Leasing companies dominated the airliner sales which were announced during the Farnborough air show

Max Kingsley-Jones

The record-breaking $33 billion worth of orders which were taken during Farnborough by Airbus Industrie and Boeing was notable for the rich mix of operating lease companies among the customers. Organisations such as International Lease Finance (ILFC) and GE Capital Aviation Services (GECAS) placed the bulk - 80% in value terms and 87% in units - of the total large airliner orders, pushing the relatively few sales to airlines into the background.

These deals follow a similar onslaught from leasing companies in the regional jet sector. GECAS, for instance, placed over $11 billion worth of orders and options for 450 Bombardier, Embraer and Fairchild Dornier aircraft at the ILA 2000 airshow in Berlin two months ago.

In recent years the lessors have emerged as the single most important clients to Airbus and Boeing, and the Farnborough surge means that their orders represent a third of the 3,400 large airliners of more than 100 seats. ILFC placed most of the leasing orders at Farnborough ($13.7 billion at list prices), and its backlog represents almost half of the leasing companies' total order backlog.

On the surface, leasing company deals appear to be 'win-win' situations from the perspective of both buyer and seller. The lessors usually place large bulk orders enabling them to qualify for large discounts from both the airframe and engine manufacturers, who in turn benefit from shoring up these long-term commitments, which helps with production capacity planning.

They can also achieve huge economies of scale by mass producing what are effectively standardised aircraft for the leasing companies. Both large and small airlines like to acquire part of their fleets on operating leases as the five- to seven-year terms and break options ensure that they can maximise capacity growth flexibility.

Block-booked slots

The downside to these multi-billion dollar deals is that the leasing companies have now "block-booked" production slots at Airbus and Boeing well into the decade. As in previous boom cycles, this forces the manufacturers to spiral production upwards to ensure that slots are available for their own airline customers. The manufacturers also face the age-old problem of having to compete against their own products, and customers, in the marketplace.

Although these conflicts of interest can usually be resolved, there have been instances where the leasing company/manufacturer head-to-heads have flared up publicly. Prior to a big Latin American group order (LanChile, TACA and TAM ) in 1998, emotions ran high among the leasing companies that manufacturers were stepping onto their "patch".

Speaking to Flight International's sister online service, Air Transport Intelligence, during an industry conference in early 1998, GATX's advisory board chairman Glenn Hickerson said: "In the Latin American order there is no-credit-risk pricing and the manufacturer is replacing the operating lessors. The pricing on small numbers of aircraft is down to the quantity discount level and the leasing companies are, frankly, paying a higher price than the airlines for their aircraft."

Both manufacturers have systems in place to ensure that funding can be secured for airlines which do not wish to go down the operating lease route. Airbus has Dublin-based Airbus Finance Company, while Boeing has adopted the former McDonnell Douglas Finance Corporation (MDFC), renamed Boeing Capital Corporation (BCC), as the cornerstone of its leasing operation.

The newly formed arm is expected to return annual growth rates of at least 15% over the next few years and has an asset portfolio value of $4 billion, of which around 50% comes from the former MDFC. BCC president Thomas Motherway says conflict with Boeing's leasing company customers is unlikely.

BCC does not plan to buy large numbers of aircraft and is concentrating on finance, not operating, leases. He adds that BCC will be able to offer finance for rival Airbus aircraft where an order has been lost.

While large leasing companies such as ILFC and GATX are clearly independent from the suppliers, this is not true of GECAS, the leasing arm of engine builder General Electric. This direct link to the engine manufacturer would suggest that powerplant choice is a foregone conclusion, but GECAS president Henry Hubschman demurs: "We are separate profit centres and the engine guys aren't the ones who make sure that my kids get fed, so [GECAS] ensures that it gets the best possible deal despite the connections."

This determination to get the best pricing has not pushed GECAS to a rival engine supplier yet, as its entire order backlog is GE or CFM International-powered. Being the sole engine supplier to all the larger regional jets no doubt helped the US group encourage GECAS to dip its toes into a market that has traditionally been the domain of airframe manufacturer financing.

Lessor concerns

Leasing companies used to steer clear of ordering large widebodies such as the 747, as the order sizes were too small to benefit from discounts, and the investment required made quick financial returns difficult. The lessors have also been concerned about being left dangerously exposed in the event of a financial downturn, with the prospect of large, expensive aircraft being returned early off lease that are difficult to place and costly to reconfigure.

But the presence of the two "big boys" - GECAS and ILFC - among the launch customers for Airbus' ultra large A3XX airliner demonstrates the major leasing companies' strength. Although the large discounts on offer encouraged them to be among the first buyers, the move signals that the leasing companies are set to become a driving force for all airline fleet planning in the 21st century.

Source: Flight International