We all know that motor vehicles are the most frequently leased assets in the world. It is interesting to know which is the second most popular leasing assetThe leasing asset is the subject... More, what are the reasons for this, what is the history of this segment and of course – what are the prospects for it.
Aircraft leasing is exactly this segment.
One year after McDonnell Aircraft Corporation merged with Douglas Aircraft Company, the first leasing product was launched. In 1968 the US aircraft manufacturer McDonell-Douglas (today part of the Boeing Corporation), for the first time in history, offered captiveCaptive Leasing Company is a company... More leasing services for the aircraft it produces. This is also when the first leasing deals with aviation equipment were concluded.
Aviation leasing began its development in the early 1970s, as a small specialized niche market of marginal importance even for the aviation industry. This “niche” market gradually expanded to engulph 50% of the world’s global aviation fleet in 2020 (according to a 2019 Boeing survey).
The Industry
Aircraft leasing is now one of the leading segments of the global leasing industry. The global aviation leasing fleet is expected to reach USD 502 billion in 2024. At the same time, as it is highly specialized and involves relatively few transactions (below 1000 per year worldwide), aviation leasing rarely “gets in the news”.
Airlines have historically bought their fleets. Over the last twenty years, this trend was reversed and today more and more airlines are opting to lease their machines.
According to a 2019 report by KPMG Tracking Headwinds, the leasing fleet of passenger planes included only 1000 machines in 1990, representing about 7% of the total number of commercial aircraft (machines with a capacity of over 50 passengers) in the world. Despite the rapidly changing industry and despite the various crises during the first two decades of the 21st century, aircraft leasing has grown dramatically. In 2019, the number of passenger aircraft leased has increased tenfold, reaching almost 10,000 aircraft, or about 50% of the world’s total commercial air fleet.
There are several reasons why airlines are turning to aircraft leasing.
The first is the typical reason for leasing any asset – the financial one: the lesseeThe lessee is the user of... More can use the leased asset without carrying the financial burden of purchasing it. Leasing companiesA company whose main activity is... More themselves often have an excellent credit rating and, accordingly, access to cheaper financial resources in comparison to many airlines. Accordingly, aircraft leasing becomes an excellent opportunity to increase the fleet of airlines at a bargain price. Aircraft leasing, in its “sale-and-leaseback” form, also helps free up financial resources from airlines that have already purchased aircraft. Sale-and-leaseback is a common service offered by specialized Leasing companiesA company whose main activity is... More. Boeing reports that in 2018, 50% of their leasing planes sold to Leasing companiesA company whose main activity is... More were in the form of sale-and-leaseback (SLB).
The second reason for the preference of aircraft leasing was reinforced by the financial crisis in 2008 – the possibility of using additional aircraft and temporarily increasing transport capacity. The lesson many airlines learned the hard way during the crisis was that maintaining an expanded aircraft fleet could be catastrophic for the company when passenger traffic drops (PanAm, European, ATA, Express Jet, and many others closed only in 2008). Hence, the interest in leasing aircraft for short-term capacity enhancement, in line with demand, has grown strongly. Leasing has become a cure for crisis protection.
Until 2018, “short-term” was most often expressed in 10 – 12-year leases. Since the beginning of 2019, a new reason has emerged that makes leasing attractive to aviation operators and stimulates further shrinkage of its tenor. IFRS 16 has entered into force as of 1 January 2019, which changes the way in which leasing transactions are accounted for by lessees. If, until now, leased (operational leasing) aircraft were not reflected in the balance sheets of lessee-companies, now the obligations under these contracts should be accurately reported. This, in turn, encourages airlines to seek a shorter lease termThe lease, or leasing term, is... More of 8 or even 6 years (a 6-year lease will have twice as little impact on the airline’s balance sheet obligations compared to a 12-year lease). Lessors complied with these wishes and begun to offer shorter leases. Such flexibility would be impossible when purchasing aircraft by the airlines themselves.
The third reason is the “speed of delivery”. Buying aircraft is a long process that takes years – ordering, manufacturing, delivery. At the same time, airlines often have opportunities (eg due to bankruptcy of a competitor) to open new lines. In the absence of vacant planes, the only option to take advantage of an opportunity is to get planes from a leasing companyA company whose main activity is... More (a process which will only take a few weeks). We should also mention here the pre-delivery payments (PDP) that manufacturers require from aircraft buyers. In the relatively long production cycle, PDPs have a strong adverse effect on airlines, should they try to buy aircraft. Hence they prefer that these PDPs be borne by Leasing companiesA company whose main activity is... More.
The fourth reason is the easy upgrade of the air fleet and the lack of difficulty in handling the secondary realization of already obsolete machines. This, also, reduces the risk of residual valueThe residual value is present in... More to airlines and accordingly adds to the attractiveness of aircraft leasing. The secondary realization is the concern of the Leasing companiesA company whose main activity is... More, which in turn develop leasing with used aircraft, which usually targets smaller airlines.
