By Bjorn Fehrm
January 22, 2020, ©. Leeham News, Dublin: The yearly Air Finance Journal conference finished its second day with a Q&A with the top executives of the Leasing industry.
The Leasing companies buy 40% of all new airliners from the likes of Airbus and Boeing, to later rent them to the airlines on a monthly basis.
With 40% of all new aircraft delivered to these companies, their view on where we are in the cycle and what are the main challenges facing air transport is important.
The main topics during the three-day conference are the state of the airlines, the ease or difficulty to finance the purchase of $50bn of aircraft per year and the growing issue of air transport and the environment.
The leasing industry buys aircraft from the aircraft OEMs and rents them to the airlines on a monthly basis. Typical rental contracts are for seven to 12 years, whereafter the leasing company will find a new home for the aircraft. Airlines typically have 30% to 50% of their fleet on a rental basis with the rest in their own ownership. This gives the necessary capacity flexibility in a changing market.
During 2019, a total of 20 airlines ceased to exist, as weak airlines went bankrupt. The lessor then sends a team of mechanics and pilots to repossess their aircraft when the rents are no longer paid. The rules around international aircraft leasing are now recognized worldwide, so the repossessing and re-leasing of these aircraft to new customers no longer poses problems or cause value losses, except in some cases where countries ignore treaties.
Angus Kelly, the CEO of the world’s largest lessor, AerCap, said the movement of aircraft from weak areas and customers to stronger new homes worked flawlessly during 2019 and that it confirms the role of the industry to dynamically provide airlift where needed.
As a result, investors like pension funds that seek a good home for their money are viewing airliners as a secure investment with good returns. There is, therefore, no issue with sourcing low-cost capital for the billions of investments needed when the OEMs deliver their aircraft said, Kelly.
A growing issue for the airline industry is the environmental stigma associated with air transport. An increasing environmental footprint of airline growth is characterized as unsustainable by environmental activists like Sweden’s Greta Thunberg. Her influence on the industry has even got its own name, the Greta factor. It was a topic on most presentations and discussions during the day.
The CEO of Avolon, Domhnal Slattery, said: “In Avlon we have identified three things we can do. First, we make sure we buy and rent the most fuel-efficient aircraft possible to our airlines. Second, we have convinced our lenders of capital to give special interest rates for aircraft we rent to airlines with active environmental footprint programs. Finally, we have put together a team to look at the problem holistically. While we find it challenging for our industry to save an additional 10% of our CO2 emission for a total gain of 0.2% in total lowered emissions (airlines represent about 2% of global CO2 emissions), the energy industry represents 72% of the world’s CO2 emissions and it would be easy for them to cut 58% of their emissions by 10% or more. Part of the airline industry’s job will be to tell the public we are barking up the wrong tree if we want quick gains.”
The background is, air transport is already very efficient regarding CO2 and any gains are hard-won. In other, more important polluters, substantial gains are easy to achieve, for a fraction of the invested effort and money.
The decarbonisation of aviation will require synthetic fuels created from renewable energy or nuclear fission. Biofuels will be very limited. My opinion is that these will be hydrocarbons created by PtL (Power to Liquids) rather than cryogenic hydrogen. Such fuels will be affordable but expensive and therefore it will extremely important to have fuel efficient aircraft.
I have read from a usually reliable source that Greta Thumburg’s yacht was the Family yacht of a most famous banking dynasty. These bankers are the major owners of certified carbon emissions credits. Cap and Trade would enhance their wealth and power. This is not the methodology that should be used.
>environmental activists like Sweden’s Great Thunberg
You probably you meant Greta. But if not a typo I salute you.
As a fellow Swede, I should know! But this is, of course, my subconscious playing me a trick. Thanks!
A yachet ride is a small price to pay for the attention she has gotten climate change.
By the time this hits the sails seriously, I will be pushing up flowers or feeding the crabs. I guess the environmentally right thing to do is just dump the body in the Inlet
Its the next generations that have to live with what they are handed.
