Aircraft lessors are jockeying for position as Asian airlines start to think more seriously about operating leases.

No-one is challenging the two giants. International Lease Finance Corp and General Electric Capital Aviation Services remain the top aircraft operating lessors. But a three-way race is on to see who will be number three. The presence of three contenders for this slot confirms a broadening of the leasing industry's base, but these three also illustrate most of the dynamics of an industry clearly in transition.

'Two sharks and 500 minnows is how an Airbus official once summed up aircraft lessors. If that ever was true, it isn't now. The leasing industry has evolved into three distinct tiers.

Ranked either by size or fleet values, ILFC and Gecas reign supreme. ILFC owns over 300 aircraft; Gecas manages a whopping 900. Both portfolios are worth more than $10 billion.

The second tier consists of the three contenders for third place - CIT Group, Ansett Worldwide Aviation Services (Awas), and Boullioun Aviation Services with its subsidiary, Singapore Aircraft Leasing Enterprise (Sale). A fourth company, GATX Capital, could grow into this group with more jets it now has on order.

All these companies have or soon will have portfolios worth over $1 billion. Each speaks of the others with respect. But as Tony Diaz, senior vice-president for CIT's aerospace group, says, 'We're concerned with all our competition. The stronger and bigger our competition gets is a concern to us.'

The third tier consists of all the others. Generally their portfolios are less than $1 billion. Lessors in this group range in size from Orix and Itochu AirLease down to companies with only one or two aircraft. This group includes several lessors which have ordered new aircraft and obviously plan to grow, as well as some well established companies which manage portfolios of mostly ageing aircraft.

The three contenders have different approaches to fleet growth. CIT has never ordered new aircraft, relying instead on secondary markets, and Awas has been cautious about ordering new jets. Only Boullioun and Sale have been bullish. Their combined 42 orders and options are the main reason they can talk of becoming number three, even though their fleets are now the smallest of any contender.

But things are changing. CIT, already largest in the group, is planning more growth. 'Our business plan calls for healthy growth in the next several years,' says Jeffrey Knittel, CIT executive vice-president. Until April 1997 CIT was barred from buying new aircraft by US rules that forbade bank subsidiaries from 'speculating' in future values of new aircraft - CITis majority owned by Dai-Ichi Kangyo Bank of Japan. 'Now that the rule has changed, we are evaluating whether to order new aircraft,' says Knittel.

Other lessors have suggested that CIT's urge to grow was fuelled by selling 23 per cent of its shares in an initial public offering last November. 'I can see how some of our competitors might attribute our growth plans to the IPO, but we had intended to grow with or without the IPO,' says Knittel. 'The fact that the IPO occurred simply puts us in a better position to go forward with that growth.' But he acknowledges: 'Going public creates a certain energy throughout the organisation. That energy can be channelled in a number of ways. One of them is growth.'

Access to capital will not slow CIT down. The $23 billion conglomerate with eight operating units has what Knittel describes as 'a fortress balance sheet.' 'Our company is AA- rated,' says Knittel. 'Very few companies in this business can say that. That gives us significant advantages. Our access to capital is certainly equal to and better than most.'

CIT is already the largest contender for number three. Indeed, it probably already holds that position. If it grows much, all its rivals will have even farther to go just to catch up.

Awas appears in no hurry to do that. 'Ansett Worldwide has taken a less aggressive approach to ordering aircraft,' explains chief financial officer Peter Wood. 'We have preferred to build our capital base, so we can finance acquisitions when the time is right.' Awas now has the capital to fund portfolio growth, unlike two years ago when its CEO warned that Awas required recapitalisation before it could order more aircraft. 'In the two financial years since Barbara Ward made that comment, Ansett Worldwide has generated aggregate earnings in excess of US$100 million,' says Wood. 'With those earnings retained in the business, with the consent of our shareholders, there has been, roughly speaking, a 20 per cent increase in our capital base.'

Then why isn't Awas buying new aircraft? 'It's not for lack of working capital,' says Wood. 'It's more a question of strengthening the financial condition of the company.'

The other obvious reason is that a sale of Awas is pending. Abu Dhabi-based Oasis International Leasing and New Zealand merchant bank Fay, Richwhite have been negotiating for nearly a year with Awas owners News Corp and KPN, the Dutch conglomerate that bought TNT, over the complex deal.

Ad Scheepbouwer, TNT's chief executive, had predicted a sale announcement in March, but the deal has changed since then. About 46 Awas aircraft are free of tax or finance leases. Recent reports suggest that those will now be sold first. Instead of splitting the finance into separate facilities as once planned, Chase Securities now is reportedly mandated to take the entire debt to US capital markets in the third quarter of this year. The other 50-odd Awas aircraft will be sold later.

It remains unclear how Awas will be capitalised and managed, and even whether it will survive in its own right given Oasis' global ambitions. British Aerospace Asset Management owns about 15 per cent of Oasis. BAe agreed to provide lease management and skill transfers as part of an offset accord; Oasis' general manager, Andrew Davis, refuses to comment.

'We're still number three in the industry in a niche below the two majors, and well above boutique lessors such as Sale,' declares Anne Chidgey, Awas general manager for aircraft finance. But, as Bob Genise, Boullioun CEO, observes: 'If Awas is acquired, that changes the whole complexion.'

