During those buoyant years before Covid-19, executives from aircraft leasing companies would gather at industry conferences around Asia-Pacific and marvel at the unstoppable growth trajectory of aircraft deliveries in the region.

Demand for aircraft seemed insatiable, based on OEM forecasts. Airlines’ appetite was plain to see, with ambitious budget carriers like AirAsia and Lion Air putting in orders for hundreds of jets, offering significant sale-and-leaseback opportunities for lessors. Moreover, as many airlines were struggling to source enough aircraft from Boeing and Airbus to meet their expansion plans, lessors could step in to fill the gap through operating leases.


Source: Wikimedia Commons

An AirAsia Airbus A320ceo. Big LCC orderbooks generated demand for sale-and-leaseback deals

These and other trends in the leasing market pushed lessors’ share of the global leased fleet towards 50%, an impressive feat for an industry that just four decades prior was regarded as more of a niche product than the indispensable component of the aircraft finance sector it now is.

Even though OEMs have now revised down their delivery forecasts amid this unprecedented global aircraft demand slump, lessors’ share of the pie has still grown 1.1 percentage points to 48.9% in 2020 amid the pandemic, says Ascend by Cirium.

Many lessors have spied opportunistic purchase-and-leaseback deals with airlines desperate to raise cash to ensure their survival. As ORIX Aviation’s chief executive James Meyler pointed out at a recent virtual industry conference, airlines such as German flag carrier Lufthansa that before Covid-19 were not big lessees have been forced to sell their unencumbered assets.

Quick-on-the-draw lessors like BOC Aviation were early on able to capitalise on the downturn via such leasebacks. With Chinese state-owned lender Bank of China’s backing and good access to other external funds, the Singapore-based lessor was able to add dozens of aircraft to its leased fleet. Other major lessors which can command similarly strong parental and investor support are also in a relatively favorable position during this downturn.

However, many industry observers warn not all lessors will survive the pandemic, although they are coy about naming names publicly. The strong and weak alike have for months been battling rental-deferral requests from customers. Whether airlines can actually pay back the deferred rent in full, or whether lessors will have to take that as a hit to their balance sheets, remains to be seen.

The shock of seeing so many airlines that would have been considered good credits pre-Covid going under, or being sustained by government life support, may result in a flight to quality among lessors and investors.

United LAS-DEN coronavirus 042420

Source: Pilar Wolfsteller/FlightGlobal

Only 16 passengers travelled aboard a United Airlines Boeing 737-800 from Las Vegas to Denver on 24 April, 2020, during the height of the coronavirus pandemic.

To take one example: before Covid-19, investors in Japanese operating lease with call option (JOLCO) structures – a type of lease that helps Japanese investors defer their tax bill, while providing cheap financing to airlines – became more open to riskier airline credits. Due to surplus investor demand, equity arrangers sold Japanese investors deals with riskier carriers, pointing to the robustness of global airline growth as reassurance. Such arrangers will now certainly be dealing with angry investors, as even airlines considered sound credits like Colombia’s Avianca have rejected JOLCO aircraft as part of their restructurings.

Separately, Chinese lessors, which in their early years focused on leasing aircraft in the domestic market, have been spreading their wings. Many, such as CDB Aviation, ICBC Leasing and Bocomm Leasing, are now truly global lessors in terms of their portfolio compositions. That expansion comes with a price, however, as they are now lumped with large numbers of lessees that cannot pay rent. Had they kept things local, they would probably have overcome most of their payment issues by now, since Chinese carriers are among the few globally that are able to pay rent on time – troubled HNA Group’s airlines notwithstanding. We may therefore see a preference for Chinese lessees in the early stages of the market recovery. A recent request for proposals from China’s Kunming Airlines was said to have garnered interest from some 20 lessors who put forward about 100 aircraft for consideration.

The transactional fabric of the industry has also changed. Leasing aircraft has always been a people business – replete with client visits, coffee catch-ups, and trading industry gossip at the hotel bar – but many executives have now had nearly a year of mostly virtual meetings and little or no travel.

While some executives are relieved at having a break from the relentless travel schedule, others are itching to get back on the road. Zoom and Teams have proven that deals can be done online, but especially in Asian markets such as Japan, China and South Korea, face time is still deemed essential to form a long-term business relationship.

Despite these significant challenges that have hit the sector due to Covid-19, leasing will continue to be an indispensable component of the aircraft financing industry. Some lessors may not survive, but those which do, and which position themselves strategically, could reap the benefits if and when Covid-19 vaccines roll out successfully and airlines are able to start flying passengers in droves again.

Ascend by Cirium does not expect long-haul to recover to 2019 levels until 2024-25, but the rich experience of senior leasing executives – many of whom have been decades in the market and ridden out cycle after cycle – will ensure many of the bigger lessors have a steady hand to guide them over the next half-decade. The sheer brute force shock of this archetypal black-swan event, however, will never be forgotten, and the lessons lessors learn from this pandemic will shape the industry for many years to come.

Analysis by Michael Allen of Cirium