SMBC Aviation Capital has reduced the size of its fleet, but rental income is up as the lessor introduces newer equipment.

The Dublin-based company was a net seller in its financial year ended 31 March. It sold 50 aircraft from its owned fleet, while adding only 15 jets, its annual results show. Nevertheless, core lease revenue increased 1.1% and overall income from continuing operations exceeded $1 billion.

"The theme is that we had a good year in terms of buying airplanes and a good year for selling them," chief executive Peter Barrett tells FlightGlobal. "The portfolio stayed the same size, but the fleet is younger and more profitable. We see it as a good opportunity to trade aircraft."

Over the past two years, SMBC has increased new-technology aircraft's share of its portfolio from 1.2% in 2016 to 22% as of 31 March.

"Fuel is going to present more challenges for airline customers over the next couple of the years compared with the past few years, so we need to make sure that we operate the most fuel-efficient fleet that we can," says Barrett, noting that even if oil remains in the $70-80 range, that's still nearly twice the level of two years ago.

As part of its strategy to grow this segment of its fleet, SMBC signed sale-and-leasebacks contracts for 43 aircraft during its latest financial year, including with India's Jet Airways for 13 Boeing 737 Max 8s, Aeromexico for 10 of the same aircraft, and Avianca for 11 Airbus A320neos.

SMBC has over 200 aircraft on order, 15 of which will be delivered by year-end, Flight Fleets Analyzer shows.

"We have significant plans to grow business," says Barrett. But it will be disciplined, he stresses. The lessor is "not going to pursue scale for scale's sake".

He adds: "The right time to inject the capital is now, before the business took delivery of the order stream.”

Earlier this year, shareholders Sumitomo Mitsui Financial Group and Sumitomo Corporation agreed to inject $1 billion into SMBC Aviation Capital as it embarks on further growth.

Since the shareholders acquired the business six years ago, the lessor has generated $2 billion in profits. Combined with the capital infusion – due by 31 March 2019 – this should help keep leverage down.

The lessor has reduced its net debt-to-equity ratio from 4.08x to 3.47x since March 2017, and expects this trend to "further accelerate". With the capital infusion, net leverage will fall to 2.3x on a pro-forma basis, it says.

"How you manage the liability and the capital side of the balance sheet is critical for an aircraft leasing company," notes Barrett. "We make sure we're robust and on liability side and balance sheet."

The company continues to increase its pool of debt providers, adding new banks to its funding sources. Over the year, it closed $1.4 billion of debt with third parties, including a $200 million syndicated term loan and a $400 million revolving credit facility.

As for concerns about rising interest rates, Barrett seems relaxed. "Interest rates are a critical for any leasing company because they are your biggest input into your cost for capital," he acknowledges, but he adds: "Increased cost pressures will flow through lease rentals... We're beginning to see that already."

Source: Cirium Dashboard