ANALYSIS: Lessors tap into shift to the east

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Airlines in search of cash this year will have plenty of financing options available, but will find increased funding relief from Asian leasing sources that are gaining in strength.

Despite a bloodbath in the emerging markets last year that sent currencies such as the Indian rupee to record lows, and caused stock markets to falter, the Asian aviation market is driven by solid growth and aircraft demand.

Airlines in the Asia-Pacific region will lead global demand for larger and newest technology aircraft during the next 20 years, according to Airbus’ latest global market forecast.

Airlines from this sector will take delivery of some 10,940 new passenger and cargo aircraft from 2013-2032, valued at $1.8 trillion.

Such figures have helped to persuade GECAS, the world’s largest lessor, to relocate its chief executive, Norm Liu, to Singapore next year as part of a wider effort to be closer to the emerging markets and Asia, in particular.

Certain GECAS staff located in Stamford, Connecticut will move to Shannon, Ireland as the entire lessor progressively “shifts its focus east,” says a source. Asia and the emerging markets are believed to now represent 75% of the operating leasing’s business.

Another major operating lessor is also rumoured to be looking to expand its operations in Singapore to be closer to its orderbook and alternative sources of funding.

This shift in money to Asia is not new. In October 2012, Mitsubishi UFJ Lease & Finance inked a deal to acquire San Francisco-based Jackson Square Aviation. That deal followed the sale of RBS Aviation Capital to Japan’s SMBC in January. And that came after RBS Aviation Capital is rumoured to have rejected a $220 million higher bid from China Development Bank for its leasing arm in late 2011, due to concerns about the ability of the state-owned institution to successfully close on the deal, proving Asian money has been trying to make inroads into the sector for some time.

Singapore’s Economic Development Board recognised the potential of the Asian aviation market and set up a tax benefits programme for locally-based lessors in 2011. Transportation Partners, which acts as an asset manager for the Lion Group, but also to lease to third parties when needed, was the first lessor to take advantage of the programme and set up shop the same year the benefits system was put into place.

And new money continues to pour into the region. Hong Kong real estate developer, Cheung Kong, is rumoured to be looking at making a 15-20 aircraft purchase to solidify its place in the operating leasing market. The company recently invested in an aviation fund set up by South African bank, Investec. Prior to that, the developer was looking to acquire failed carrier Oasis Hong Kong Airlines, which ceased operation in 2008.

Airlines can rest assured that this flow of cash into the Asian leasing market is not "hot money" solely driven by a short-term search for yield in the emerging markets, as is the case in the greater financial markets right now. Instead, this money is looking to better match funding and personnel with the growing source of aircraft ordering activity .

Proof that this money will not flee once the western economies begin to recover can be found in recent moves by Chinese banks to establish headquarters in Ireland, proving these are long-term investments in aviation, not simply high-yield bets on the growing markets.

China’s Bank of Communications Financial Leasing (JY Aviation) recently set up its European headquarters in Dublin, where the lessor will manage a fleet of more than 20 aircraft.

Luo Le, who is heading up the Irish operation, says the Shanghai-based financier plans to expands its aviation fleet by 15 to 20 aircraft through “sale and leasebacks, financial leases or a portfolio acquisitions in 2014”.

JY Aviation has a fleet of 21 aircraft leased to Chinese, Asian and European airline customers.

According to IDA Ireland, the foreign investment agency of the Irish government, JY Aviation is the third Chinese leasing company to locate its European headquarters in Ireland in the past 18 months.

ICBC Leasing, the leasing arm of ICBC Bank, the largest bank in the world by total assets and market capitalisation, moved to Dublin in 2012 and manages more than 360 aircraft from its Irish operation, according to the IDA.

The same year, China Development Bank's CDB Leasing established its European headquarters in Dublin in as well.

Recently lessors AWAS and Avolon hired banks to advise on “strategic opportunities” for their businesses, such as an initial public offering, a merger or an acquisition. Because of this shift in money, airlines can expect these lessors too will be looking at solidifying a greater role in Asia as part of their future plans.