Fast growing aircraft leasing industry

The aircraft leasing industry underpins commercial aviation and is a fast growing aerospace business. However, it is not well understood, especially industry trends and success drivers. Growth in aircraft leasing has broad implications – not just for leasing companies but for airlines, aircraft manufacturers, suppliers, and the parent conglomerates.

Primary trend: strong market
The most significant trend is the anticipated growth of the aircraft leasing market. From today’s US $129 billion with over 5,000 leased aircrafts worldwide, the market will grow at approximately 6 % per annum, to reach 7,200 leased planes by 2011. This growth builds on a currently attractive return on equity (ROE) of up to 10% in the long run. This ROE is better than most legacy airlines and about the same as a well run low cost carrier (LCC).

Growth drivers
The primary growth drivers for the aircraft leasing industry include:

  • Sustained increase in travel as a result of falling air travel fares, and supportive policy changes and deregulation (especially, Asia and Eastern Europe)
  • Rapid increase of LCCs in Asia (primarily, India and China)
  • General shift to leasing, with even traditional airlines working to balance their portfolios and reduce risk through leasing
  • Growing demand for wide-body aircrafts in the Middle East

Success factors
This expected growth depends on several success factors for the leasing companies: the right backers, overall company size, and skills. With more than 75% of the companies backed by big financial institutions, the industry has few independent players. Moreover, the industry is dominated by two players, with over 50% of the assets:

  • GE Commercial Aviation Services (better know as GECAS), a unit of GE Commercial Finance, which is a part of the larger conglomerate GE
  • International Lease finance Corporation (better know as ILFC), which is owned by insurance giant AIG

Backers such as these are able to provide a range of aircraft types, secured loans and other financial solutions, a variety of engines and parts, and can even help train pilots.

These principal players have consistently performed better than the medium and small players. At the next level there are around 10 principal companies that actively compete with each other in all segments of the market. Tier 3 players focus on local regions and specific clients.

Challenges
The primary challenges for aircraft leasing include the risk of a catastrophic event and the cyclical nature of the industry. The aircraft leasing industry is highly cyclical with a typical up-cycle lasting 7-8 years, followed by 2-3 down years. This swing is similar to airline industry cycles but even more volatile, plus leasing lags the airline cycle by 12 to 18 months.

During the down cycle, well run aircraft leasing companies out perform and are more sustainable than those that are poorly run. At present the industry is entering a zone of uncertainty, since it has been in up cycle since 2001. Experts are debating whether the current up-cycle will run for another 2-3 years or start dipping in 2007-2008.