The Leading Leasing companiesA company whose main activity is... More
The attractiveness of leasing, as a form of air fleet expansion, for airlines is driving demand. Increased demand, in turn, leads to an increase in specialized aviation Leasing companiesA company whose main activity is... More. If there are less than 100 specialized Leasing companiesA company whose main activity is... More (Boeing, Current Aircraft Financing Market 2019) at the beginning of the century, with the leading 2 holding over 45% of the entire market, by the end of 2018 the number of air Leasing companiesA company whose main activity is... More has increased to 153, respectively, the share of leading companies has also fallen – the leading 2 Leasing companiesA company whose main activity is... More hold only 20% of the market.
The curious thing about aircraft leasing is that we could also talk about a leading country in this type of leasing. No, this is not the United States, nor China, nor Germany. This is a relatively small island country – Ireland. More than half of the world’s aviation leasing fleet is owned by more than 50 specialized Leasing companiesA company whose main activity is... More based exactly in Ireland. The top four aviation lessors in the world (SMBC Aviation Capital, GE Capital Aviation Services, Avolon, and AerCap) are also based in Ireland. There are several reasons for this leadership role – a favorable tax environment and double tax treaties, trained professionals, good location, but most of all – the GPA history (see Guinness Peat Aviation Leasing in the History of Leasing). In preparation for protection against competitors such as Hong Kong and Singapore, in 2018, a specialized agency Aircraft Leasing Ireland was also set up.
If we add all other aircraft (passenger jets, cargo planes, and helicopters) to passenger aircraft (see above), their number in 2019 reaches 12 263, which are owned only by the largest 30 Leasing companiesA company whose main activity is... More:
One of the oldest and largest companies (by the number of aircraft) since 1996 is GECAS (General Electric Capital Aviation Services). It is a specialist US-Irish aircraft leasing companyA company whose main activity is... More which is a subsidiary of GE Capital. Their first lease deals were in 1967. The company grew sharply in 1995 when it took over much of the assets and staff of the then troubled Guinness Peat Aviation. GECAS leases large-size passenger airplanes, regional jets, cargo planes, propeller planes, and helicopters – 1900 in total in 2019. Since 1999, in addition to aircraft, GECAS has is also offering leasing of aircraft engines.
The second-largest aircraft and the first in terms of assets is AerCap, the successor to the aforementioned Guinness Peat Aviation. The company is again based in Ireland and its history is linked to the development of the entire aircraft leasing segment (see Leasing History).
Avolon is the third largest aviation leasing companyA company whose main activity is... More based again in Dublin, Ireland. As of June 30, 2019, the company operates 923 aircraft, proud of its youngest aviation fleet among the top 3 Leasing companiesA company whose main activity is... More – which is only three and a half years.
Types of air leasing
In addition to the standard types of leases, aviation leasing has three characteristic types of leasing: dry, wet and damp leasing.
They are specially designed for the needs of the aviation industry. Wet leasing involves leasing an aircraft with crew and maintenance included. The service is usually offered for relatively shorter periods (up to 24 months) and lease payments are based on operating hours. A dry lease provides solely the aircraft and is usually for a longer period. Damp (or “Moist”) leasing is something in between – the ground staff is provided by the lessorOne of the parties to the... More and the flight crew by the lesseeThe lessee is the user of... More. You can read more about them in the “Leasing Types” article.
Current trends
We mentioned above the downward trend in the average lease termThe lease, or leasing term, is... More for aircraft related to the introduction of IFRS 16. This, in turn, also leads to a decrease in the average age of leased aircraft. According to a Fitch study, the average age of leased aircraft portfolio dropped from 9.9 years in 2013 to 7.4 years by 2018. This 25% drop happened against the nearly unchanged average age of the global commercial aviation fleet, which is 11-12 years old. Statista publishes statistics on the average age of the leasing fleet of the top 10 Leasing companiesA company whose main activity is... More:
After 50 cloudless years, what can aviation leasing expect in the future? The answer is pretty straightforward – continuing rapid growth and shifting markets to the east. The volume of travel continues to grow at a rate that exceeds the 10-year average of 5.5% annually.
According to the International Air Transport Agency (IATA), in the period 2018 – 2038, the number of trips per person is expected to increase annually by 4-8% for many developing countries, and this growth is expected to reach 10-11% for India and China. This growth is well ahead of growth anticipated in advanced economies, which is expected to be around 1-2%. The growth of travel in the next 20 years, the increasing population and the rise in average incomes all imply an increase in the need for new aircraft. Hence, the prospect of aircraft leasing remains cloudless for the foreseeable future.
