The airline leasing sector has already had an incredibly busy year with major moves towards consolidation in the form of the purchase of lessor AWAS by DAE in April.
Leasing plays a significant role in the aviation sector as a whole – with leased aircraft estimated to account for 40-45% of new aircraft purchases. Consolidation is not the only factor driving change and shaking up the sector. Major players are increasingly noting competition from new Chinese entrants to the market. Many more have benefited from Chinese investment.
Chinese lessors are making real waves in the sale and leaseback market by the terms they can offer for new aircraft purchases. We know that the Chinese lessors we work with have ambitious plans, not least because of China’s huge domestic market (industry estimates put demand at around 6000 new aircraft over the next two decades).
What opportunities and challenges does this influx of new entrants pose for the aviation industry as a whole?
What considerations should be taken into account when partnering with a lessor – particularly those brand-new entrants to the market, that may not have the track record of a more established player?
- Which aircraft do they own/manage? Which aircraft do they have ordered, and would they be a good match for the airline’s own business plans? The answers to these questions will help an airline to determine whether working with that lessor will work for their business, and to plan their working relationship several years in advance
- Who are they? The company might not have a proven track record yet but the people who have joined it might, so it may be that the new lessor benefits from established networks and relationships as well as the momentum and energy of a start-up, which might be the right fit for the airline’s own business
- Which lenders have experience working with the particular lessor, or are financing the aircraft? This will help lessees to assess how flexible or restrictive their relationship with the lessor might be, noting that the financiers might want more control of a transaction with a new and relatively untested lessor
As competition ramps up in the sector, what are the points of differentiation that will secure your place in the market?
- There are reports that redelivery condition standards are being lowered by lessors to attract more interest in this increasingly crowded market. This is an opportunity for lessors to get an airline’s attention, but is something that they will have to balance carefully with their own interests in maintaining the value of the asset and the requirements of their financiers
- Positive relationships with lenders and financiers will be very important – especially those with an understanding of the flexibility that is increasingly required to compete in this growing market – to make it as easy as possible for airlines to sign on for both individual and multi-aircraft transactions
- One of the difficulties for newer and smaller lessors will be their reduced ability to use their scale to their clients’ advantage, and to offer tailored packages according to needs. For example, they might not have spare parts or engines frameworks in place, or be best placed to assist if something goes wrong or needs to change, or might not have access to the number or type of aircraft that a client requires. New lessors might therefore need to think more creatively, and perhaps engineer new methods of partnering with others in the industry to provide what airlines and financiers need.
The Aviation Finance team at Reed Smith are always happy to discuss these or any other topics of interest further – please don’t hesitate to contact us if you would like to do so.