Aircraft leasing industry advances into a broader market.-USA Aircraft Group Corporation

Date: 2024/12/20

Every air show, the news that airlines buy planes attracts much attention. Careful people will find that not only airlines buy planes at the air show, but also some leasing companies buy planes. The latter do not operate aircraft themselves. After purchasing the aircraft, they will lease the aircraft to airlines for operation through financial leasing or operating leasing. According to industry insiders, in the airline fleet, self-purchased, financial leased and operating leased aircraft each account for about one third. Moreover, leasing companies not only appear in the front end of aircraft design, manufacturing and delivery, but also begin to play an increasingly important role in the aircraft exit stage. When did China's aircraft leasing industry start to develop and what level is it at now? What are the challenges and opportunities in the development process? At the recently held Second Civil Aviation Finance Forum, many heavyweight leasing professionals on and off the field gave their answers. The prospective aircraft leasing industry began to develop in the 1970s, and gradually became an important part in the field of air transportation. With the advantages of improving fleet flexibility and delivery speed, saving airline liquidity and facilitating the introduction of new models, aircraft leasing has become the most effective way for airlines to solve the contradiction between fleet expansion and capital shortage. China began to use financial leasing to introduce aircraft in the 1980s. In the case of shortage of funds and strong demand, aircraft leasing has provided a powerful boost to the development of civil aviation in China. China's aircraft leasing industry only started to rise at the beginning of this century. "In the latest list of the top 20 leasing companies in the world, according to the location of the headquarters, there are 7 Chinese leasing companies on the list, and two of them are still in the top 10. Ten years ago, there were three Chinese leasing companies on this list. The fleet size has also increased from the previous 860 (accounting for 9.5% of the total number of leased aircraft in the world) to more than 1,800 (the proportion has increased to 25%). " Li Ling, Marketing Director of Bank of Communications Financial Leasing Co., Ltd., said at the Second Civil Aviation Finance Forum that the aviation industry is a typical capital-intensive industry. In the 17 years since the establishment of the first five financial leasing companies in China in 2007, the aviation industry and the financial leasing industry have been promoting each other and growing together, which not only makes the innovation of aircraft financing concentrated in the leasing field, but also has a profound impact on the mode of aircraft introduction. Shi Chen, head of aircraft leasing business in Bohai, told reporters that among the top 20 leasing companies in the world, apart from seven Chinese leasing companies headquartered in China, BOC Aviation Leasing, a subsidiary of China Bank, and AVOLON, a subsidiary of Bohai Leasing, which is headquartered in Ireland, are also Chinese-controlled leasing companies, among which Avolon ranks second in the world according to the fleet size. When it comes to aircraft leasing, we have to mention Tianjin Dongjiang, the second largest aircraft leasing center in the world. In 2006, Tianjin Dongjiang Bonded Port Area was approved for establishment. At the end of 2009, ICBC Leasing launched the first bonded aircraft leasing business in Dongjiang, Tianjin, which was the first one for Chinese leasing companies to innovatively adopt the domestic bonded transaction structure to operate aircraft leasing, filling the gap in the aviation leasing industry in China. After 15 years' development, by the end of September this year, the number of aircraft leased in Dongjiang has exceeded 2,300, accounting for 70% of the national aircraft, ranking second in the world. Major aircraft leasing companies at home and abroad, such as ICBC Golden Leasing, Bank of Communications Golden Leasing, Bank of China Golden Leasing, AERCAP, ALC, AVOLON, BOCA and ACG, have served more than 50 domestic and foreign airlines such as Air China, China Eastern Airlines and China Southern Airlines through Dongjiang. Yu Chaoliang, director of the Financial Leasing Promotion Bureau of Tianjin Dongjiang Comprehensive Bonded Zone, said that aircraft leasing is the ballast stone of Dongjiang leasing industry and an important starting point for Dongjiang to serve the development of China aviation industry. "In the past five years, more than 300 aircraft asset transactions have been completed in Dongjiang, further serving the global circulation of leased assets and supporting the security of the industrial chain of China aircraft leasing supply chain." The role of aircraft leasing in aircraft introduction is expected to be further enhanced. According to the report of aviation industry leaders in 2023 jointly released by KPMG and AirlineEconomics, by the end of 2023, there were about 14,000 commercial aircraft owned or managed by global aircraft leasing companies, accounting for 51.3% of the total number of existing aircraft in service. It is expected that this proportion will further increase to 60% in the next few years. Challenge A number of guests who spoke at the Second Civil Aviation Finance Forum said that the position of leasing industry in aircraft financing has been continuously improved recently. After 2020, the penetration rate of aircraft leasing has always remained above 50%, and the penetration rate of new aircraft leasing is as high as about 60%. The characteristics of the aircraft leasing industry and the trend of the entire aviation market are also beneficial to the future development of the aircraft leasing industry. Experts said that aircraft leasing is a completely competitive industry, and the industry concentration is high. The number of fleets held by the top ten aircraft leasing companies exceeds 6,100 (excluding propeller aircraft and regional aircraft), accounting for about 46% of the total number of aircraft managed by global aircraft leasing companies. Aircraft leasing industry is highly related to the development of global air transport industry, and the demand of airlines for leasing aircraft is the main driving factor for the growth of aircraft leasing industry. From the GlobalMarketForecast2024 released by Airbus in July this year, it can be found that the global demand for passenger and cargo aircraft will reach 42,430 in the next 20 years, and the total number of aircraft in service will reach 48,230 by the end of 2043, an increase of 98.8% compared with 2023. The aircraft leasing industry has broad development prospects. However, while the momentum is improving, the aircraft leasing industry is also facing development concerns. Wenning Liu, assistant general manager of ICBC Aviation Finance Leasing Co., Ltd., said that the profit margin of leasing industry is being squeezed in both directions. "At the income end, the competition in the domestic financial