Today, more than 35% of the world's airline fleet is leased, but not all lessors are convinced that the figure will grow to 50% by the start of the next decade as expected by various market observers, including Boeing.
"I think we are about at the saturation point for operating-lease penetration. I am neither an advocate, nor a believer, that we can greatly exceed the current levels we have already achieved," John Willingham, chief executive officer of Macquarie AirFinance, said at the Ascend Finance Forum in San Francisco in December 2013. "There are some constraints on the sustainable market share of lessors because if it becomes too easy for an airline to take an aircraft... and give it back, we will end up flooding the used aircraft market."
According to Willingham, if lessors do not produce the returns that they were targeting when they originally invested, "over time this will affect the overall economics of the market".
Steve Rimmer, chief executive of Guggenheim Aviation Partners, questions whether manufacturers and aircraft pricing will allow lessors' share to grow to 50% of the global fleet.
"Manufacturers have been very plain and straightforward about how they want to control who their customers are," he says. "I don't see manufacturers, quite bluntly, allowing lessors to own that much of the market – this will be a barrier."
Also putting pressure on the growth of lessors will be the airlines, he says.
"If one associates the returns of leasing as being opportunistic returns of 15-20% IRs [initial returns], the airlines can't afford to pay that sort of return on all 50% of the leases."
However, Frank Pray, chief executive of Intrepid Aviation, is optimistic about the growth of lessors.
"Absolutely, lessors will continue to grow," he says. "We are at 40% on average today from 10-15% years ago, so I expect about 50% of the global fleet in the next eight years."
One airline that prefers fleet ownership but remains open to leasing for its upcoming deliveries is Delta Air Lines.
"We'd rather own aircraft, it is easier that way, but we will play it [fleet ownership] the way it plays out. It is not a matter of focusing on what is our ownership and leasing ratio, but rather which method offers the best economic pricing," said Nathaniel Pieper, the carrier's vice-president of fleet strategy and transactions, who was speaking at the finance forum.
Approximately 85% of the fleet is owned, but the airline has entered operating leases, such as its recent Boeing 717 agreement with Southwest Airlines, when the "opportunity makes sense".
Delta has agreed to lease 88 717s from Southwest, which is removing the type from its AirTran Airways subsidiary's fleet. It expects to have all 88 in its fleet by the end of 2015.
Pieper likens Delta's fleet strategy to a game of gin rummy: "Delta has all kinds of cards of every suit and every number. And while I would love to trade all my twos and threes for kings at one point, there is a lot of value in discarding twos and threes and taking sixes and sevens."
He admits Delta has done "very well" with its fleet ownership strategy for the past 30 years by "getting the most amount of economic life out of the asset" that it possibly could.
The airline has 19 Boeing 737-900ER deliveries scheduled in 2014, Flightglobal's Ascend Online database shows. Its regional subsidiary Endeavor Air will receive 28 Bombardier CRJ900s.
Operating lessors are expected to increase their funding levels in the commercial aviation market during the next decade.
In a finance report issued last December, lessor Avolon said operating lessors are tipped to fund $35 billion in aircraft this year, and more than $40 billion in 2014 – levels that are equivalent to the industry's total funding requirement from all financing channels a decade ago.
Source: Airline Business
