Lessor CEOs: Chinese leasing slowdown

The return of the MAX and growing climate consciousness in airlines, passengers and leasing companies alike led discussion in lessor Q3 earnings call (see Insight: ‘Lessor CEOs: Boeing ‘helps’ with MAX rentals’). In this Insight, Ishka summarises other points of discussion across lessors: slowdown from Chinese leasing platforms; 2019’s spate of airline bankruptcies; and weakening demand for the largest widebodies.

 

Slowdown among new Chinese lessors

 

Lessor chiefs observed again decreasing competition from their Chinese competitors (see Insight: ‘Lessor CEOs: MAX continues to boost narrowbody lease rates’). After Marubeni and Mizuho’s recent acquisition of rival Aircastle, the remaining public lessors instead highlighted Japan’s growing presence in the aircraft leasing industry (see Insight: ‘Marubeni and Mizuho team to acquire Aircastle’).

John Plueger (ALC, CEO). “We see less activity from new Chinese leasing companies, in fact, I think it’s fair to say, we see some of the more recent entrants exiting the space. As evident from some of the more recently announced transactions, we are seeing renewed interest from Japan in the leasing space. But the teams running those businesses are seasoned veterans having been in the industry for some time.”

Steven Zissis (BBAM, CEO). “Definitely, the Chinese have pulled back from the marketplace. And that’s been positive for some of the returns that you see on what we call the Tier 1 type of deals.”

Aengus Kelly (AerCap, CEO). “What we have seen and we have observed over the course of the last 12 months is a reduction in the appetite that particularly Chinese lessors have. I think that's due to a combination of factors. Many of them are owned by banks where dollar funding may be slightly more challenging. Furthermore, some of them will have paid some significant premiums to get their hands on those assets. Those assets are now maturing, the leases that they bought them on. The leases are expiring, and they’re having to place these airplanes themselves. And few of them have a platform capable of leasing aircraft.”

 

Airline bankruptcies not indicative of wider industry trend

 

Lessor chiefs agreed that the high-profile bankruptcy of Thomas Cook in Q3 was reflective more of the holidaymaker’s outdated business model and less of general distress in the airline sector. They also all noted how quickly leasing companies repossessed and remarketed the aircraft – a contrast to previous quarterly calls, in which trouble repossessing Jet Airways and Avianca Brazil aircraft meant debate around the robustness of Cape Town (see Insight: ‘Lessor CEOs: Hitting the bottom of the sale-leaseback market’).

Colm Barrington (Fly, CEO). “Thomas Cook’s demise and the recent demise of some other very minor airlines have had very little impact on the aircraft leasing sector. As the number of aircraft involved is negligible in relation to the total leased portfolio, strong demand for aircraft has ensured that the aircraft previously leased to Thomas Cook have been picked up rapidly.”

Colm Barrington (Fly, CEO). “Thomas Cook's demise is primarily due to structural changes in the European travel industry that are seeing more and more passengers moving away from traditional inclusive tour operators toward expanding low fare airlines such as EasyJet, Ryanair and Wizz.”

Steve Hazy (ALC, executive chairman). “None of the events we have seen stemmed from a lack of passenger traffic demand, and the market has recovered quickly from each event given the sheer demand there is for the aircraft.”

 

Airlines’ growing preference for smaller widebodies

 

The larger and smaller ends of the widebody market have been hit by bad press in 2019: Airbus has announced the planned closure of the A380 programme; Boeing has announced it is reducing 787 production. At the same time, improvements in narrowbody aircraft range capabilities have damaged one of the widebody aircraft’s top selling points. Increasingly, lessors and airlines are coming to prefer the smaller reconfiguration costs and fuel bill that accompanies smaller widebodies.

John Plueger (ALC, CEO). “Most [airlines] will phase out [A380s] in 12 years. Some may hang onto them for a little while longer, but definitely the A380 fleet is going to shrink at a very rapid rate […] Most of the airlines that we’re dealing with are not interested in replacing them with the largest twin engine wide bodies. The actual trend is the other way […] The 787-9, the 787-10, the A350-900, the 1000 are the four models that appear to be the most interesting to the airlines. And what we’re finding is that until there’s clear visibility on the 7779X, we are not seeing a lot of momentum there until the airlines understand what that airplane is going to do, and it’s an expensive airplane.

Greg Willis (ALC, CFO). “Building 12 787s a month is the highest rate for any wide body aircraft. That’s over 140 aircraft a year. That is still at a record pace. So [Boeing announcing recently that it is] going from four to 12 a month is not necessarily a red flag in our opinion.”

John Plueger (ALC, CEO). “The sweet spot of the wide body market [has] moved away from hub to hub […] The growth in the wide body market has actually been more in secondary and tertiary destinations. And that means smaller passenger loads.”

 

The Ishka View

 

China’s passenger numbers continue to grow apace – up 9% year-on-year in September 2019 – but, for the third quarter in a row, lessor CEOs have noted some Chinese leasing companies pulling back from the market. This has recently been punctuated by Castlelake’s purchase of CMIG Leasing’s entire aircraft portfolio.

However, it is important to stress that while many of the smaller and newer Chinese leasing entities are perhaps showing less appetite for new deals, several of the larger Chinese lessors are still actively chasing new assets. China Leasing International Corporation’s (CCBLI) recently signed a joint venture with Norwegian to acquire and lease 27 aircraft from the troubled airline, reminding aviation finance that China still has capital to deploy. Some of the largest Chinese leasing companies – such as ICBC Leasing, BOC Aviation and CDB Leasing – also continue to be major global players, with BOC Aviation announcing 12 deliveries of aircraft to Chinese airlines in just the last week.

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