Paris Air Show

Lessors See Signs of Optimism for 2019

 - June 12, 2019, 2:00 AM

The grounding of the Boeing 737 Max and U.S.-China trade tensions are dominating this year’s Paris Air Show, according to lessors, though they see reasons for optimism, with about half the global fleet likely to be leased in the coming years.

Discussions at the show are likely revolving around when and how Boeing will resolve the Max issues, a lack of new orders for narrowbody aircraft, and the effect on aviation of an escalating U.S.-China trade war, if the two sides have not resolved their issues by then, said Firoz Tarapore, CEO of Dubai Aerospace Enterprise (DAE) Capital.

Still, the leasing industry continues to grow, Tarapore said, “with most observers expecting that roughly 50 percent of the global fleet will be leased in the not-too-distant future.” This is already the case for a number of narrowbody types, he said, where lessors account for more than half the market.

“With airline deregulation spreading globally, many newer start-up carriers find it efficient to begin operations with a leased fleet, given the lower initial capital outlay and the ability to adjust fleet needs to traffic demand,” Tarapore added. He said the Airbus A320 and Boeing 737 families remain the most in-demand assets, though DAE Capital has seen increased interest in the ATR 72 “now that there is a reasonable number of leasing options for the type.”

There have been a number of highlights for DAE Capital over the past year or so, Tarapore said, pointing to the delivery of the first six Boeing 787-9s to Gulf Air. Last year was also the first full calendar year of operations since the company’s acquisition of AWAS, he added. The company “has stayed away from speculative commitments to new technology narrowbody aircraft as the risk-return profile continues to be in imbalance,” he argued, though he expects to transition to new technology aircraft “when the risk-return trade-off has improved.”

In 2018 DAE Capital posted solid financial numbers, Tarapore added, and reduced leverage in line with its commitments to creditors and rating agencies. It received an investment grade rating from Kroll Bond Rating Agency and upgrades from Moody’s and Standard & Poor’s, he said.

Brian Harvey, chief marketing officer at SMBC Aviation Capital, echoed Tarapore, saying the show would be dominated by discussion of the Max grounding and U.S.-China trade relations. He said this environment would “form a key part of discussions as we look to the future” of the leasing sector.

SMBC has made a range of deals since the beginning of 2018, Harvey said. It announced the acquisition of 65 new Airbus aircraft in January and recently placed 44 aircraft from its order book. It also committed to a further 24 aircraft under sale and leaseback (SLB) agreements. Harvey highlighted a deal with Aegean Airlines, where SMBC provided SLBs on two aircraft, placed six from its order book, and agreed an extension on four aircraft already on lease. SMBC saw a number of other deals of note, he said, including with JetSmart, Gulfair, Icelandair, and GoAir.

The company also reached a number of significant financial milestones recently, Harvey said, receiving a rating upgrade from Standard & Poor’s to A-, matching the same grade it has from Fitch. This has boosted the lessor’s ability to raise debt at attractive prices, he said, with the company raising an additional $500 million in April to fund growth plans.

Like DAE, SMBC’s strategy has been to focus on the A320 and 737 family, he added. The company will predominantly concentrate on new technology narrowbody aircraft, where it sees the most interest from customers, he said. There has been strong demand for the A321, he said. The major growth markets overall are “still undoubtedly the emerging markets in Asia and Latin America.”

Tarapore expects strong demand for leased aircraft in the coming years thanks to continued deregulation and the flexibility that leasing offers them. He expects lessor-owned aircraft to make up at least half the global fleet and to stay at that level at least, “while growing with the overall airline fleet”.

The cost of fuel and general environmental awareness will drive demand for the most fuel-efficient, new technology aircraft, Harvey said. SMBC is studying new and emerging technologies developing from the IT and financial technology sectors, such as Blockchain and artificial intelligence, “to find ways to advance and improve our offering to our customers,” he added. “Innovation will form a key part of our strategy as we seek to differentiate ourselves in a crowded market.”

Still, many lessors will be working through issues related to the Max for some time to come, said aviation analyst Brian Foley.

“With airlines already taking delivery of 737 Max aircraft and putting them into service, the subsequent grounding has the potential to lead to turmoil for both lessors and lessees.”