The creation and growth of aircraft leasing companies in China is viewed with mixed feelings outside the country. On the one hand, Airbus and Boeing are happy to see this liquidity enter the market at a time when demand for finance is growing and banks still tend to be stingy. On the other hand, western lessors and others view the emerging players as inexperienced, sometimes naive, and capable of making decisions that can hurt the western leasing market and even aircraft values.
No western lessors wish to be quoted by name because of the political sensitivities of Chinese "face" and the potential for harming their own business relationships. But the candour expressed when cloaked in anonymity makes it clear these competitors are not particularly happy, but they are philosophical. "ICBC will be around and they are going to learn some lessons the hard way," says one US-based lessor about a new, leading Chinese lessor. "They will take some planes back in the same way we did from Eastern and Pan Am in the 1980s and 1990s."
Return conditions and bankruptcy protections written into leases were often ambiguous and court rulings left lessors on the hook for much more than they had thought. Leases written by the new Chinese lessors fall short of the protections in western documents.
The impact has been small so far because the Chinese lessors have few leases outside their homeland. But some western lessors are still concerned. The aircraft affected are mainly Airbuses because the company has been particularly aggressive in placing orders with Chinese lessors and because there is an A320 assembly line in Tianjin, which was established to serve home-market airlines. But a few Chinese lessors are conducting business in the West, and it is these transactions that are causing discontent.
Chinese lessors have a healthy orderbook for the A320, not surprising considering the assembly plant in Tianjin. Although lease rates are taking a hit because of the new entrants, western lessors have long complained about A320 lease rates.
CIT Aerospace has placed large orders for the A320ceo and the Neo. Its president, Tony Diaz, assesses the A320 market like this: "Ultimately, it is supply and demand. It's been a few circumstances that have come together, even going back to when Boeing had a strike [in 2008] when 60-70 737NGs didn't get built. If there were an additional 60-70 NGs in the market, it would be a different supply and demand." He adds that even without the strike, Boeing builds fewer aircraft than Airbus, "and that adds up".
Some large bankruptcies have involved Airbus operators, pushing A320s on to the market, says Diaz. Five or six years ago, there was a "bit of a glut" to Boeing and rates were soft, he points out. "It's a little bit of a cycle."
Diaz adds: "There is a distinction at Boeing between the Classic and the NG. There are more A320s out there. There is a big difference between the early and current vintages, so there is a perception that there are more of them out there."
There are 10 active lessors in mainland China, plus BOC Aviation (BOCA) of Singapore, a Western lessor acquired by the Bank of China. BOCA is wholly owned by BOC and occasionally has to bow to home-market pressures, such as by ordering the Comac C919, but 80% of its funding comes from western sources and its management is steeped in western personnel and business experience. In December, "China Inc" announced plans to buy 80.1% of International Lease Finance with an option to buy a further 9.9%.
In addition to these 10 active lessors a number of new Chinese leasing companies are looking to enter the business and are being monitored by Aviation Capital Group, which leases aircraft into China.
What has riled some western lessors is that not only are the lease rates offered by the Chinese below what they would like to see but, more importantly, contracts offered by Chinese lessors in the West fail to give the asset adequate protection. They say return conditions are poorly written and maintenance provisions are not up to western standards, which have been a long time in the making. "They are new to the business and they are learning," says a US-based lessor. "BOC Aviation is as sharp as anyone. The newest entrants that have ordered aircraft have turned round and done deals below where the market is. Then there are the conditions of the deal."
The western lessor continues: "It's not like it's a totally out-of-control situation. It's more on the edges, perhaps 10% on the rates. They are definitely leaving money on the table."
The lessor observes that the new Chinese entrants are, in a sense, following the example of other new entrants. "You always have the most inexperienced guy who sets the rate. You may not know for 10 years if the rate is too low until you see whether the residual value is wrong."
Although Chinese lessor inexperience has adversely affected some A320 leases and contracts, its impact on leasing has been fairly small globally. However, the US lessor warns against complacency: "Essentially, you have a government mandate to learn the business and they will do so, in some cases, the hard way. You have a combination of low funding costs and low criteria. They will become formidable competitors over time. You have to learn to compete with them. You ignore them at your peril. They are not going to go away. You have to learn to compete with them, and we are."
China took another major step to becoming a global influence with an announcement in December that "China Inc" will acquire 80.1% of mega-lessor International Lease Finance The buyers are China Trust, China Aviation Industrial Fund and P3 Investments. China Life Insurance and ICBC Investment Holdings are in line to take a further 9.9%.
ILFC parent AIG will retain 10% as a passive investor when all tranches are taken up. ILFC will continue to be managed from its Los Angeles headquarters, just as BOCA retained its Singapore head office after the Bank of China bought the company, but ICBC can be expected to benefit from ILFC's expertise. It may be that ILFC will eventually order the Comac C919, joining GECAS's small order from the West. Chinese lessors make up more than half the orders and commitments for the C919, accounting for 200 of the 380 announced as of December.
Another US lessor believes China's purchase of ILFC will eventually hinder its agility. Like the first lessor, this one requested anonymity to avoid offending the Chinese because it, too, does business in the country. "Will they make it a difficult process to approve a deal?" the lessor asks. "That remains to be seen."
This lessor, which competed with Singapore Aircraft Leasing Enterprise (SALE) before and after it was bought by Bank of China and renamed BOC Aviation, observes: "SALE is more cumbersome. Chief executive Robert Martin has to go to Beijing every six weeks and talk with 25 people. They are limited as to what they can and cannot do."
Martin replies: "The comment is five years old. Remember, we have now been owned by BOC for six years [in December]. At the start in 2007, it is true that we spent a lot of time educating the new shareholder, but it was worth it in the long term. In December 2008 to February 2009, at the bottom of the cycle, we bought $2.5 billion of good purchase-leasebacks in three months with the full backing of the shareholder, who had committed both debt and equity to support our countercyclical growth.
"Over the last six years, we have tripled the size of the company to $9 billion and maintained one of the highest returns on equity in the industry while also getting investment-grade credit ratings from Standard and Poor's and Fitch. Bank of China has been very supportive and the acquisition of SALE has been a success for both parties."
The second lessor believes ILFC faces a more daunting challenge in integrating with its new Chinese owners: "You have three or four different companies buying ILFC. I don't know how much autonomy they will give ILFC. The Chinese will become much more formidable competitors. They will learn from [ILFC] but this is China Inc buying ILFC and how much will they let the management run ILFC remains to be seen. By nature, China becomes much more hidebound."
This lessor says China is buying companies that bring scale and scope to leasing and these new lessors will have "cheap money".
In 2013, the global leasing community is expected to self-fund about 5% of Boeing's deliveries, according to an analysis by Boeing Capital with a larger percentage financed by lessors through other liquidity.
Boeing Capital did not have a breakdown of the money expected to come from China's leasing community.