Avolon's emergence as a potential mega-lessor following two major acquisitions last year reinvigorated speculation about structural change in the aircraft leasing industry, but the pace of consolidation has been slow.
Consolidation has been a topic of discussion for many years. AerCap's acquisition of ILFC in 2014 was widely expected to catalyse a major round of mergers within the industry, but though large buckets of capital poured into aircraft finance by investors attracted by the asset class's strong yields, large-scale mergers did not crystallise until late last year.
A turning point had perhaps arrived with Chinese group HNA's acquisition of Irish lessor Avolon via subsidiary Bohai Capital. Granted its status as Bohai's leading aircraft leasing brand, Avolon quickly moved to integrate Hong Kong Aviation Capital's portfolio into its own, and under the leadership of chief executive Domhnal Slattery set about pursuing ambitious plans to grow aggressively both by organic means and through acquisitions. Bohai had signalled its intentions early, pumping $1.2 billion of additional equity into the lessor to meet those expansion goals.
Shortly after closure of the Avolon deal, there was strong speculation that Bohai was aggressively bidding for AWAS, to the extent of having two separate bids rejected by Terra Firma. Then when AWAS was put up for sale, the race reportedly drew other Chinese lessors ICBC Leasing and Ping An Leasing. But the sale stalled, and it soon became clear Avolon had much larger ambitions.
A bigger prize came up for grabs when CIT revealed plans to hive off its aircraft leasing unit. Avolon was quickly named by many in the industry as the front-runner.
In June, Slattery telegraphed his company's interest in CIT, noting that a takeover of the US lessor would be "quite transformative for us", given that the size of the on-offer portfolio and its spread of aircraft types.
Following months of speculation, including talk of a possible IPO of the unit, CIT named Avolon as the winning bidder in a $10 billion deal. Avolon would pay a 6.7% premium to the book value of its assets. The transaction is set to close early this year.
In announcing the deal in October, Slattery indicated in a statement that it would not be the end of the M&A trail for the ambitious company.
"While this transaction is strategically compelling and will double the scale of Avolon, it is not the summit of our ambition... We look forward to continuing to drive the disciplined growth of the business in the years ahead," he said.
However, in an interview with Bloomberg Television shortly after, he made clear that in the short term Avolon would be looking to integrate CIT, effectively taking it out of the running for mergers and acquisitions over the next year.
"The primary focus now will be on the integration of the business... I think, in terms of additional M&A, it will be beyond 2017," he said.
This has not quietened rumours that Avolon is looking at AWAS, which is back up for sale.
MAKING ROOM
There are signs that other Chinese lessors are still in the M&A market, particularly for Western platforms, and they stand to benefit from Avolon's assumed absence. ICBC Leasing, Ping An Leasing and AVIC International Leasing have all been linked to previous competitions, and it appears likely that they will be involved in any further sales of Western lessors.
Fresh from its float on the Hong Kong stock exchange last year, CDB Leasing could also enter the fray for acquisitions.
Speaking at a conference in Tianjin in September, CDB Aviation Lease Finance's chief financial officer Will Gramolt observed that while the industry had been talking of consolidation for some time, it was Chinese capital driving it along.
"New money coming from China is not just about taking delivery of the next aircraft on the production line," he said.
Nonetheless, he cautioned that while Chinese lessors would seek to continue acquiring their Western counterparts, they would not be looking to overtake industry leaders GECAS and AerCap.
Instead, most Chinese involvement is being driven by a desire to gain access to US dollar-producing assets, amid concerns that the yuan is set for further depreciation in the near future. Many also believe that the larger lessors may need to buy in experience from longer-established platforms, particularly as their portfolios start to reach middle age.
Not all consolidation is happening at the big end of the spectrum, however. Nordic Aviation Capital last year moved to consolidate the regional leasing market with its acquisitions of Jetscape Aviation and Aldus Aviation.
As well as M&A, 2016 also featured a number of portfolio transactions. AerCap and GECAS in particular took advantage of the strong trading conditions to sell off packages of aircraft. This included a 45-unit sale by GECAS to Avolon, announced before the CIT takeover.
That transaction followed the closing of Macquarie AirFinance's acquisition in March of the Skyfin portfolio from AWAS. Only 83 of 99 aircraft eventually transferred to the Macquarie Bank-owned unit.
Further portfolio deals are also still in the mix. At the end of 2016, Singapore-based lessor Avation disclosed that it had received an unsolicited expression of interest from a third party to acquire 22 ATR 72 turboprops in its portfolio, but no deal has yet been confirmed.
MIXED DRIVERS
In November, speakers at the Airline Economics Growth Frontiers conference in Hong Kong shared views on what would drive consolidation of the leasing industry in the longer term.
"I think there will be an amount of consolidation in the industry, and I think that is a natural trend as the industry gets bigger and bigger," said David Power, chief executive of Orix Aviation, a lessor based in Ireland which manages 166 aircraft, Flight Fleets Analyzer indicates.
Similarly, Investec Aviation Finance co-head Alok Wadhawan said consolidation was a "sign that the industry is maturing". He also argued that although there would be fewer lessors controlling the market, "there is always room for niche players".
