Airlines could lose appetite for sales and leasebacks as cheaper fuel creates healthier cash positions, a lessor cautions.
Toby Bright, Jackson Square Aviation's head of marketing, told Flightglobal at the ISTAT Americas conference in Phoenix: "The long-term impact of lower fuel prices concerns us – if airlines generate a lot of cash when fuel prices are low, they could be less interested in sale and leasebacks. However, we still argue that our product reduces airline exposure to residuals risk, and we think we still have a good argument."
Sale and leaseback activity is the "mainstream" of Jackson Square's business, he adds.
Airlines' spend on fuel will drop to $192 billion this year, from $204 billion last year, IATA predicts.
Stronger economic growth and cheaper fuel mean global airlines will report their strongest profit margin in more than five years in 2015, says the association.
It foresees net profit rising to $25 billion this year, giving a profit margin of 3.2%.
However, airline demand for sale-and-leasebacks activity is robust at the moment – a situation that has drawn an abundance of investors to the sector.
"There is no question over the last year we have seen a lot of new entrances; the number of bidders have definitely gone up," Bright says. "One airline said to us we didn't do bad: we came in number 42 out of 70. There are definitely a lot of new entrants out there. It is very competitive, not a doubt."
He adds: "On some deals, the airline just asks for financing and both the finance lease and operating lease bidders get involved."
Scott Weiss, Jackson Square's operating chief, sees a lot of the new interest in the sector coming from institutional money managers.
"Whether you are an insurance company or a Canadian pension fund, you don't necessarily have the capability or the depth or the management expertise to go out and bid the airline sale and leaseback itself," he says. "These companies are more interested in partnering with an experienced lessor who has a good relationship with the airline. Some people call it sidecar vehicle or a parallel fund. It allows them to get some exposure to the sector."
To win bids in a hugely competitive sale-and-leaseback marketplace, Jackson Square has begun providing pre-delivery payment financing for customers.
"We have done this for the Airbus and Boeing product lines: we had contracts in place with the manufactures as a recognised provider of PDP financing," says Weiss.
He adds: "We do it only to win sale-and-leaseback business – we don't do it on its own without a sale and leaseback attached. We have seen it as a competitive advantage to offer over the past years. Overall, we would probably prefer not to do it, but we will do it to help us win business."
Another way to handle PDPs is through Jackson Square's banking contacts, says chairman Naoki Soto.
"Our capital market group has good contacts with the banks and sometimes we try to arrange a deal where a bank group provides the PDP financing and, in conjunction, we provide the operating lease after delivery," he says.
Jackson Square is already seeing requests from Airbus A320neo customers for its services.
"We have seen some interest from airlines that have taken large order positions in those aircraft and are looking for lessors for sale-and-leaseback financing, but also help on their PDP requirements," he says.
Source: Cirium Dashboard
