Aircraft lessors buckle up for continued turbulence as players consolidate, struggle to scale up

THE benefits of scale and the impact of consolidation will continue to shape the aircraft leasing industry over the coming decade, said Andy Cronin, chief executive of Avolon, the world’s second-largest aircraft lessor.

He said the benefits of scale are significant, particularly where the plane manufacturers are sold out for such a long time in advance.

Cronin was in Singapore to attend the Airline Economics Singapore conference last week, and spoke to The Business Times in a wide-ranging interview.

He has seen consolidation among aircraft lessors taking place post-pandemic; a clearer difference between lessors that are rated investment-grade and those that are not; plane orders placed by a smaller number of players; and the barrier to entry getting higher.

“It’s much more difficult to get an order book now. It’s much more difficult to get bank financing because of changes in bank regulations, and it’s much more difficult to get to scale,” he said, listing the difficulties that lessor startups face.

Mergers and acquisitions

The chieftain of the Dublin-headquartered aviation finance company therefore expects merger and acquisition activities to further increase.

“The industry will benefit from some consolidation. It has for the past 20 years been overly fragmented actually, and I think that that is coming to an end in the new chapter beginning.”

Thomas Baker, chief executive of Aviation Capital Group, pointed out during a panel discussion at the conference that the inability of the planemakers to manufacture aircraft fast enough has impaired access to aircraft through ordering and sale-and-leaseback channels.

This has led to “extraordinarily active” secondary-market trading as well as merger and acquisition activities, he added.

He said: “I think you are going to see, in the absence of more new aircraft coming, it’s going to be portfolio trades and consolidation.”

Avolon, for one, has agreed to acquire Castlelake Aviation, with the transaction expected to complete in the first quarter of 2025.

Avolon has more than US$31.5 billion in assets and serves 141 airlines in 62 countries. It had a fleet of 1,137 as at end-September, including Castlelake Aviation’s 118 and its orders of more than 440 new planes – the largest among lessors. In 2023 alone, Avolon ordered 200 planes.

The lessor will receive the planes it ordered largely till the end of the decade and into the early 2030s.

This, Cronin said, positions the privately held player jointly owned by China-listed Bohai Leasing and Japan-listed Orix well for the promising Asia-Pacific aviation market, where about 42 per cent of its fleet is on lease and counts IndiGo, Cathay Pacific, AirAsia, Akasa Air and Korean Airlines as customers.

India, China and South-east Asia are expected to drive demand for air travel in the region.

Undersupply

But, the undersupply of planes will be more acute in Asia in the next two to three years, as airlines in the region deferred plane deliveries during the pandemic. On the other hand, their peers in the US, for example, aided by federal assistance, had been taking plane deliveries in that period.

While carriers would require a significant number of aircraft, Boeing and Airbus have shown how difficult it is for them to increase production, noted Cronin.

Lessors have also not been actively ordering in the past years, resulting in the reduction of their share of plane deliveries from around 40 per cent to 25 per cent over the next five years.

The smaller share of lessors of the backlog of plane deliveries, he said, will certainly put upward pressure on lease rates.

He forecasts that lease rates could rise by another 10 per cent, noting that the current rates are 10 to 15 per cent higher than the pre-pandemic period, as 10 per cent of global fleet had been removed during the pandemic.

Particularly, the lease rate for new aircraft will stay high because these planes are fuel-efficient and less noisy, satisfying economic and regulatory requirements.

Elevated lease rates bode well for the industry, as lessors are still grappling with the challenge of restoring their return on equity (ROE) to pre-pandemic levels.

Providing the right amount of value relative to other asset classes is a challenge for lessors, said Cronin, as current higher lease rates will take effect only on planes placed out in the next two years.

He said: “I think it’s important that the industry recovers back to its pre-Covid levels of returns, in order to continue to attract capital from other sectors.”

Prior to the pandemic, the ROE on average was 11 to 12 per cent. “Post-Covid, it is now probably more like 7 or 8 per cent, if you take a sample of the top five public reporting lessors.”

Avolon, which has an investment-grade rating, taps the US debt capital market for funding.