ANALYSIS: Lessors set to broaden horizons

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Paul Sheridan, head of consultancy Asia with Flightglobal advisory service Ascend Online, considers the trends in lessor transactions and what the near-term future holds

Aircraft trading markets have shown a lack of variety in leasing company transactions over the last four years - but that is set to change in the next two.

The relatively stagnant picture seen since 2009 reflects a combination of circumstances - airline demand and lack of financing - and choices - lessor investment strategy and increasing production rates. Now, competition in the market is set to make an impact.

The Sales List report in Ascend Online Fleets facilitates analysis of aircraft values, offering rich information on the state of the market. a comprehensive view of the volume of transactions, it is particularly valuable since the prices of the majority of transactions are held privately and are hard to come by.

The chart below shows transaction volumes on a half-yearly basis where the buyer or seller (or both) is a leasing company. These transactions are separated into four categories: sale and leaseback (SLB) for new and for used aircraft; sale with lease attached; and others, where the "other" category is largely made up of aircraft purchased for part-out. The dotted line shows the historical ratio of Market Value to Base Value for in-production aircraft types. The link between the total volume of transactions and this ratio is clear from the chart.

Over the past 10 years, SLB volumes have been fairly consistent, ranging between 230 and 340 aircraft a year, but there has been an underlying consistent upward trend in deals involving new aircraft. The largest drop in transaction volumes, since the downturn began, has been in the category of sales with leases attached. These fell dramatically in 2009, but have shown some signs of recovery in the past 18 months.

Further analysis of the SLB volumes demonstrates how homogenised the trading market has become. The second chart shows the percentage of SLB transactions relating to used aircraft over the past 10 years. It is clear that focus has shifted to SLB transactions for new aircraft. Now that the banking markets are becoming more competitive and banks start to reconsider their prohibitions on financing older aircraft, there should be an increase in transactions involving older aircraft over the next 24 months.

This homogenisation is not confined to the aircraft's age. Over the past 10 years, the proportion of SLBs involving the Boeing 737-800 and Airbus A320-200 has gone from 23% to 62% of total SLBs, as seen below. It is remarkable to note that just four 737-800 aircraft were delivered with SLBs in 2003, a statistic unlikely to be repeated.

The final chart shows the 2012 lessor transactions in more detail and further demonstrates this overwhelming preference for the A320 and 737-800, both in the SLB and sale with lease attached categories.

For the past four years, we have been living in a market where, both by circumstance and by design, leasing companies have been fiercely competing for the same prizes. We are now at the peak of a second wave of competition in the markets where lessors with low costs of capital are able to bid aggressively for deals (the first wave was the emergence of the well-capitalised start-ups in 2010).

Now that debt capital is becoming easier to find, the next natural step should be for banks and lessors to broaden their horizons to other asset types and to older aircraft. Barring another downturn in the global economy, this should happen during 2013 and 2014, and will be one of the main drivers of market values again going above base values.