Aircraft lessors have been growing fast in Asia, but few are likely to pose a major challenge to Western domination of the sector.
The combination of cheap debt and a strong appetite from carriers in the region to take on operating leases and conduct sale-and-leaseback transactions have prompted the emergence of a number of new lessors in recent years.
The key focus in recent years has been China, where a number of lessors and financiers have geared up to meet the country's huge leasing needs.
While it has proven to be a happy hunting ground for the world's top-tier lessors, Beijing is increasingly working to establish more of its own lessors. Some of these newcomers hope to grow well beyond the region.
At a recent industry conference, GECAS chief executive Norm Liu expressed his belief that a Chinese lessor will eventually take the number three spot in the world.
Most of the growth that will propel a homegrown lessor into the top tier will come from the domestic market, says Fitch Ratings senior director Jonathan Lee.
"Currently, Chinese lessors have about 40% market share," he tells Flightglobal. "In 2017, they will be about 50:50, and in 2018 they will have a bigger share, around 55% of the China market."
Most of those lessors have grown through sales and leasebacks with the growing array of Chinese airlines. Their links to second- and third-tier banks have also given them access to capital to pursue such opportunities.
"They are expanding their capacity very quickly, and have very large capital infusions from their parents," says Lee.
However, he believes that longer term, there will be consolidation among the smaller players, while some will play a niche role in supporting China's maturing aircraft manufacturing industry.
That is evidenced in the backlog for the Comac C919. Flightglobal's Ascend Fleets database shows that of the 275 firm orders for the type, 200 are from Chinese lessors, including CDB Leasing, Bank of Communications Leasing and ICBC Leasing. Tellingly, the largest single order – for 50 aircraft – is held by state-owned CCB Financial Leasing.
Chinese aviation conglomerate AVIC has also used its finance arm, AVIC Capital, to help facilitate sales of the Xian Aircraft MA60 to carriers both in and outside the country.
Nevertheless, Lee says ICBC and CDB Leasing are well placed to rise and dominate the industry, particularly as they have focused on placing aircraft outside of the country.
ICBC has already been on a strong – albeit largely quiet – growth path that has made it one of the larger lessors in the world. Ascend Fleets shows that it has 176 aircraft in its portfolio, while the 117 on order give it a strong delivery pipeline to drive further growth.
For its part, CDB Leasing received an "A+" rating from Standard & Poor's earlier this year, with the agency noting that the lessor is viewed as "strategically important" to its state-owned parent company, China Development Bank.
China continues to press for more lessors, and has been actively promoting its free trade zones in Tianjin and Shanghai, particularly, as key bases. Some foreign lessors, such as BOC Aviation, have established offices in the free zones to take advantage of the tax concessions. Carriers such as Spring Airlines have also established their leasing units there.
Nonetheless, there are signs that China is not yet ready to challenge the status quo and will not become a giant in the global sector.
Critics point out that bids in recent years by two separate Chinese consortia to acquire ILFC came to nought. The US-based lessor was later acquired by AerCap.
History repeated itself last year, when AVIC Capital teamed with China Investment Corporation in a bid for Avolon Holdings. In August 2014, two state-owned Chinese companies revealed that they were conducting due diligence to bid for the Dublin-based lessor. The lessor's management rejected the bid in November, and the company went on to complete its planned initial public offering.
HONG KONG HUSTLE
Although the bulk of activity in the leasing market has centred on mainland China, there have been major moves in Hong Kong in the last year.
That's not to suggest that Hong Kong has not already been busy. In June 2014, the Hong Kong-based China Aircraft Leasing (CALC) debuted on the Hong Kong Stock Exchange, making it Asia's first listed lessor.
While there were many deriders of the IPO, which closed fully subscribed, the recent performance of the share price appears to have validated the move. While it was listed at HK$5.53 ($0.71) per share, it started 2015 trading around the HK$12 mark.
CALC also had a busy year expanding its portfolio. This included acquiring four new aircraft from carriers including AirAsia. These were then leased to clients in China.
In addition, the lessor signed a 100-aircraft order for A320-family aircraft during the second half of 2014. Those aircraft are scheduled for delivery between 2016 and 2020.
