Aircraft Leasing Bubble in Trouble?

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Alarming signals are coming from an unlikely place, the market that the industry long touted as an engine of infinite growth.

By MC01, a frequent commenter, for WOLF STREET:

In 1990, leased aircraft accounted for 15% of airline fleets. By 2017, the overall fleet of aircraft had ballooned, and within this much larger overall fleet size, the share of leased aircraft had surged to 40%.

There are three general reasons why companies lease aircraft: To operate without the financial burden of buying them, a particularly important factor for the rapidly expanding fleets of airlines in the emerging markets; to provide extra capacity for a limited time; or to temporarily replace part of their fleet which may have become unavailable.

Aircraft leases can be “wet,” dry,” or “moist” (“mixed”): in a wet lease, the lessor provides the aircraft (A), complete crew (C), maintenance (M) and insurance (I), so it’s also called an ACMI lease. In a dry lease, the lessor provides only the aircraft itself.

There are several variations to these two categories: for example, large cargo companies such as FedEx and DHL may buy the aircraft and lease them to other companies that will operate for them under an exclusive contract. This type of lease may be further complicated by the lessor also owning a stake or even a majority in the lessee. For example, DHL wholly owns European Air Transport Leipzig which operates exclusively for the parent company, from which it also leases all of its aircraft.

A “moist” or “mixed” lease starts out as “wet,” usually to allow the lessee to train and qualify the crews to operate a new aircraft type commercially and set up maintenance and insurance contracts. It turns into a dry lease once the lessee is ready to operate the aircraft.

Dry lease contracts run for a predetermined length of time, generally but not always starting at two years. Pricing is on a monthly basis, with provisions regarding insurance, depreciation, maintenance etc. For example, leasing an aircraft from a company partially owned by an insurance company may come with strong incentives to use that same insurance company. Maintenance Reserves (also called Supplemental Rents), meaning the funds collected during the duration of the lease to cover the costs of maintenance of the airframe, landing gear, engines and APU (Auxiliary Power Unit) may be bundled in the lease cost, unbundled, or be the subject of separate contracts. And so on.

The costs themselves vary wildly. An Airbus A320ceo less than six years old will set your fledgling air travel company back about $250,000 per month. An older A320ceo (over 12 years) will allow you to save a lot of money on the bare lease, costing you $160,000 per month, but will have considerably higher maintenance costs, as Maintenance Reserves are usually unbundled on leases for aircraft this old. The average “A Check,” a package of routine maintenance and inspection procedures performed on “classic” Airbus aircraft every 50 days or 425 flight hours (whichever comes first) is about $14,700 for an A320ceo.

Wet lease contracts are structured in different fashion, with the contract running for a certain duration and number of flights (say, four daily flights for four months) and pricing is by “Block Hours” (BH) meaning the time between the closing and opening of the doors during a revenue generating flight.

An Airbus A320ceo will set you back about $2,800 per BH while an Airbus A330 will be about $5,700. On top of this, most lessors will ask for a lump sum per staff member, usually about $57 to $85 per staff member per flight.

While there are dozens of aircraft leasing companies and also airlines offering wet-lease services – among the most active are Qatar Airways, Alba Star, and Air Atlanta Icelandic – the worldwide market is dominated by a handful of megacompanies owning over 250 aircraft each.

In descending order by fleet size (as of October 2018), they are: AerCap, GECAS, Avolon, Nordic Aviation Capital, SMBC Aviation Capital, BBAM, BOC Aviation, ICBC Leasing, the Air Lease Corporation, and the Aviation Capital Group.

GECAS (General Electric Capital Aviation Services) is probably the most famous of the lot. As the aircraft leasing arm of GE Capital, it rose to worldwide prominence between 1993 and 1996 when it took over many of the assets of leasing pioneer Guinness Peat Aviation, a victim of overambitious expansion plans. Despite a longstanding policy of buying exclusively aircraft with engines from GE or CFM (joint venture between GE and Safran of France), this policy was recently relaxed due to pressure from faithful customers such as Qatar Airways to include other engine options, such as Rolls-Royce and Pratt & Whitney.

