Having been based in Singapore over its 25-year history, BOC Aviation has witnessed and played a key role in supporting Asia's rise in prominence among the global aviation finance community.

Speaking to FlightGlobal in an interview, long-time chief executive Robert Martin says that when it started in 1993 as Singapore Aircraft Leasing Enterprise, US and Japanese banks were the main financiers of aircraft, whereas today, they come from with Asia.

Martin also points to the huge growth of the global operating leasing market. In its heyday, Guinness Peat Aviation was a $3-4 billion business. "Today, that wouldn't even get you into the top 20," he notes.

In part, that reflects the growing importance of operating lessors' involvement in aircraft deliveries – either through sale-and-leasebacks or direct orders with the manufacturers.

"They now make up between 45%, maybe 47% of the market, and again that market is a lot less concentrated than it was back in the early 1990s."

A lot of that growth has come from China, led by the rise in bank-owned financial leasing companies such as ICBC Leasing, CDB Aviation Lease Finance and Minsheng Financial Leasing.

In such a marketplace, Martin points out that BOC Aviation's main point of difference is that it is an aircraft operating lessor, rather than a lessor that is invested in a broader range of assets.

"We see ourselves as very much a very specialist aviation-focused business, whereas a lot of our competitors, particularly from China, are general leasing companies that finance all sorts of different industries," he says.

Nonetheless, since its acquisition by Bank of China in December 2006, BOC Aviation has also become a conduit for its airline customers to access the wider suite of banking products offered by its parent company. Those range from cash management, foreign exchange and bank financing right through to bond and equity issuances. Martin adds that since then, it has done around $20 billion in cross-selling of the bank's products to its airline customers.


While oil price rises have led IATA to lower its forecast for airline profitability this year, the industry continues to grow at a strong clip, meaning good business for lessors such as BOC Aviation.

Martin notes that the industry's collective profits of around $30 billion over the past few years have been driven by the larger US and European carriers that have achieved pricing power in their markets. Their profitability has masked some weakness in other jurisdictions, particularly in emerging markets, where some carriers are under real pressure.

"They are getting hit by a strong dollar – and obviously fuel is in US dollars – rising US dollar interest rates on their aircraft financing, rising domestic interest rates on their working capital financing, and they may have been hit with some delays [to aircraft deliveries] over the summer," says Martin.

Recent collapses of carriers in Europe, such as Cobalt and Primera Air are another case, which Martin says shows that airlines need to have their working capital in place, particularly as many head into the leaner northern winter season.

"For those airlines that don't have critical mass and maybe don't have those working capital lines in place, life has become more difficult."

While those airlines may come under pressure, they are not likely to cause the current strong cycle to turn. Nonetheless, Martin notes that "pockets of recession" have provided it with opportunities to step in and act counter-cyclically.

He points to recent deals BOC Aviation has concluded with Qatar Airways and Turkish Airlines as occasions where it has been able to step in and provide capital when political forces have clouded the outlook for some other financiers.

"These are good, strong carriers, just with a particular unique issue related to their home market," comments Martin.

This year, BOC Aviation has also completed a number of pre-delivery financings with lease-attached transactions for the likes of Norwegian and Azul. Under those deals, the lessor effectively assumes ownership of the on-order aircraft, while granting the client an option to purchase it on delivery. That has allowed them some breathing space to overcome financial pressures, while also allowing the lessor to deploy its capital.

On a brighter note, Martin expects that the emergence of long-haul, low-cost carriers in recent years will continue to reshape the air travel market.

"I think some of those [carriers] will thrive. As with any new airline, having depth of liquidity is important to them. Those who are part of bigger groups will have a major advantage."


As BOC Aviation's customers remain in a strong position, so, too, does the wider aircraft finance market, with liquidity still widely available and continued strong interest from new investors. However, that growing competition continues to depress lease rate factors and yields.

"This is an industry that has relatively good returns relative to other types of leasing, and we see a lot of competition coming into this market over the cycle," says Martin.

He adds that risks are increaseing among the newer players as interest rates start to rise. Martin is especially critical of lessors that have used short-term debt to finance their long-term assets – leaving them exposed to the rising rate cycle.

"We have seen quite a lot of that going on in the marketplace, particularly in China, and this was the mistake that was made back in the global financial crisis, when people relied heavily on commercial paper."

Some of that exposure is coming onto the market, with a number of aircraft being offered for sale with leases attached. The high level of liquidity in the market has meant, however, that values for the most in-demand aircraft – such as Boeing 737-800s and Airbus A320s – remains broadly steady.

That buoyant market is not tempting BOC Aviation to trade out large numbers of aircraft from its portfolio. Rather, this year it has continued to trade out of aircraft older than 10 years of age, smaller narrowbodies such as 737-700s, A319s and the last of its E190s, and some of its aircraft leased to weaker credit airlines to preserve the balance of its portfolio.

“We will have 80% of our risk in the portfolio with airlines that have more than 20 aircraft and stronger credits,” adds Martin.


While he has expressed concerns about Boeing and Airbus's plans to boost production of their narrowbody aircraft, Martin does not see that slowing down – even as supply-chain issues have dogged both manufacturers this year.

"We can see that they are pushing through their production rates next year, we can see the supply chain building up for that. At the same time, we are seeing continued delayed deliveries coming out, particularly from Airbus."

At the end of September, BOC Aviation was nine aircraft behind where it planned to be as a result of delays from the manufacturers. Martin says that by the end of the year, it will have taken delivery of between 50 and 60 jets, "depending on where the aircraft come out from the OEMs themselves" – down from 74 in 2017.

As for the looming consolidation of Boeing-Embraer and Airbus's takeover of the Bombardier CSeries programme (since renamed the A220), Martin says that move back towards a duopoly of aircraft manufacturers should prove positive for the A220 and Embraer's E2 – particularly as a result of the wider span of customer support they offer airlines.

"If you look at the markets for those two aircraft types, it is heavily dominated by North America and Europe. For these to be successful operating aircraft in the long term, they need to have a global market. That is something that Airbus and Boeing bring them.”

Martin also notes that the consolidation of the aircraft supply chain – such as the looming merger of UTC Aerospace Systems and Rockwell Collins – as well as the move by Boeing to enter into the interiors and APU markets, show that there are moves to play out at that level in the coming years.

"I don't think that supply-chain consolidation is finished; I think we're going to see more of that happening at the level below Boeing and Airbus."

Source: Cirium Dashboard