She is a bit like Jean of Arc from the 2020’s looking at impossible problems (like England controlling big parts of France and nobody could kick them out) to human induced climate change with todays world population effected by food and water shortages in large areas. It has happenend historiacally but the human population were less and mainly lived on conditions similar to wild animals. Just red that the US DoD and USN/USAF now are detail analysing the environment, how to cope with climate change in its operations and projected civil unreast in areas with shortages of food and water. Even “The Donald” agreed to participate in mass plantation of trees that help in many ways besides converting CO2 to O2 and Wood.
I agree that Aerospace Technology applied to base industry could reduce their CO2 emissions way more than Aerospace can for the same amounts.
Just stop using coal and use natural gas will have a huge global impact and the US has almost done it already.
>The background is, air transport is already very efficient regarding CO2
Indeed I think it is now about 2.2l/100km which is more efficient than a single person in any vehicle. About the same as a 2 in one of them most efficient, and better than 4 in an SUV. All that before you take into account the CO2 cost of building and maintaining the roads.
Of course a bus beats them all, well except for staying home.
It is possible to have a serious discussion as to transport priorities
One factor to consider is the security apparatus attached to airtravel, the inherent cost of this as well as the gigantic amount of passenger time consumed, as well as, well, let’s say the ancillary costs of such conditioning and submission
the ‘cheapest’ as well as the ‘quickest’ syndrome attached to airtravel may be misguided, based on false assumptions, as well an un necessary illusion (why consider travel only in terms of cost and speed efficiency)
I fear the security cost os coming to other modes. Already the EuroStar out of London has airport-style security. And it is all made worse by the fact that this was not originally envisioned so the facilities are cramped. Took the joy out of it really.
I agree about Eurostar, but this is the only rail service that can impose such security
On the continent the borders are porous : the French tried to impose significant airport style security on the ‘Thales’ high speed commuter services, even got as far as putting such in on the Paris to Brussels train
They found the railways station was not built for such, exiting passengers mixed with departing in ways that not only wasted more time but also negated security efficiency, railways staff were reluctant, everyone objected to the additional costs, and time wasting
end result commuters took to their cars in such numbers that the service lost money, furious green objections to such an encouragement given to the ‘worst’ form of transport, etc
At the height of their security panic the Hollande government announced they wished to bring security up to airport level in every railway station in France (including freight, postal and so on) of which there were over 4,000
After publication of satirical calculations that the cost would exceed GNP for the next 20 years…
But they’ll still search your shopping bags in some downtown shops in the tourist districts, although not in most, in some public buildings, but only those frequented by tourists, not again in most
They thought to launch patrols in the Churches, but ended up with….burning down Notre Dame
For that 40% of new planes bought by lessors, does that include airlines buy and lease back.
Wouldn’t that be a separate category, as the airline is the ‘chooser’, and the leaser is just a financial intermediary.
I would have thought the lease industry only buys , say 10%, on their own account. Otherwise 40% would mean enourmous buying power in just a few hands.
Lessors typically account for approx. 20-25% of the order book for “popular” types via speculative purchases, i.e. they order aircraft themselves and actively market them in advance of delivery. At the same time, they may also acquire new deliveries from airlines that have ordered aircraft in their own right – in these instances, the airline is looking to make a gain on sale…these transactions are generally referred to as Sale Lease Backs and can prove very popular as it removes a large part of the risk compared to a speculative order. As a result, Lessors can represent 40+% of the financing of new deliveries…indeed, if you look at say the A320-200 & 737-800, companies defined as Operating Lessors today manage/own around 54-59% of those fleets.
I am surprised that supplier reliability is not a top topic.
Here’s another thing leasing companies can do; they can pay for aerodynamic upgrades to their aircraft (e.g. blended winglets) and make the leasing airlines pay an additional rental cost for it, but leave them to keep the gains made in saving fuel.
Thus, cash rich leasing organisations can upgrade their own products (capital investment) while their customers’ financial health is improved, and to the gain of the environment. Win, win, win.
I don’t know of any leasing organisations that have done or are doing this.
Commercial Aviation, Nº of Passengers Carried Worldwide:
In the Year 1990: 1.025 Billion Passengers
In the Year 2018: 4.233 Billion Passengers
Data: World Bank
A quadrupling every 28 years. At that rate 16 billion passengers can be expected in 2048. Best projections for fuel burn reductions are 70% so we can carry that with a 20% total increase in fuel burn. (4 x 30%) About 0.6L/100km/passenger. It’s doable.