GECAS has not been spared by the unfolding GE fiasco: After GE Capital sold off its banking unit, GECAS was cut off from a source of capital with extremely favorable conditions and was forced to finance its operations at going market rates. This coincided with a period of exceptionally loose financial conditions, which for a while allowed GECAS to shrug off these higher capital costs. But as it always happens, it worked until it didn’t.

GECAS has seen the value of its portfolio (not inflation adjusted) shrink from its 2012 peak of $34.1 billion to the latest estimate of $23.6 billion. Its fleet declined 42% from 1,600 aircraft in 2012 to 930 in 2017, as aircraft are either struck from the fleet and not replaced or simply sold to raise cash.

GE has hired Goldman-Sachs to carry out a review of GECAS and help decide its future. GE has already been in talks with several potential buyers, including GIC, Singapore’s sovereign wealth fund, BOC Aviation, and ICBC Leasing.

The latter two are particularly problematic as they’re subsidiaries of Chinese state-owned banks: BOC Aviation belongs to the Bank of China and ICBC Leasing to Industrial and Commercial Bank of China (ICBC). While GECAS is registered in Ireland like so many other leasing companies, it’s beyond doubt that the US government would take a strong interest in the transaction – GECAS is a big customer of the highly strategic US aerospace industry.

In terms of Chinese aircraft leasing companies, HNA Group’s stupendous acquisition binge abroad ended up attracting the attentions of the Chinese government, which is now pushing the company to reduce leverage levels. So HNA made a deal to sell a 30% stake in Avolon to Japan’s Orix Corporation.

Avolon is a posterchild for HNA’s crazed and convoluted expansion drive: It was bought in late 2015 by Bohai Capital Holding, an HNA Group company, for $2.5 billion. One year later Avolon bought CIT Group’s aircraft leasing division for a massive $10.4 billion to create the world’s third largest aircraft lessor by fleet size.

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Orix (part of the Mitsubishi keiretsu) will pay $2.2 billion for a 30% share in a company that in Q1 2018 was implied to have had an enterprise value of $23.7 billion. This means either a huge discount or that Avolon has taken from its parent group a highly convoluted corporate structure that makes determining its ultimate value extremely difficult.

BOC Aviation, one of the interested parties in the anticipated GECAS sale, has become a Hong Kong stock market darling since its IPO in May 2016. This has also allowed potential investors to have a peek at its financials, including net debt of HKD88.8 billion.

Like BOC Aviation, the entire aircraft leasing industry has become dependent on low interest rates and massive infusions of capital from China, whose investors (often state-owned or state-backed) now account for a 30% of total capitalization.


While complacency still reigns, alarming signals have already started to come from the most unlikely place, the one market which the air transport industry (including leasing companies) long touted as an engine of infinite growth: India.

Domestic Indian airlines have asked local authorities through the Federation of Indian Airlines (FIA) to be given “government assistance” in obtaining unsecured loans to offset their now depressingly common losses.

The true reason for this brazen request is Indian airlines have added so much capacity at such a rapid pace they are dealing with a glut of epic dimensions: To give an idea of what kind of crazy expansion we are talking about here, IndiGo had a 50-aircraft fleet in 2012. It now has 196 aircraft with a migraine-inducing 412 on order.

This fleet growth has led to a capacity glut which in turn fueled an all-out fare-war between India’s airlines that has destroyed profitability. For example, to win over customers from competition airlines, SpiceJet will often wave the bane of air travel, fuel surcharges, ending up with big financial losses as it has to eat the extra costs.

Indian airlines and leasing companies are still convinced the way forward is unbridled expansion, with fleets that are projected to be four times larger in less than a decade than their current fleets, and with the Ministry of Civil Aviation having already cleared eight brand-new airlines for domestic operations just over the past two years.

Aircraft leasing companies have already signed contracts to lease hundreds of aircraft to Indian companies over the next decade. As this engine of “infinite growth” stumbles and clashes with multiple problems, leasing companies will have to adapt and hope similar problems don’t surface elsewhere in the world. But with companies such as Indonesia’s Lion Air determined to more than double their capacity over the next decade, I predict a lot of changes in the industry, and a lot of lessons learned. By MC01, a frequent commenter, for WOLF STREET

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