leasing market is very fierce, and many projects are caught in a price war. On the debt side, most aircraft are matched with US dollar financing. Although the interest rate cut of the US dollar has improved our financing cost marginally, it is still at a high level, and the future trend is not very clear. Under the influence of a large number of stock liabilities, it is expected that the short-term cost of the industry will still be maintained at a relatively high level. " Another thing that worries him is the external environment facing the aircraft leasing industry. At present, the aircraft supply chain is affected by the industrial chain, and its recovery is less than expected. With the influence of geopolitical factors, it is expected that the growth rate of the aviation industry will slow down with the macro-economic trend. The profit level of airlines is also relatively low, and it will take some time to repair the financial report, and there will be some differentiation in future performance, which further increases the operational difficulty and risks faced by aircraft leasing companies. Li Ling noticed that the production capacity of the world's major civil aircraft manufacturers has not recovered to their peak level, and even the number of aircraft delivered this year may be lower than last year. However, many aircraft that should be delivered now were signed and sold at their peak, which makes the delivery time of many new aircraft longer. The same problem is the supply of aircraft engines. These not only affect the capacity arrangement of airlines, but also have an obvious impact on the aircraft leasing industry. How to deal with the new challenges in the development process? Leading aircraft leasing companies have begun to lay out in advance in order to have a greater say in the future market. Shi Chen, the head of Bohai leasing aircraft leasing business, is optimistic about the prospects of the whole industry. He said that since the beginning of this year, the market value and rental of aircraft have shown signs of strengthening. According to the data of Ascend, the rental rate of Airbus A330-300 has increased by about 37% in the past year, which not only proves to some extent that the market demand is accelerating recovery, but also shows that the demand of airlines for aircraft rental is also strengthening. According to the market demand, the company will continue to optimize the fleet structure by selling aircraft leasing assets in a timely manner, reduce the fleet age to meet the diversified needs of customers, and reinvest the sales proceeds in the expansion of aircraft leasing business. Shi Chen introduced that in September this year, Bohai Leasing announced that its subsidiary Avolon would acquire 100% equity of CAL, an aircraft leasing company, mainly including 107 self-owned aircraft assets with leases and 13 aircraft orders. This transaction will help improve the profitability of the company's aircraft assets, and after the transaction is completed, Avolon will further increase its market share and consolidate its position as the second largest aircraft leasing company in the world. Moody's then upgraded Avolon's investment grade rating (Baa3) outlook to "positive", and pointed out that the positive financial impact of Avolon's announcement of the acquisition of CAL was taken into account. This reflects Avolon's ability to improve profitability through the portfolio of new aircraft fleet under the background of high leasing rate in the aircraft leasing industry. "Limited by the manufacturer's supply chain problems and capacity gap, airlines need to seek more seats from aircraft leasing companies and extend the lease to meet the demand. Strong demand will promote the overall recovery of aircraft value, lease rate and renewal rate, and investment-grade leasing companies with deliverable seats will occupy an dominant position in the market. As a head aircraft leasing company, we also hope to actively embrace the market and play a greater role in airline fleet expansion and structural improvement. " He said. Wenning Liu introduced that ICBC Golden Rent is stimulating the vitality of high-quality development through innovation and transformation. "ICBC Golden Leasing insists on innovation-driven business development, actively expands along the aviation industry chain, successfully landed the first direct leasing business of its own engines in China, completed the direct leasing project of aircraft maintenance equipment, deeply judged the development trend of low-altitude economic industries at home and abroad, fully exerted its unique advantages from equipment and facilities procurement to comprehensive financial support of industrial financial chain, explored business opportunities in low-altitude economic construction, infrastructure construction, operation and maintenance support, aircraft products and other related fields, and developed new tracks and new products for aircraft leasing, thus continuously shaping high quality. Li Ling said that it is necessary to strive for more support policies, amend the civil aviation law's right registration system for engines, and further enhance the enthusiasm of leasing companies to engage in engine business leasing; At the same time, it is suggested that relevant parties should strive for more support from the green evaluation system of the financial industry to the aviation industry, make better use of the policies of large-scale equipment renovation and financial support for low-carbon transformation, and at the same time effectively improve the green development level of civil aviation in terms of scientific and technological support, digital empowerment, carbon market mechanism and international cooperation. What makes domestic financial leasing companies unanimously optimistic is the domestic civil aircraft leasing business. ICBC Financial Leasing has continuously increased the proportion of domestic aircraft leasing business, and signed a total of 100 C919 and 35 domestic C909 aircraft purchase letters of intent. At present, the C909 aircraft in the fleet accounts for 20% of the total delivery of this aircraft. The company's fleet has recently welcomed the second C919. "As C909 and C919 enter the mass production channel and continue to be delivered in the domestic market, it is the only way for domestic civil aircraft to go out. This process is inseparable from the close cooperation between manufacturers, airlines and Chinese leasing companies. Leasing companies need to give strategic support to domestic civil aircraft in pricing strategy. Airlines will improve the economy of operating domestic civil aircraft, and at the same time explore new business models through joint marketing, such as wet leasing and subletting, to further revitalize assets and enhance their asset liquidity in the secondary market. In addition, because domestic aircraft are duty-paid goods, the initial cost of domestic leasing is increased. It is suggested to comprehensively improve the tax refund or tax exemption policy for domestic aircraft from the perspective of supply chain and enhance the activity of domestic aircraft leasing.