Asia Aviation Capital chief executive Stephane Daillencourt, a former GECAS executive, agreed that the industry was consolidating, but noted that the current environment did not have many catalysing factors to drive a rapid flurry of mergers and acquisitions.
"The direction is clear: there will be consolidation. But the timing is not clear," he said.
Daillencourt pointed out that, unlike other industries, leasing did not offer many economies of scale. Instead, other factors are likely to drive consolidation.
"I think the main driver is on the financing side. You can't compete unless you have cheap cost of funds and cheap aircraft you can buy," Daillencourt said.
Standard Chartered executive director of aviation finance Andy Beer posited that a liquidity-based downturn could affect funding costs and therefore profitability, which in turn could lead to some investors looking to exit from aircraft leasing.
"I think if there is an adjustment in the market and some sense of a downturn, a lot of leasing companies' profitability will drop off at that point," he said.
"Then shareholders, if they don't have access to further capital or growth plans, will start asking questions around what they are doing with those platforms and assets. I think that will be the driver for other leasing companies to swoop in and make further acquisitions and consolidate the industry at that point."
Daillencourt added that, in some cases, it was hard to see consolidation taking place quickly, as the real tests for lessors would come further down the track.
"You can put the dust under the carpet for quite a while," he said, adding that the true value of a lease was not know until the end of the term when residuals were realised, and it was only then that some lessors would face distress.
"This is also a factor why some mistakes are not forcing consolidation at a faster pace."
In China, a proliferation of small lessors has driven up competition in the sale-and-leaseback market, hitting yields. Some observers feel that a number of Chinese lessors have written marginal deals and thus could be under some financial pressure in coming years, especially as they deal with the challenges of remarketing mid-life aircraft as they come off lease.
Nonetheless, Bank of Communications Financial Leasing executive director Gao Sixiang saw no compelling case for consolidation among Chinese lessors.
"I would say in China, in the next five or 10 years, I don't think there will be a huge consolidation," he said at the November conference. "The reason is that all of the Chinese lessors are backed by the big banks."
That would largely prevent the emergence any time soon of a "white knight" lessor that could act as a consolidator.
Ping An Leasing managing director Huang Zhang agreed, pointing out that for many lessors, "their parents are too big and too strong".
MARKET ENTRANTS
For all the recent M&A activity, new players continue to emerge in the leasing space.
Notably, former AWAS chief Ray Sisson teamed up with Eastern Air Lines founder Ed Wegel to launch a new Ireland-based lessor, AVi8 Air Capital, in November.
At the end of the year, Sisson told FlightGlobal that the new platform had been close to finalising its investor base, and could raise up to $750 million, or more, in equity funding.
He also challenged assumptions that the lessor would require scale to be successful in the market.
“When I was growing and managing other large portfolios in the past, people always said scale was vital. In fact, an investment bank once told me that a lessor needed to be sized at around $12 billion upwards to achieve economies of scale," he said. "In my experience that wasn't the case. What mattered was how many aircraft you could place, how many deals you were doing. If an airline needs an aircraft now, what matters is that you can do that jet for them today – not the fact you already have 15 on lease to them.”
Joint-venture platforms continue to emerge in various forms too, often teaming investors new to the industry with experienced players. Hong Kong conglomerate Chow Tai Fook Enterprises has invested in two platforms: Goshawk and Bauhinia Aviation Capital, a new joint venture with Aviation Capital Group.
Another force resisting the consolidation move is the re-emergence of airline-related lessors such as AirAsia's Asia Aviation Capital, Lion Group's Transportation Partners and Norwegian's Arctic Aviation Assets.
All three lessors have access to large orderbooks of competitively priced aircraft from their parent airlines, and have been showing a willingness to deal with third-party carriers. That may contribute to keeping the market competitive, even as some lessors are gobbled up by other players.
"In a consolidating industry, it is actually adding more competition, so from an airline perspective, we are actually helping the airlines," said Asia Aviation Capital chief financial officer Simon Perkins in November.
One of the airlines to have benefited from that is Hong Kong Express, which last year started taking delivery of its first A320neos leased from Arctic Aviation Assets and has contracted to take 12 of the Pratt & Whitney PW1100G-powered jets from the lessor.
Transportation Partners has been less aggressive in the market, with only three aircraft leased outside of operators affiliated with its parent company Lion Group. They comprise one ATR 72-600 acquired in a sale-and-leaseback deal with Azul and two 737-800s leased to Chinese budget carrier 9 Air.
Nonetheless, sources tell FlightGlobal that Transportation Partners is considering broadening its focus by acquiring aircraft from other lessors.
Asia Aviation Capital has put forward major growth plans to become a full-service lessor, but is also in the process of being sold by AirAsia. There are indications that a number of the prospective bidders have come from outside the industry, such as Asia-based pension funds and insurers.
On a smaller scale, Canada's Chorus Aviation has started to play in the regional aircraft leasing market. Launched in December, Chorus Aviation Capital has secured a C$200 million ($150 million) investment from Canadian insurance and investment management company Fairfax Financial Holdings, and has already concluded a deal to lease four CRJ1000s to Air Nostrum.
Even with aircraft leasing starting to consolidate at the top, the continuing emergence of new players is continuing to keep the market competitive. One thing seems certain: the market is as different from seven years ago as it will look in 2024.
Source: Cirium Dashboard
