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Aircraft Leasing – Is There an Opportunity Amid Crisis?

by Ajay Prakash

Globally, airlines operate a fleet of more than 31,000 commercial jet aircraft valued at over $700 billion (active and parked aircraft). Half of these aircraft have traditionally been leased by airlines from leasing companies. Over the past twenty years, the operating lease model has worked well for both parties. The lessor gets a decent return on investment while the airlines are able to conserve cash.

@ Aircastle

Aircraft Lease Options

Broadly there are three types of aircraft leasing methods. viz.

  1. Wet Lease – Here the lessor provides the Aircraft, Crew, Maintenance and Insurance (ACMI) to the lessee. The crew includes pilots, flight attendants and engineers. Wet leases are normally contracted for a short duration.
  2. Damp Lease – Damp lease is almost similar to wet lease, but without providing the crew. This method is also known as Aircraft, Maintenance, Insurance (AMI).
  3. Dry Lease – These are long-term contracts, and there are many aspects to the agreements. Here the lessor provides only the aircraft. Everything else, including the Air Operator Certificate, is provided by the lessee.

The Aircraft Leasing Players

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@ Travel Radar 2020

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@ Travel Radar 2020

The Current Portfolio graph shows the number of aircraft owned by the Top 20 Aircraft Leasing Companies. It is significant to note that the leasing business is dominated by a few players such as GE-CAS, AERCAP, Aviation Capital Group etc. Most of these companies have sound financial backing and are able to sustain for extended periods.

Also, note that –

  • The Top 5 (3%) players account for twenty-two (22%) per cent of the leased inventory.
  • The Top-20 (13%) companies own fifty per cent (50%) of the leased fleet.
  • The remaining 130 (84%) companies own the balance fifty per cent (50%) which is about 8000 aircraft

 Challenge for Leasing Companies

As air travel slowly started to recover in May this year, the leased aircraft are being recalled into service by airlines. But by July, leased aircraft constituted only forty-three per cent (43%) of the airline’s fleet, whereas in January this year that number stood at fifty per cent (50%).

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Source: CAPA – Centre for Aviation, CAPA Fleet Database

Today, the leasing companies are having to deal with a multitude of issues. The major one’s to reckon with are –

Airline bankruptcy – Airlines going out of business or reducing operations. The reduction results in cancellation of the lease.
Oversupply and falling lease rates – Airlines are re-negotiating lower lease rates to as lessors try and sell the stuck-up inventory of aircraft.
New aircraft orders – Most of the new purchases by leasing companies are placed as firm orders. Cancellations would mean severe financial penalties.

In the current scenario, it is expected that some small players who do not have enough liquidity will come under stress and industry consolidation can be expected.

With a challenged airline sector, the trend towards leasing would grow in popularity. In the coming years, carriers will seek more flexibility and more money-saving opportunities.

Demand may shrink short-term, but, in the long term, aircraft leasing is all set to be a win-win situation for both parties.

What do you think about the future of aircraft leasing? Do write back to us in the comments section.

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