Freighters appeal to more financiers but face leasing issues

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The more cautious financiers are starting to warm to freighter investments, but leasing, particularly for large widebodies, is still a developing operating tool for this asset class.

“What we are seeing now is that in-production freighters are getting more mainstream acceptance with some of the more conservative banks,“ said Paul Newrick, president and managing director of Guggenheim Aviation Partners at the Ascend Finance Forum in London today.

Guggenheim has financed all of its freighters with non-recourse debt from major lenders during the past 10 years. “I think what this demonstrates is that certain lenders have become comfortable with freighters as long-term assets.”

Freighters have yet to make a proper move into the capital markets, but Newrick is certain this opportunity “will come”. He notes that the last major securitisation of freighters was back 1999.

Lower depreciation curves on freighters, compared with passenger variants, are helping to attract financiers to this investment space, he says.

In addition, financiers favour cheaper transition costs for freighters compared with passenger units.

He reckons a passenger [widebody] aircraft warrants a $10-15 million transition cost on a secondary lease, but with a freighter, even with some avionics customisation, the cost is $1-2 million.

“Certainly with widebody passenger aircraft the sky really is the limit [in terms of transition costs],” he says. “Some trends such as in-flight entertainment going wireless could make for an easier transition…but with premium seating and inflight connectivity - these are trends that most major airlines, with their brands, need in order to distinguish themselves."

However, as a lessee, leasing freighter aircraft is not necessarily a straightforward, cost-effective option, according to Yves Germeaux, vice-president corporate finance at Cargolux.

“On widebody freighter aircraft, we have to be realistic, as there is not a wide leasing market out there,” he says.

He also notes the widebody and new generation freighter aircraft markets are “not very liquid”.

“The price you pay for the lack of liquidity is quite high, particularly at the beginning of a new aircraft campaign, like us on the 747-8, and as an airline we are not quite prepared to pay for that premium.”

He reckons "margins are so tight" that carriers cannot just afford to overpay in a leasing structure. "But as operating lease evolve, such as towards the middle of a campaign…they start to make sense,” he says. ,

He points to Cargolux’s 747-400 aircraft fleet, in which the carrier was the launch customer.

“Ten years later, we did sale and leasebacks on those aircraft, with views on the new generation of aircraft, more certainty on the exit time of the fleet, and with some idea on the residual values,” he says. “It became easier with lower aircraft values and lower book values to do operating leases that make sense.”

Out of a fleet of 20 747s, Cargolux owns 14 aircraft, three are on “opportunisitc short-term leases” and three are on long-term operating leases.