It is also reportedly in discussions with Boeing. If reports are true, CALC could also announce a big 737 Max deal in 2015.
CALC makes no secret of its focus being firmly on the Chinese market, counting carriers such as Sichuan Airlines, China Eastern Airlines and Chengdu Airlines among its clients. However, this year, it will also make its first aircraft deliveries to a customer outside China, with five A320s to be delivered to Air India.
As well as the growing operating lease portfolio, CALC has signed a memorandum of understanding to establish an aircraft disassembly joint venture with the Harbin government.
The new business will be established in phases, with the total investment set to be $2 billion, including acquisition of aircraft to be torn down at the facility.
"The new aircraft disassembly business will generate synergy with our existing aircraft leasing business," says chief executive Mike Poon. "Through a package-deal model, we will dispose of aged aircraft for airlines whilst providing them with new aircraft leasing services."
CALC's growth has been helped indirectly by its links back to Beijing. Its largest shareholder, China Everbright, is a subsidiary of China's finance ministry.
The lessor's high-profile IPO, however, was soon eclipsed by Cheung Kong's debut in the leasing space in November 2014. The company, founded by Hong Kong billionaire Li Ka-Shing, has historically invested in infrastructure, technology and real estate in the city state and beyond. Prior to November's announcement, which had been long rumoured in the industry, it had dabbled in the aircraft business with investments in aircraft funds.
The announcement came in the form of a series of deals to buy 44 aircraft from BOC Aviation, GECAS and Jackson Square Aviation. Cheung Kong also took a 60% stake in a newly established joint venture with MC Aviation Partners, which will begin with a portfolio of 15 aircraft transferred from the Japanese partner.
Lee says the entry of the company into the aircraft leasing business is a major positive for other lessors.
"Through these transactions, they provide more liquidity into the secondary market. I think this is good for lessors looking to move aircraft out of their fleet," he says.
Cheung Kong had been a strong contender to acquire AWAS's planned divestment of 99 newer aircraft from its portfolio, but sources indicate that it is no longer the frontrunner in that competition.
Other established lessors in Hong Kong have also grown. Hong Kong Aviation Capital (HKAC) last year ordered 70 Airbus A320neo-family aircraft, marking the first time it has placed a speculative order.
In addition, it has added more aircraft to its portfolio through sales and leasebacks with a diverse range of carriers, including Volaris, SriLankan Airlines and Azul.
Earlier in the year, HKAC chief executive Donal Boylan said that the company had started a search for new investors to take it to the next stage. Speaking to Flightglobal in November last year, he said that HKAC was still sorting through some of the offers available. One difficulty is that its two shareholders – China's HNA Group and Bohai Leasing – together still plan to hold a 51% stake in the company, likely lessening the appeal for some potential bidders.
The importance to HNA particularly has been evident in recent months. In a December 2014 regulatory disclosure, Bohai Leasing said that HNA-backed carriers Tianjin Airlines, West Air and Capital Airlines had taken rights of first refusal on 55 of the A320-family aircraft from HKAC.
Under the agreement, the three airlines will be able to reserve the aircraft for lease or purchase from HKAC. As of December, however, Boylan told Flightglobal that no lease or sale agreements on the aircraft had been formalised.
Some argue that the move further demonstrates that HKAC's ambitions are less about becoming a global giant in the airline industry and more focused on meeting HNA's needs.
At the smaller end of the scale, Hong Kong's Regent Hotels group has also made a major play to increase its exposure in the leasing market. The company already owns two A321s and an 80% interest in a 737, and agreed late last year to buy 18 Embraer regional jets with leases attached for $84.7 million from ECC Leasing.
Signs are that there may be further growth ahead in Hong Kong, with the government set to enact a package of tax and other incentives this year, with the aim of attracting more lessors to the city.
Hong Kong plans to focus its pitch on the positives of its UK-style legal system, proximity to China and deep financial markets in the race to attract lessors to set up shop there.
That will put it in competition with Singapore's long-held aircraft leasing scheme, while some also see it competing with China's growing free trade zones in Tianjin and Shanghai, which have attracted some foreign lessors to establish their offices within the zones.
