The tumult of recent months has laid many economic myths to rest, including "decoupling" and "super cycles". Now the theory that lessors might escape the downturn relatively unscathed is looking shaky.
"If you look back historically, lessors have always been able to manage their portfolio deployments well, even at times of soft demand," says Frank Pray, chief executive of Dublin-based lessor AWAS. He says lessors could navigate past downturns by lowering lease rates under short-term arrangements and then repricing when the market recovered.
A different dynamic now prevails. "In today's market I don't feel lessors are immune [to] the liquidity shortages that we see in the financial markets," says Pray.
This view is shared by Bob Genise, chief executive of Dubai-based lessor DAE Capital, who voices fears of "a major shortfall in funding available to take care of all the aircraft that are on order for 2009". He cites the "tremendous contraction" of the banking and capital markets.
WHITE KNIGHTS?
Consolidation is widely considered a potential salve to the leasing sector's wounds. "There are many leasing companies that don't have sustainable business models," says Steve Hannahs, chief executive of California-based lessor Aviation Capital Group.
However, the unavailability of credit could seriously complicate potential mergers and acquisitions, including insurance giant AIG's disposal of aircraft leasing arm ILFC and the sale of bankruptcy-hit Allco Finance.
"We see more consolidation or restructuring when the leasing business is strong than when it is exposed to cyclical downturns," says Jeff Knittel, president of transport finance at CIT Group, a New York-based bank and lessor.
Any consolidation that does take place is likely to take the form of small players combining, suggests Robert Martin, chief executive of Singapore-based lessor BOC Aviation. "I don't think there are the debt volumes out there to support large-scale consolidation," he says.
"There's plenty of equity out there, there's plenty of private-equity companies looking to get into this business. Debt is the key to any consolidation."
Far from merging, big players might themselves be broken up. Either way, the possibility that sovereign wealth funds might ride to anyone's rescue appears to have receded. Some funds sustained losses last year by underestimating the severity of the downturn, perceiving stocks to be undervalued when in fact they had further to fall.
"I've heard a lot of talk about sovereign wealth funds getting involved, but since the crisis began I haven't seen anyone invest," says Martin. "The sovereign wealth funds invested in banks first and the experience hasn't all been good, and that has led them to be a little bit more cautious about investments in the financial sector."
Furthermore, plummeting oil prices in the second half of 2008 have doubtless encouraged caution at the sovereign wealth funds of oil-producing countries.
With consolidation problematic, lessors are likely to train their sights on export credit agencies and airframers as they look to ease their liquidity worries.
US export credit agency Ex-Im Bank has already expressed its willingness to provide direct loans, and European counterparts such as France's Coface and Germany's Euler Hermes can be expected to take a similar line.
Meanwhile, Airbus expects to double the amount of vendor financing that it provides, and Boeing's financing arm - Boeing Capital - has filed a shelf registration with the US Securities and Exchange Commission to sell up to $5 billion in debt securities.
Yet there remains scepticism as to whether such help will be sufficient, especially if production is not curtailed.
Meantime, the plight of lessors has been eased by falling interest rates, which - say a number of lessors - have so far allowed yields to remain relatively constant as headline lease rates decline.
Caution must remain the watchword, however. "What the lessor community has to ask itself is whether they really want to go after additional business at this time," says Genise. "It's a good time to keep your head down."
Source: Flight International
