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Trade-offs in trading

Leasing aircraft often seems an easy option but care needs to be taken. Mario Pierobon reports

In the early days of commercial aviation it was very much the case that airlines would buy aircraft rather than lease them. Since aircraft leasing companies began to develop critical mass in the 1980s, the leasing of aircraft has become a common option. Nowadays airlines making fleet planning decisions have to consider whether to buy or lease their aircraft assets, and as this decision making trade-off is never a perfect science, we reached out to industry experts to identify some best practices to deploy in the current economic environment for aircraft acquisition.


A sizeable proportion


The global commercial fleet today consists of 29,400 aircraft, both active and parked. “The percentage of those leased is still growing and is currently 45%, up from 2% in 1980. Growth has been spectacular but is now levelling out as operators balance their fleets with a mix of owned and leased aircraft. While the top line figure is 45%, there are differences among both aircraft types and geography. In the long term, leasing can be a more expensive option so it makes sense to purchase aircraft if possible, when comfortable with the technology and price,” says Paul Lyons, Head of Advisory at IBA.


In absolute terms, the number of leased aircraft is currently approaching 11,000 units of all types, but the narrowbody market comprises over 7,000 units and accounts for two thirds of the total. Widebody leasing accounts for nearly 2,000 aircraft, and the remainder is roughly equally split between regional jets and turboprops. “Almost nobody believes that aircraft ownership will ever disappear, and as strange as it might seem, TrueNoord would not be alone in not wishing aircraft ownership to dwindle to a small portion of the total commercial airliner fleet. There are several reasons for this which include the fact that owning a portion of their fleets demonstrates that airlines are both financially and operationally committed to a type for the long-term, and have the appropriate infrastructure to maintain them,” says Angus von Schoenberg Industry Officer at regional aircraft lessor TrueNoord. “Furthermore, the evidence to date shows that leasing penetration of popular aircraft types tends to stabilise at around 40-45% of the total fleet. Narrowbodies on lease have been in this range for some years with lower penetration rates for widebodies and regional aircraft. In the case of widebodies, high transition costs between lessees have always been a barrier to the growth of leasing, while regional aircraft leasing has only been adopted in a scalable way over the last decade. For this reason, TrueNoord and others see this sector as less mature than the larger aircraft segment, thereby offering more scope for further growth.”


Dealing with low interest rates


In recent years, low interest rates have proven to be widely available globally and across industries. To a degree low rates have led cash rich airlines to revert to buying aircraft assets instead of leasing them. “There are clear benefits of ownership if you are considering new generation narrowbodies long term. These include cheaper debt – if you are an established airline – better OEM support and lower total cost of ownership. However borrowing capacity and cost of capital on a risk adjusted basis will still make it uneconomic for many airlines to own aircraft going forward. We have supported a number of younger airlines who having initially leased given their relative credit risk, are now in a stronger negotiating position as an established airline,” says Lyons.


Whilst, from the one end, low interest rates reduce the cost of borrowing for airlines, this also applies to lessors – so airlines can benefit through lower lease rates. Lessors typically finance their acquisitions of aircraft with a mix of equity and debt, and the latter usually amounts to 70-80% of the total purchase price. “In recent years, not only has the cost of debt been at historically low levels, but also the investor community has piled into narrowbody aircraft in particular as an attractive asset class, so the cost of equity has also reduced substantially. This has enabled quality, cash rich airlines to secure extraordinarily low lease rates. While the appetite for regional aircraft has been less, our investor profile demonstrates that equity can now also be attracted to the regional aircraft segment,” says von Schoenberg.


The proportion of aircraft that airlines lease depends on their strategy. “Larger top tier carriers have the luxury of choice. At the extremes, American Airlines leases the largest portion of its fleet with over 400 aircraft leased, while Lufthansa chooses to own the majority. However, in practice most major airlines opt for a mix of owned and leased aircraft,” notes von Schoenberg. “In the case of less good airline credits, the availability of leasing solutions or debt may influence how their aircraft are financed. In general, aviation finance lenders are more selective than lessors on their credit quality requirements, although many are happy to lend to lessors who then lease to the weaker credits on the basis that the lessor’s equity ranks junior to their loan exposure. Accordingly, some airlines lease rather than own due to lenders’ reluctance to engage. However, in other cases some carriers that have a strong presence in a local market but would be considered weak at an international level, can access attractive funding from local lenders. This then favours ownership.” >>


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