Leading aircraft lessor chiefs see the coronavirus crisis increasing the likelihood of consolidation among aircraft leasing companies.
Speaking during the Leasing Leaders on the Aviation Crisis webinar, organised on 7 May by FlightGlobal in association with IBA Group, Dubai Aerospace Enterprise chief executive Firoz Tarapore said: “We have said for the last three years that the leasing space is due for consolidation. But the reasons we have articulated for that are different…. than the reasons we would say now.
”This time around, for folks who are newcomers in quotes – in the last five to 10 years – there is a subset of that group that I think will come to realise the complexity and financial uncertainty of managing through a full life-cycle of the aircraft. And while no willing seller, if they can afford to hang on, will exit at the kind of losses they would have to take at the current, time, I would say if they can afford to wait it out a little bit while prices recover, they will.
”Consolidation is inevitable,” he adds. ”The question is over what timeframe and the pain threshold – which is linked directly to the level of preparedness – that is in the balance sheet of some of these companies.”
Chief executive of BOC Aviation, Robert Martin, notes that among traditional lessors, consolidation will be driven by the wider strategies or financing requirements of the parent.
”If we see consolidation, it tends to be the owner – for its own reasons – wants to sell out,” he says, citing the examples of AIG with ILFC after the financial crisis, and CIT selling its leasing business.
”The other thing to watch out for is where we have big debt balloons or maturities. Sometimes that may force a leasing company into some restructuring with its banks and that can lead to some kind of consolidation,” he says.
”As a leasing company your achilles heel is the liability side of the balance sheet. This has always been the thing that has killed lessors in previous downturns,” Martin says. ”The key thing is …to not have big debt balloons falling because that is where you become very subject to what is going on either in the capital markets or in the banking market.”
But he does see other areas of the leasing market where consolidation is likely, such as airline-owned leasing companies. ”I don’t think they will survive this downturn. This is a financial business and the airlines will retreat to their core business during this period. What you tend to find is during a downturn, people will defend their core business.”
Citing some of the disposals over the past year with AirAsia and Norwegian’s leasing arms, he says: ”I think that trend has already begun long before Covid.”
Martin adds: ”We have had an explosion of ABS vehicles over the past two to three years. As we go through this downturn, what happens to those? Unlike a traditional leasing company that can add additional assets, generally they don’t have that option, so how do those companies go through [merger & acquisitions]?
”There is also a large amount of assets sitting in warehouse facilities that were due to go into ABS deals – so what happens to those as well. So I think we are going to see a lot of activity in that [area].”
The Leasing Leaders on Aviation Crisis will be available to listen on demand at flightglobal.com/webinars