Chinese travel demand may favour aircraft lessors like BOC Aviation, China Aircraft Leasing Group

PENT-UP travel demand and China’s reopening continue to support global aircraft demand, tilting the supply-demand balance in favour of lessors, said DBS Group Research.

In a report on Monday (May 29), the research house said it is positive on aircraft lessors BOC Aviation and China Aircraft Leasing Group. It also maintained its “buy” call on both counters.

This comes amid the lessors “promising” medium-term earnings trajectory and undemanding valuations, it said.

Despite increased recessionary risks and rampant inflation, air travel demand has remained resilient, DBS noted, given that global air passenger capacity appeared to be tracking well against its estimates.

“This growth was primarily driven by a resurgence of travel in Asia, led by China’s long-awaited reopening combined with a broad-based turnaround in other regions,” it said.

Additionally, aircraft supply may be tighter as a large proportion of stored aircraft may not return to service and protracted production challenges intensify the shortage, DBS said.

“Steadfast air travel demand and constrained aircraft supply are constructive for aircraft values and lease rates,” it said.

Although rapid interest rate hikes and ongoing aircraft delivery delays will create near-term net lease yield pressures, DBS expects these challenges to be mitigated by reductions in lease restructuring and aircraft in transition, and improved cash collection.

DBS expects a further recovery in aircraft demand in the near term as forward-booking data shows “no signs of slowing down” despite macroeconomic uncertainties.

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The research house also projected a higher portfolio yield from 2024, given the current improved lease rates.

It added that aircraft lessors could see further gains over the medium term following an increase in aircraft leasing over the duration of the pandemic, with the share of leased aircraft increasing to 52 per cent from about 47 per cent pre-pandemic.

Shares of BOC Aviation were trading down 2.2 per cent or HK$1.30 at HK$58.50 as at 1 pm on Monday. Meanwhile, shares of China Aircraft Leasing Group were trading up 1.4 per cent or HK$0.06 at HK$4.52 as at 11.05 am.