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.