Some are sceptical of China's free trade zones, however. Dewey Yee, a member of the Hong Kong Economic Development Board and architect of the city state's planned aerospace investment scheme, dismisses the free-trade zones as a "real-estate scheme".
AIRLINES AS LESSORS
The other growing phenomenon in Asia has seen those airlines with large orderbooks, most notably Lion Air and AirAsia, leveraging them to create their own leasing platforms.
Lion's Singapore-based unit Transportation Partners has played a key role in leasing aircraft to the Indonesian carrier's offshoots in Thailand and Malaysia, while also managing the financing of Lion's fleet.
Last year, it signed its first external leases, supplying four 737-800s to Chinese carrier 9 Air, a subsidiary of the Juneyao group. It also completed a sale and leaseback on an ATR 72-600 with Brazil's Azul. Both deals show that its future is not completely tied to managing aircraft within the Lion group.
Lion's regional rival, AirAsia, also joined the show last year with the establishment of Asia Aviation Capital, based in the Malaysian tax-free territory of Labuan.
Asia Aviation Capital, unlike Transportation Partners, is primarily focused on managing aircraft leased out to AirAsia's various affiliate carriers, and also managing the withdrawal of aircraft from its fleet.
Speaking at an industry event in Dubai in October 2014, AirAsia group chief executive Tony Fernandes hinted that it could look to bring in additional shareholders to the unit but could also pursue its own listing.
"The leasing market is hot, there's a lot of capital going into it," he adds. "We've got a great market, a great product, we own all our assets. We can start to lease those assets to third parties."
The model is starting to spread elsewhere too, albeit for different reasons.
Chinese carriers Spring, China Southern Airlines, Lucky Air and Joy Air have all made moves to establish platforms, based in the free trade zones. Their immediate motivation, however, appears to stem from tax concessions, although some see those platforms growing further.
"By setting up this leasing company in the Shanghai free-trade zone, we can also enjoy some of the benefits of the special policies for leasing companies," Spring Leasing chief executive Chen Ke tells Flightglobal.
However, he sees other opportunities ahead in the near future.
"In China, a lot of aircraft are 10-12 years old, so that means that the first delivery financing has nearly expired, but the aircraft still have 10 or 15 years of life, so they need a second financing."
Despite the growth of airline-linked lessors, few expect that they will pose a major threat to established lessors as they will lack the scale required to be competitive over the long term.
Without question, Greater China is emerging on the global leasing scene. The single biggest criticism, however, is that they lack the scale to truly compete on a global stage.
Fitch's Lee believes that scale is a crucial attribute for a global player: "Once you have the size, you enjoy the benefit of scale and steady revenue, and the ability to redeploy ageing aircraft."
There are also issues novating aircraft finance across from an airline to a leasing platform. Others point out that, unlike the bank-backed lessors, such companies may also struggle to secure low-cost funding, especially if there is a sudden shift in the liquidity environment.
MORE INVESTMENT
Despite the doubts of some, indications are that the aircraft leasing industry in Asia will continue to grow, particularly as investor appetite for aircraft increases.
Speaking during a forum in Hong Kong last year, BOC Aviation chief executive Robert Martin called on the industry to tap more equity from areas outside the USA.
"We're just about to move into a strong US dollar period. This is a US dollar-based industry and while we have a strong dollar, we must make some headway in it," he says. "I think Asian investors in particular are going to look to invest some of their portfolios into US dollars."
Lee agrees that there are good prospects ahead for investment.
"People think it is reasonable good growth, and the yield is pretty good. This will probably attract more equity funds into the market, either buying [into aircraft lessors] or forming smaller leasing companies."
However despite the success of CALC's IPO, he does not expect many others to follow suit.
Other analysts also point out that the natural home for any future IPOs will likely remain the USA for the foreseeable future, as stock analysts there understand the dynamics of the business better.
IPOs aside, Lee believes that, for the bank-backed lessors especially, more investment is on the way. "These leasing arms are new businesses for their parents so I think there will overall be more investment."
Source: Cirium Dashboard