Boullioun and Sale are barrelling ahead with portfolio growth unmatched by any other aircraft lessors. That includes expensive widebodies; Sale has firm orders for six Boeing 777-200s with options on 10 more. In March Sale bought a new 777-200 from Malaysia Airlines and leased it back. Genise explains: 'If the right [sale-leaseback] opportunities present themselves, why not take advantage of them? Sale has the equity base to acquire more aircraft.' The MAS 777 could replace one of Sale's options, but so far Sale hasn't said that it will.

The growth at Boullioun and Sale may seem opportunistic, but it is by design. Genise's first priority at Boullioun was to assemble a team of experienced experts. 'I consciously started doing this in '94 when I became president,' he recalls. 'We didn't start building the asset base till '95-96. The size and quality of our team is what makes it possible for us to grow.'

With Boullioun providing much of the technical support, the emphasis at Sale was to build its capital base. Boullioun and Singapore Airlines injected an initial $58 million, later supplemented. The big boost came last year when two Singapore government investment groups committed $125 million and Boullioun and SIA added $125 million each. The result was a total capitalisation of $375 million.

'It's now a matter of developing what we have already,' says Robert Martin, who will become Sale's managing director in July. 'We have some very strong shareholders in place, we are starting to take deliveries on our first order, and we have diversified our banking relationships to improve access to money. Now we're basically consolidating our position.'

Outgoing MD John Willingham emphasises that Sale has only begun to grow. 'Clearly we are planning to expand the business over the medium term. We will consider additional orders to get ourselves to the level where Sale and Boullioun hope to be recognised as the third lessor in the first tier.'

Willingham challenges the characterisation of Sale as a 'boutique' lessor. 'If you look at the way we've been set up - step by step how we've built the business - I think we've demonstrated quite clearly our long-term commitment, not only to ourselves but to our shareholders. They wouldn't commit $375 million to a "boutique" in the expectation that it might cut and run if times got tough.'

Based on current orders and options, Sale will become bigger than Boullioun sometime in 2000. But Genise is eyeing another order, perhaps for A320s to balance Boullioun's portfolio of 737s. 'No more delivery positions are available on the A320 for quite some time,' he says. 'Fortunately, Sale's deliveries are starting now and go over the next several years. We would like Boullioun to have a block of Airbus equipment coming in to dovetail with that.'

On the combined strength of Boullioun and Sale, Genise says: 'At the end of '95 we had assets of $360 million. At the end of 1997 we were at just under $1 billion. We tripled the size of the company in two years. If you lump Boullioun and Sale together we probably have $1.5 billion in assets.'

'It's not our goal to try and reach the level of ILFC or Gecas,' Genise adds. 'But we'd be very comfortable getting Boullioun to 150 aircraft. In five years Boullioun will probably be about double the size we are now. Unless someone else comes along or grows rapidly, the Boullioun/Sale portfolio will likely be number three in the industry.'

Asia's current storm could affect all lessors. 'Fortunately, aircraft leasing is global,' says Sale's Willingham. Sydney-based Awas sits at the edge of the storm, but it too has taken precautions. 'Awas significantly reduced exposure to Asian markets in 1997,' says Chidgey, who also warns that the 'Asian crisis may have short to medium term impact on widebody values and rentals.'

Dave Thompson, marketing managing director for GATX Capital, echoes that fear: 'Widebodies appear to be taking more of a hit.'

Sale's Willingham thinks 747-400 values are most affected. But others foresee turbulence for the 777, in which Sale has a major commitment. 'One issue to watch will be the large number of 777s on order by the leasing companies,' warns CIT's Diaz. 'The number of airlines who could operate a plane the size of the 777 is a much smaller universe than the number of operators for, say, a 737 or A320.'

CIT was just planning to boost its Asian presence when the crisis broke; now it has postponed plans. Because of Asia's storm, Sale too has shifted efforts elsewhere. It has leased no aircraft in Asia in the past six months, and Willingham foresees few chances over the next 12-18 months. In fact, one of Sale's most recent transactions was to cancel a proposed lease of two A320s to Malaysia's Saeaga Airlines, and place them with America West instead. 'Our own marketing in Asia has switched to a strategy more focused on sale-leasebacks,' explains Willingham.

That has been the response of most lessors. Awas alone claims no interest in them. 'Our approach is to concentrate on our own deliveries and current portfolio,' says Chidgey. Aside from Sale's recent sale-leaseback with MAS, Nissho Iwai and Gecas have completed recent sale-leasebacks.

Most lessors see a silver lining in Asia's storm. CIT's Knittel predicts: 'I think both the short and long term effect will be to shift more ownership to lessors. I see that not just as an Asian phenomenon; airlines overall are looking more towards their business of moving passengers and less to the actual ownership of airplanes.'

Sale's Willingham agrees. 'Historically Asian airlines have not paid much attention to fleet flexibility. They made massive investment in aircraft ownership. This crisis will cause them to re-examine the assumption that they should acquire all their fleet.' He notes how the proportion of Asia's fleet on operating lease climbed from 9 per cent in 1991 to 17 per cent in 1996. It slid back to 15 per cent in the past two years, but he predicts Asian fleets will approach the 20 per cent world average.

Opinions vary on how this will affect lessors. Some predict more entrants - perhaps more 'boutiques'. Others foresee consolidation. Thompson at GATX observes: 'Changes will come simply because there are two dominant lessors. We may see a reaction among the others about how they're going to be more competitive.' That reaction - whether spurred by new banking rules, the imminent sale of a major lessor, Asia's storm, or aggressive growth - is clearly well underway.

Source: Airline Business