Financiers looking for better returns on their capital are increasingly turning away from new aircraft, say investors.
“It has been a challenging environment for new aircraft owners, and the returns have not been stellar, so people have started looking for other investment opportunities,” said Stephen Hannahs, chief executive officer of Wings Capital Partners at the Airline Economics Forum this week.
According to Hannahs, low interest rates and more aircraft in the market due to higher production output at the manufacturers, “have forced capital to look for other homes, such as mid-life assets, part-outs and a variety of other means” .
Tom Tuggle, managing director of CMC Capital, said the current environment is characterised by “a lot of money chasing few assets, so the topic du dour is people looking at older aircraft”.
“We are starting to see a lot money coming into that space,” he adds.
Tuggle says older aircraft allow for “knowledge arbitrage” because “these are complicated pieces of equipment and not every two people look at them the same in terms of valuations”.
He notes, in the current environment, where there is “so much money in this space”, investors are running the risk of overpaying for their assets if they are not disciplined.
“If you can be patient, opportunities should occur as this current high liquidity cycle starts waning, and we start seeing some normalisation to interest rates and to money in this sector.”
The operating lease business has benefited from the low interest rate environment during the past several years, says Tuggle, so the market may see some weakness “in respect to the small operators”, as rates start normalising.
“It is all about your cost of capital, and we have two very big players out there right now that will be very dominant, but down, below that level, there may be some volatility and movement that present opportunities.”