REPORT BY MARK PILLING IN LONDON
With their stable order flows, leasing companies have played a crucial role for Airbus and Boeing in the past few months, and their importance is likely to increase as larger carriers move to operating leases
With times getting tough, the manufacturers have been able to rely on one type of customer above all others. While some seek to renegotiate their orders, the leasing companies just continue with business as usual. "You can count on them for delivery," says Nicole Piasecki, Boeing's newly promoted vice-president for business strategy and marketing, who formerly looked after sales to the lessors. "Since 11 September, lessors have played a starring role in our business. They have taken delivery of their aircraft when originally contracted. None have defaulted or deferred orders."
The same pattern is noted by Airbus chief commercial officer John Leahy, who claims credit for persuading the lessors to take hundreds rather than handfuls of aircraft at a time as the market grew in the mid-1990s. "Over the past two years, a lot of people were saying we were giving too much production to lessors. The answer is we've just had the ultimate downturn, and of all the delays, deferrals and cancellations since 11 September, only 11% came from leasing companies," he says.
The nature of the deals between lessors and the manufacturers means the relationship can really only work this way. "The lessors know Boeing has a policy that essentially we do not slide leasing company deliveries as part of selling through them," says Piasecki. "Why would a manufacturer sell through a channel if that channel did not take those aircraft?"
Around 30% of Airbus production is allocated to lessors for 2002/3. Prior to the US terrorist attacks of 11 September, Airbus would have been concerned only if this figure rose above 35%, but "today we are not bothered if the backlog goes over 40%" says Leahy. The backlog percentage tends to fall for the actual delivery year, as lessors place their orders several years in advance while airlines generally order at shorter notice.
Piasecki says Boeing's backlog committed to lessors stands at 31% of total. The company has delivered around 30% of its narrowbody production to lessors for the last ten years, while at the same time the percentage for widebodies stood at 17-20%. "The lessors tend to take a steady number of aircraft per year, regardless of the cycle and regardless of what we are producing," she says.
Delivery slots
Boeing is more wary than Airbus about allocating more than 30% of production to lessors. The argument against raising it too high is that airlines wanting aircraft at short notice find delivery slots already taken up by lessors, and subsequently have no choice but to opt for an operating lease. Demand for operating leases has risen steadily over the last decade, although growth has recently showed signs of starting to settle. Boeing is monitoring the market carefully, however, and could lift the 30% figure if the airlines increase their appetite for operating leases, says Piasecki.
Airbus is less concerned about the slot issue, with airlines simply moving to operating leases if they want aircraft at short notice. "As long as there is capacity through the leasing companies, I'm happy," says Leahy.
While this debate continues, there is no question over the importance of the world's two largest operating lessors GE Capital Aviation Services (GECAS) and International Lease Finance (ILFC) to Airbus and Boeing. Together they easily represent the biggest leasing customers for the manufacturers. For example, of the deliveries Boeing makes to leasing companies, around 70% is bound for GECAS and ILFC. The same applies to Airbus. "What better customers can you have?" asks Leahy, "they pay cash, they don't need any [financing] help and they are triple-A rated."
Neither manufacturer is worried that these lessors are becoming too dominant. "There truly is some benefit to their size in terms of being able to offer more to airline customers," says Piasecki of Boeing. And this is not just in terms of attractive pricing generated by buying in bulk. For instance, the large portfolios held by the leading lessors gives them flexibility to offer airlines the chance to trade down to smaller aircraft when traffic is under pressure.
But, according to Piasecki, a second level of smaller but strong lessors is crucial to "ensure a level of competitiveness in our leasing channel, so value is getting to the airlines". The manufacturers prefer to work with a handful of established players such as Tyco Capital Aerospace, Ansett Worldwide Aviation Services and Boullioun Aviation. "We don't really tend to have the smaller lessors. It is important to have a partner with a steady delivery stream from Boeing so there is market continuity - one delivery per month is fine, one per year is not," she says.
What the smaller lessors can often offer are aircraft available at shorter lead times, perhaps just two months prior to delivery. GECAS and ILFC tend to place aircraft on longer lead times. Other lessors pride themselves on having particularly strong technical expertise.
Whatever size, lessors have played a crucial role in placing aircraft over the past few months. "Leasing companies are increasingly becoming the financiers - they are very good at facilitating deals with airlines," says Leahy. "After 11 September we had quite a few airlines that were having difficulty financing aircraft." A swift telephone call and the lessors were on the case. "It has meant the ability to raise $1 billion worth of financing that we had not expected to do through the lessors, above and beyond what was already ordered."
Boeing cites two deals closed immediately after 11 September that lessors were instrumental in bringing about - ILFC finalised a deal with Hungarian flag-carrier Mal‚v for Boeing 737-800s, bringing a new customer for this type, despite the troubled market; while the first 737-800 to be operated in Australia was leased by Tyco to low-cost carrier Virgin Blue in November, says Boeing.
The US manufacturer's own aircraft finance and leasing operation, Boeing Capital (BCC), has played a growing role in ensuring that aircraft it has ordered are delivered. However, Boeing and Airbus are going in opposite directions in this area. Two years ago Boeing clearly identified finance as one of the key areas which it plans to boost as part of a wider corporate strategy of diversifying beyond core aircraft production and into related service areas. It has steadily grown the BCC portfolio from around $3 billion to $7 billion today.
Airbus is going the other way. "We are at a fork in the road compared to Boeing. They like the idea of building up BCC and financing their own aircraft. We don't like this idea, it is very dangerous and we don't want to put ourselves at too much risk," explains Leahy. Airbus has reduced its exposure to the financing of customer aircraft by half, falling from over $7 billion in 1997 to $3.7 billion today, although it admits there is likely to be some increase once more in 2002. Airbus chief executive Noel Forgeard stresses that the company's exposure to customer finance has fallen from 50% of commercial sales four years ago to only 20% today. He has also controversially dismissed Boeing's strategy as "flashy diversification".
Operating leases
Whatever the strategic differences between manufacturers, both are convinced lessors will grow in prominence, particularly if, as expected, larger carriers begin to expand the use of the operating lease. Boeing estimates that the top 20 carriers use operating leases for just 10% of their aircraft, compared to something like 25% for the next 100 carriers. Some, like American and Southwest Airlines, do not use them at all so far.
According to Harry Forsythe, vice-president for marketing at Ansett Worldwide, some large carriers used to view operating leases disdainfully, preferring to own these large assets. But this attitude is changing, as airlines look to remove aircraft from their balance sheets and focus on the core business of running the operation. "We are seeing requests from some very large airlines for operating leases," says Forsythe.
Today the leasing companies' problems are more short term, as carriers are requesting rental holidays and lease re-structuring. Several lessors have significant numbers of aircraft grounded. But by being flexible in things like lease terms by using such mechanisms as step rentals - where the price is lowered for the current year but raised in subsequent years - lessors are fighting hard to get their fleets flying again.
Source: Airline Business
