ANALYSIS: Lessors increasingly on the hunt for twin-aisle investments

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Operating lessors are shying away from their traditional bread and butter of narrowbody aircraft as they look to boost their returns on investments through twin-aisle assets.

"We saw the widebody competition level really increase early last year, and what drove it was buyer fatigue on the returns available on narrowbodies," said Aircastle's chief executive officer Ron Wainshal during a second quarter earnings call earlier this week.

"These aircraft are typically on long-term leases with strong customers and offer attractive ROEs [return on equity]," he adds.

He sees a continuing role for twin-aisle units in Aircastle's portfolio, particularly for new technology aircraft.

"These aircraft have played an important part in the evolution of our asset base. During the past several months, we've received a lot more clarity as to the timing and nature of the next generation of widebody aircraft and we remain very comfortable with the residual value outlook for our investments."

Fly Leasing's director of the board, Steve Zissis, is looking to grow the lessor's twin-aisle exposure.

"When we started up Fly, it was such a small company, so we didn't think it was prudent to have many widebodies in the fleet. But as we grow and get closer to the $3 billion to $3.5 billion size, we think it's a prudent strategy to have up to 25% of our fleet in widebodies," he said on a second quarter earnings call last week.

Fly will look to expand with the Boeing 787-8 and -9, the 777-300ER and the Airbus A330-300, but it "won't go beyond that," says Zissis.

A strong macro-economic environment is supporting recent twin-aisle activity, says Wainshal.

"Robust demand growth has, so far, enabled the market to absorb increased levels of passenger aircraft production. To this end, the supply and demand story has been stronger for modern widebodies, where the full ramp-up of the 787 continues to be a big factor, and where the retirement of older fuel-efficient aircraft such as 747-400s and A340s is gaining momentum."

According to Wainshal, twin-aisle aircraft offer good investment value, particularly given the available credits and long-lease terms.

However, he admits there is an increasing level of competition in "mid-age" twin-aisle units, "despite limited opportunities for levering these aircraft, as some participants are simply targeting lower leverage and low returns on equity as a result."

In June, just ahead of the Paris air show, aviation financier Doric took the twin-aisle investment enthusiasm one step further with the launch of an all-widebody operating lessor. Unlike other lessors, which have grown their widebody presence predominately through sale and leasebacks, the new vehicle, Doric Lease, placed an order for 20 Airbus A380s.

Chief executive officer Mark Lapidus says there is "pent-up demand" for the A380. He sees growth in routes operated by aircraft with over 400 seats, and adds: "These aircraft create new passenger traffic."

He says the order will bring a financing solution for customers. "We will solve their capital cost issue through leasing arrangements."

Doric's chief commercial officer of Doric Paul Kent anticipates the lessor's MOU will expand the aircraft's operator base.

"Absolutely, this [the MOU] will. It is a fundamental goal of what we are trying to do - to expand the base," he said at a conference last month.

Kent dispels a "market myth" that Doric Lease is involved in a "sweetheart deal to front a 20-aircraft order for Emirates."

"That's absolutely not the purpose behind what we have done."

He adds: "Is the move due to the benefit of experience, due to the fact that we have been working with the asset type for the last seven years, and we have had a significant amount of inquiries form airlines that informed us of our decision? Yes, it is."

Kent says he has some "clear candidates in mind" who have expressed interest in the A380 and are not of the existing operating base.

He says these airlines are not necessarily "purchase candidates" because it is "a lot easier for these airline to lease the A380 than it to buy it."

According to Doric, a new 747-400 delivered in 1989 retains about 50% of its value in a 12- year period, and the lessor believes the same holds true for the A380 as well

Ed Hansom, a consultant for SMBC Aviation Capital, believes new twin-aisle aircraft, such as the 787 and A350, will offer more appeal to operating lessors than the current technology, helping to spur growth in the global leased fleet.

"The percentage of the world fleet, which is going to get leased, will increase quite substantially in the next 10 years, and the fundamental reason for this is due to the new twin-aisle aircraft, such as the 787 and A350," he said at the Ascend Finance Forum in London last month. "These aircraft are going to be more attractive to lessors than their predecessors, and for good reason."

According to Hansom, lessors, to date, have not been "very keen" on twin-aisle units with only ILFC playing a "dominant roll" in this end of the market.

This is changing though "judging by the lessor interest that is out there for the available 787s," he says.

While he acknowledges airline business sheets are "getting somewhat stronger in the aggregate", lessors still have access to "lower" costs of capital, he says.

"I think this increased appetite from lessors will be met by the right response from airlines, which will say 'this is great, I can now not focus all my use of leasing, as a capital source, on single-aisle aircraft'," he says

(additional reporting by Laura Mueller)