||33,259|
|3. CIT Group||293||7,332|
|4. RBS Aviation Capital||202||7,065|
|5. Babcock & Brown||268||6,830|
|7. Aviation Capital Group||233||5,057|
|8. Boeing Capital Corporation||313||4,683|
|10. Macquarie Finance||140||3,523|
|Source: Flight Global (www.flightglobal.com)|
As the members of the International Society of Transport Aircraft Trading (ISTAT) wrapped up their annual conference in the US last month, the message that emanated out of the coveted gathering was loud and clear: the industry globally is facing its worst slowdown, with aircraft manufacturers, financiers and operators bleeding like never before. The sentiment is echoed by Steven Udvar-Hazy, CEO, ILFC, as he reportedly acknowledged that none of his 200 customers were on the mark vis-à-vis revenue targets. The ILFC, the biggest customer of aircraft manufacturing behemoths Airbus and Boeing, has over a thousand aircrafts in its fleet deployed by air operators across seven continents.
Udvar-Hazy is a leasing industry veteran, having co-founded the ILFC in 1973, only to sell it to the AIG, the insurance giant, in 1990 for a whopping US $1.3 billion. Besides customer performance, the ILFC today has its own reasons to worry. Its parent company recently got a US federal bailout package of US $180 billion, leaving it in the clutches of the US government that now technically holds 80% of the company. This has raised questions on the ILFC’s survival, which depends on it meeting its debt obligations and ensuring that its customers stay in business.
|Source: International Lease Finance Corp|
Despite the troubles that haunt the aviation industry, the current economic turmoil still means brisk business for leasing companies. The ongoing global recession is causing airline operators to postpone the purchase of new aircrafts in favor of taking them on lease. Citing an opportunity, many an airline is quietly stepping into the shoes of leasing companies by renting out their excess capacities. Take the case of Jet Airways, believed to have leased out at least nine aircrafts, with more on the block. Kingfisher is also said to have leased aircrafts to some foreign carriers. Czech Airlines has entered into a pact with Nayzak Air Transport for leasing of two Boeing 737-400 aircrafts, including crew, for a year.
The upswing in the aircraft leasing business shows in the financial results of GECAS, which witnessed a 32% jump in lease agreements in the fourth quarter of 2008 over the previous year. This despite the fact that the last quarter of 2008 was by all means a tough one. The company signed lease agreements for 66 aircrafts in the fourth quarter (including 30 lease extensions and 36 fresh pacts). In 2008, GECAS leased out 232 aircrafts, including 146 from its existing fleet, 42 from the new order skyline and 44 extensions of existing leases, a jump of 10% over 2007. “The market is witnessing continued leasing deals being signed between the leasing companies and airlines worldwide. Dearth in financial resources to fund internal purchases of aircrafts may force many airlines to increasingly rely on aircraft leasing companies,” says Global Industry Analyst, a market research publisher. As aircraft leasing activity gains momentum, DARE takes a quick look at the business.
What is aircraft leasing?
Leasing is a common practice in the airline business. Airlines take aircrafts on lease to reduce costs and to increase the number of flights quickly. Waiting periods for new aircrafts is long, running into years. Thus, leasing is often the only way out to quickly ramp up operations. Some airlines, despite owning a good number of aircraft, prefer to take a few on lease to keep their cost in check.
Types of leases
There are different types of leases, depending on the terms and conditions of the agreement. These are ACMI (Aircraft, Crew, Maintenance, and Insurance), also called the wet lease, dry lease, and damp lease.
ACMI (wet lease)
In the case of ACMI, the lessor (the company leasing out the aircraft) provides the crew, including pilots, engineers and flight attendants, besides maintenance and insurance. The salaries of the crew are paid by the lessor and not the lessee (the company that takes aircraft on lease). However, in this type of lease, the cost of fuel, parking, landing etc are paid by the lessee. According to GlobalPlaneSearch.com, “The lessor will charge for the block hour (choc off to choc on) and depending on the aircraft type, sets a minimum guaranteed block hours limit per month.” Whether the plane flies or not, the lessee has to pay for the minimum guaranteed block hours. “The period can [vary] from one month to usually one to two years. Everything less than one month can be considered as ad-hoc charter.”
Damp lease is wet lease minus cabin crew. This means the lessor will take care of maintenance and insurance of the aircraft it leases out, but will not have to bother with providing a crew to the lessee. However, sometimes the leasing company provides a trainer on board for a limited period of time to give initial guidance to the crew of the lessee. This happens if the model of the leased aircraft is different from the one that the crew of the lessee has been flying.
A dry lease does not include crew, maintenance or insurance. “A typical dry lease starts from two years onwards and bears certain conditions as far as depreciation, maintenance, insurances etc are concerned,” according to GlobalPlaneSearch.com. The average tenure of this type of lease is usually more than two years. The terms of dry lease involves aspects such as depreciation, maintenance and insurance.
Dry lease is of two types: operating and finance.
In the case of an operating lease, an aircraft is leased out for a short period of time when compared to its total life. For instance, if the life of the aircraft is, say, 20 years, under an operating lease it would be leased out for a period of about seven years. In accounting terms, the aircraft taken on an operating lease does not show up on the balance sheet of the lessee. After the stipulated lease period, the lessee returns the aircraft and a purchase option remains closed.
However, a finance lease is a long-term lease and the lessee can purchase the aircraft on the completion of the lease period. According to GlobalPlaneSearch.com, in the case of a finance lease, the lease payments are more than 90% of the market value of the aircraft, and the term of the lease is over 75% of the aircraft’s usable life.
One of the biggest growth drivers for the leasing business is the slump in the fortunes of airline companies. Although a dip in aviation fuel prices has brought some solace, the situation is still troublesome. The concerns of aviation industry representatives finds reflection in the recent forecast of the International Air Travel Association (IATA), which predicts global air transport industry losses to touch US $4.7 billion in 2009. “Industry revenues are expected to fall by 12% to $467 billion, worse than after the 9/11 terror attack in the US. Our loss forecast for 2009 is now $4.7 billion. Combined with an industry debt of $170 billion, the pressure on the industry’s balance sheet is extreme,” says the IATA, which represents some 230 airlines comprising 93% of scheduled international air traffic.
Other growth drivers include a sharp increase in overall air traffic (which has slipped now due to the slowdown), dip in airfares and rise in the number of low-cost carriers.
The backing of huge financial institutions that till recently have had deep pockets to buy expensive aircrafts across a wide range have also driven growth. According to research firm ATKearney, “With more than 75% of the companies backed by big financial institutions, the industry has few independent players. Moreover, the industry is dominated by two players, with over 50% of the assets: GECAS, a unit of GE Commercial Finance, and International Lease Finance Corporation, owned by AIG. Backers such as these are able to provide a range of aircraft types, secured loans and other financial solutions, a variety of engines and parts and can even help train pilots.”
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