Betting on the turbulent aircraft leasing industry
Article 5 minute read

Betting on the turbulent aircraft leasing industry

09 March 2020

TMF Groups' expert Kevin Butler developed an ‘airline leasing guide for the new investor’ and discusses trends and developments in the space in a video. During the COVID-19 crisis and the turbulence it brings to the airline industry it is extremely important to mitigate risks in your airfinance portfolio and to keep a close eye on your assets. In this article Kevin discusses the industry with airfinance CEO's and how they cope with the challenges the market is facing.

According to Kevin Butler, head of TMF Group’s air finance team, aircraft leasing has been growing dramatically. The world’s airlines now lease almost half the aircraft they fly, up from 10 to 15% 30 years ago. Over the next 20 years, it’s expected that the total capital required to sustain this growth will exceed $5 trillion. 

The airline leasing market is dynamic but investors have traditionally overlooked the small number of specialist companies that invest in plane leases. This is changing as investors are attracted by the steady lease payments from reputable airline giants that flow through to good dividend yields.

Competition is taking off

The market is seeing growing competition, as highlighted by Paul Sheridan of AMCK Aviation at an Airfinance Journal panel session in Dublin earlier this year, which was moderated by Butler. “Older aircraft, younger aircraft, sell-leaseback markets, placements of aircrafts – there has been competition everywhere you look in the last couple of years,” said Sheridan. “There is lots of money coming in. People see that it’s a good business, a good way to invest your money.”

Butler cautions that it isn’t a market in which inexperienced investors – however talented – are likely to thrive without expert professional support. It’s a very technical business that combines industry-specific legal and fiscal complexity with some very particular asset-backed risks.

Airline economics are vulnerable to global uncertainties, such as the price of oil and international tensions. Then there is the question of second-hand values, or ‘residuals’ – the value of an aircraft on the second-hand market. These are fundamental to overall portfolio returns, but hard to forecast and mitigate against.

Active asset management is crucial but requires deep, specialist knowledge of the market and the technology. Investors should monitor the secondary market and assess opportunities and alternatives. It’s advisable to track trends in airline preferences and to be ready to trade if  prospects begin to deteriorate, even if an aircraft is still in-lease.

Assets facing a finite future

Many of the companies, for example, focus on A380 double-decker planes but Airbus has announced that it will stop making these by the end of 2021. Airlines will then start slowly phasing them out.

As demand for A380s drops off, resale values will drop sharply. Most companies operating in the sector believe that these assets will be worth 40 to 50% of the original purchase price. Investment commentator David Stevenson predicts that the planes will either be re-leased at lower rates or sold second-hand for parts, and that we could see resale prices closer to 20 to 35%.

Scope Analysis’ Frank Netscher, however, has noted that “the prices of funds whose A380s are already in a part-out – selling the aircraft for their parts – have risen slightly from previous lows: the process has provided investors with greater certainty over the expiry of the aircraft leases and return of the aircraft to their owners amid near-zero secondary-market demand for the planes.”

Novus Aviation Capital’s Hani Kuzbari, a panellist at the Airfinance Journal event, also believes that the industry has become less risky. “The liquidity coming to asset classes is much more diversified. Trading aircraft today is relatively straightforward, which was not the case 20 years ago. Yes there is a pressure on margins, but it is a less risky business.”

Another panellist, Aircastle’s Michael Inglese, pointed out that the key is to focus on leasing structures and the cashflows that the asset will generate over the chosen time period. “When investing in an asset, you make an asset bet and a credit bet,” he said. “You want to make sure that you understand the cashflows this asset will generate, and looking at the credit, what is the right credit package to take a bigger risk on a less creditworthy customer.”

A technically sophisticated, highly mobile and very expensive asset creates a host of multi-jurisdictional tax and legal risks. To profit in the aircraft leasing industry, its crucial to create ownership and leasing structures whose efficiency, compliance and sustainability can be relied upon over the full term of a lease. Decisions about tax structure have profound legal, fiscal and practical consequences. Trading structures must meet economic substance criteria to secure the necessary advanced capital allowances.  Without sufficient substance, a non-trading structure – or section 110 regime SPV – must be used, but that will rule out deals with certain countries.

Taking flight with TMF Group

The aircraft leasing industry offers strong and stable returns but new investors, with limited in-house aircraft leasing expertise and a restricted network of industry connections, often find themselves at a competitive disadvantage. You can level the playing field by teaming up with industry experts.

TMF Group is one of the world’s leading providers of business support services to the airline finance industry. Our dedicated aviation finance team manages hundreds of aircraft leases all over the world. We work with a wide range of aircraft lessors, including new entrants and established players, airlines, private equity, hedge funds and banks. 

Our capital markets, aviation finance and regulatory compliance teams tailor their services to the particular needs of the industry, helping clients to create efficient structures, acquire appropriate assets and negotiate effective relationships with lessees. Contact us to find out more.


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