The balance of power is shifting from airlines to leasing companies. Aircraft leasing companies now control around 50% of ‘in-service’ aircraft, up from 30% in 2000. Both airlines and OEMs are increasingly dependent on lessors. What is going on?
Rapid expansion across both FSC’s and LCCs created a painful case of oversupply in the market for wide-body aircraft in the years before the pandemic. Post-pandemic, airlines took the crises as an opportunity to renew their fleets, shift away from older fuel-inefficient planes towards next generation aircraft and streamline operations such as training and maintenance. Many are retiring wide-body planes, deferring or cancelling orders, or swapping orders for smaller planes. Aircraft that have been retired in large numbers during the pandemic and will continue to be phased out include Boeing 777s, Airbus’ A330-200 and Airbus A330-300. From Etihad and Lufthansa to British Airways and Thai, the pandemic has spared no one.
The impact of this shift shows to dramatic effect in the leasing market for Boeing’s 737MAX. Orders fell like skittles: Avolon (75), ACG (60), SMBC Capital (18), CDB Aviation (7) and ALC (6). Though there will be an uptick in the medium term as the impact of the pandemic works its way out of the industry.
Aviation’s Wingmen: Leasing Companies
Meanwhile, the Covid-19 induced crises caused a liquidity crunch across the aviation industry. Traditional sources of funding, for both airlines and OEMs, dried up or became too expensive. Demand for ‘sales and lease back’ (SLB) transactions in particular grew as airlines turned to leasing companies to reduce capital expenditure and pressure on balance sheets.
The aviation leasing community stepped up. Aircraft leasing companies, especially those with strong credit ratings, and therefore better and cheaper access to financing, debt and hybrid equity were able to support airlines stuck in a cash crunch. According to Betsy Synder, aircraft lessors with large portfolios of ‘unencumbered assets,’ or who had cancelled or deferred orders or ‘stretched out debt maturities’ were able to maintain access to liquidity. These players were able to offer lease financing or SLB facilities to customers in need.
Survival of the fittest
Before the pandemic, high demand for aircraft fuelled by exponential growth in air travel created huge opportunities for aviation leasing companies. An industry dominated by European and North American companies became increasingly competitive as new players from Korea, China and more recently India, began to enter the market. The knock-on effect of this increase in lessors was declining leasing yields.
Post-Covid19, the smaller or inexperienced leasing companies, particularly those who aggressively pursued market share to enter deals with ‘ultra-low lease rate factors,’ as part of sale and lease back transactions (SLB), found themselves in trouble. As these players were forced to retreat, bigger players stepped in. DAE Capital and BOC Aviation dominate the industry while Avolon’s portfolio has increased over 50% in 12 months.
Implications of the power shift
Adam Pilarski of Avitas points out that lessors have become stronger because airlines and OEMs have become weaker. The shift in balance of power is purely an accident of circumstance. But it will be all too permanent. At least for a while. What will this mean for the future of airlines and OEMs?
Aircraft leasing companies will have a bigger say in the design of future aircraft, make up of fleet portfolios and negotiations of leasing terms. It is likely that leasing companies will focus their investments on the more efficient narrowbody aircraft such as the Airbus A220, Boeing 737 MAX and the Airbus A321XLR (newest addition to the A321neo family).
OEMs should follow the money, reduce widebody production and invest not just in twinbody fleets but also innovation designed to make this sector more sustainable.
