From a standing start in 2007, China's aircraft leasing companies have become major players in global aerospace – even though many are closely tied to Beijing's policy agenda.
Since the central government allowed banks in China to open financial leasing businesses just over a decade ago, a range of aircraft leasing companies headquartered there have become major providers of capital to airlines through sale-and-leaseback transactions. They are also becoming major customers for Airbus, Boeing and homegrown airframer Comac.
FlightGlobal's top-50 aircraft lessor rankings show that last year the value of the fleet managed by Chinese lessors rose by more than 15% to over $40 billion. ICBC Financial Leasing, a unit of the Chinese bank ICBC, is the largest of those players.
Chinese banks are meanwhile active in providing loans and financing for new aircraft. Boeing Capital's current aircraft finance market outlook, released in January, forecast that Chinese banks would provide around 28% of all bank financing for its deliveries this year, representing by far the largest source of debt.
A number of other investors in China have also moved into the space, including large insurance companies such as Ping An, Guangdong Airport Authority, and provincial governments through vehicles such as the Henan Civil Aviation Development & Investment (HNCA).
David Yu, an adjunct professor of finance at New York University Shanghai, says the proliferation of smaller lessors focused on the domestic market has caused some of the larger, more politically connected leasing companies to go abroad in search of better deals.
"The number of lessors domestically obviously is geared towards the domestic airline market, which is growing at a very fast clip. But there is a lot of competition domestically, so some lessors want to go abroad to diversify themselves," he says.
Yu notes that many government approvals are necessary for leasing companies to establish overseas operations, which can be challenging for new players, especially if they do not have the right backing.
Closer to home, Beijing has also backed Hong Kong's efforts to become the "Dublin of the East". Last year brought the implementation of significant tax incentives, which have the potential to effectively reduce the duty on operating leasing to around 4%. That has drawn Orix Aviation and SMBC Aviation Capital to establish platforms in Hong Kong, while ICBC Leasing delivered its first aircraft through a platform there in late 2017. China Aircraft Leasing (CALC) followed suit in September.
"Hong Kong is a fantastic location to collaborate with both mainland players, as well as a great destination for international players to set up to serve customers across this booming, dynamic, wider Asian region," said Stephen Phillips, director-general of Invest Hong Kong during an industry conference late last year.
Thanks to its deep finance market, Hong Kong is a major centre of aircraft capital. BOC Aviation and CALC both have their shares listed on the bourse there, while Hong Kong is also home to conglomerates such as CK Hutchison Holdings, NWS Holdings and Chow Tai Fook Enterprises, which have invested in lessors Accipiter and Goshawk Aviation.
Having started out doing finance leasing, Chinese lessors have mostly now moved into standard operating leasing, where they acquire an aircraft and lease it over a period of time.
That has often made them a target for scorn among established lessors. Yu admits that Chinese lessors are the "new kids on the block" that have disrupted a market long dominated by Western names, often by cutting shrewd deals: "It is definitely true that since 2007 when the Chinese lessors started to be established that lease rate factors have gone down."
Some feel the Chinese presence in the global market is starting to reshape how lessors do business. At the ISTAT Asia event in Singapore in May, BOC Aviation chief executive Robert Martin appeared to allude to the role that Chinese lessors, many of which came from finance leasing backgrounds, have had on changing some of the practices of the operating leasing market: "Finance lessors don't take maintenance returns. Finance lessors don't worry about return conditions and whether it's full-life or half-life at the end of the lease as much as traditional operating lessors.
"As the size of the new competition grows relative to the traditional lessors, some of their heritage is influencing the market."
A number of Chinese lessors gained their entry into the aircraft finance market through sale-and-leasebackS. More recently, however, a number are now moving into the placement market by ordering directly from Airbus and Boeing. "Chinese lessors have started to order as well as starting to receive those orders, and placing them into airlines. That is a big difference from before when they were doing trading and sale-and-leaseback," says Yu.
To date, those have mostly been the larger lessors like CDB Aviation, BoComm Leasing and CMB Leasing, and almost exclusively for narrowbodies.
While China's leasing companies are increasingly important to Toulouse and Seattle, they are also playing a crucial role in supporting China's aerospace industry and some other policy directions set by Beijing.
Flight Fleets Analyzer shows that local leasing companies account for 270 orders and commitments for Comac's ARJ21, and 585 for the C919. That accounts for 49% of the ARJ's commitment backlog, and around 61% of the C919's.
In addition to the direct orders, Chinese lessors are likely to be strong players in the sale-and-leaseback market for Chinese aircraft. ICBC Leasing, for example, has executed two sale-and-leaseback transactions on the ARJ21, completing a transaction on a Chengdu Airlines-operated jet.
Comac also recently signed an agreement with HNA Group, under which the two companies intend to launch support services targeting the ARJ21 at potential operators in Africa. That includes the possibility of establishing a specialist leasing unit for the aircraft, Comac says.
It is the second agreement between the manufacturer and HNA, which in June signed a "strategic co-operation" agreement with Comac; that deal involves addition of 200 C919s and 100 ARJ21s to its group fleet.
Some observers interpret these deals as HNA seeking to win favour with Beijing. The company is struggling to meet its debt obligations following years of costly global acquisitions.
Major aviation conglomerate AVIC also has its own leasing unit, AVIC International Financial Leasing, which supports a number of its products. Flight Fleets Analyzer shows that the lessor manages 22 MA60 turboprops and nine Harbin Y-12s, among its portfolio of 112 aircraft. It also has letters of intent to order 30 ARJ21s and 20 C919s, as well as 10 Avicopter AC313 helicopters.
Another major policy area that Chinese leasing companies have been throwing their support behind is president Xi Jinping's so-called belt-and-road initiative. Under the policy, Beijing is undertaking major infrastructural investments towards Europe along the ancient Silk Road trading routes, and through Asia and Africa.
Most of China's lessors make a big show of their support for the belt-and-road initiative, especially when engaging in deals involving airlines based in the target countries. In January, CALC and its 32% shareholder China Everbright signalled that they were planning to establish a fund dedicated to financing belt-and-road projects, which would also cover aircraft. While little detail was given, the two companies were reportedly in talks with various Chinese government departments to explore opportunities.
Yu is, however, sceptical about the role that aircraft lessors will play in the belt-and-road initiative, given that most of the focus will be on funding major infrastructure projects. "For the most part I feel that, size-wise, the deals that Chinese aircraft lessors do under belt-and-road are going to be under the radar," he says.