Less than half of aircraft now owned by airlines

According to some estimates, leasing now accounts for 51 per cent of the world’s commercial aviation fleet and that number is only going in one direction.

“I would say that estimate is probably about right,” says Andy Murphy, managing director and head of strategy (structured finance) with Waystone. “However, I would expect this number to rise post-Covid. The benefits of leasing a plane versus owning one, I think, will outweigh the negatives going forward. For example, when airlines lease a plane, they not only forego the upfront burden of acquiring the asset which allows them to utilise cash reserves and balances for other projects, but it also allows flexibility to short-term lease assets during times of increased capacity.”

KPMG head of aviation finance Joe O’Mara agrees: “Aircraft leasing has consistently grown its market share for decades. At the turn of the century about a quarter of all aircraft were leased – that is over 50 per cent now. The pandemic has increased the importance of the leasing channel for capital constrained airlines, with leasing companies funding closer to 60 per cent of new deliveries in the last couple of years. It remains to be seen whether this level is sustainable, but with the additional debt taken on by airlines as a result of Covid, I expect lessors will continue to fund the majority of new deliveries over the next few years.”

‘Unstoppable force’

UCD associate professor of banking and finance Thomas Conlon describes leasing as “an unstoppable force”.

“Going back to the 1970s almost all aircraft were owned by the airlines, now it’s less than 50 per cent,” he notes. “The proportion of leased narrow-bodied aircraft is even higher than that. That’s a particular focus for the lessors. There is less uncertainty in relation to their future value. Widebody aircraft are susceptible to demand shocks. When Covid hit, the first thing the airlines did was ground their widebody aircraft. They didn’t have passengers to fill them. With four engines they are very costly to run.”

That cost factor is driving a widespread move two-engine aircraft, he adds. “Airlines are running on very tight margins and 30 per cent of their cost base is fuel.”

The lessors also enjoy an advantage in terms of their cost of capital. “Leasing companies can borrow at lower rates than airlines,” Conlon points out. “All the top lessors have achieved investment grade credit ratings over the past number of years. Most airlines don’t enjoy those ratings. That gives the lessors access to deep pools of capital at competitive rates.”

That can be particularly important for smaller or start-up airlines, according to Murphy.

“In some cases, these airlines would have struggled to obtain financing from banks in order to buy aviation assets,” he explains. “Aircraft lessors are specialist lenders in this sector, and perhaps understand the underlying risk profile of the smaller lessee a little better, or indeed have a higher risk profile themselves and are therefore comfortable lending to smaller or start-up airlines.”

Leasing may also be the only way for airlines to get their hands on new aircraft. “If you want to buy a Boeing today it could take five to eight years before it is delivered,” explains Conlon. “The lessors have a lot of the delivery slots tied down through speculative orders. They have guaranteed access to aircraft. If you want to get a new aircraft, leasing might be the only way to get it. The lessors also tend to have the most fuel-efficient aircraft. They could be 20 per cent more fuel efficient. That means a lot in a tight margin business.”

There is also the not insignificant matter of risk management. “Aircraft can depreciate quite dramatically over the first few years, leading to a negative depreciation write-off amount,” says Murphy. “If the asset is held on the balance sheet of the airline this is quite penal for their profit and loss account. However, if the asset is leased then the depreciation does not have an impact on the airline’s balance sheet, rather it impacts the balance sheet of the asset owner – the aircraft lessor.”

More certainty

It brings more certainty as well, according to Kieran O’Brien, lead advisory partner in aviation finance, KPMG.

“The two main drivers are flexibility and risk management. Purchasing aircraft ties up significant amounts of capital for an airline. Having a mix of owned and leased assets can open opportunities for airlines to increase their fleet size and drive growth. Leasing also allows airlines to avoid taking on residual value risk. At the end of their lease term, they can hand the asset back and they don’t need to worry about movements in the aircraft’s value, which sometimes can be significant.”

O’Mara believes leasing will continue to grow both in scale and importance.

“Long-term air travel has grown at a rate of roughly 4.5 per cent per annum,” he says. “Covid clearly stopped that in its tracks, but the recovery is evident, and that growth factor will return sooner than originally thought. Environmental concerns are driving a move to newer technology aircraft and appetite to upgrade fleets. The relationships between leasing groups and airlines have grown stronger over the course of Covid, with lessors being instrumental in many airlines’ survival. All these factors give you confidence that leasing will continue to grow both in size and importance. Given Ireland remains the centre of the aircraft leasing world, that’s a huge positive for our economy.”

Conlon agrees: “It is my belief that we will continue to see an increase in leased versus owned aircraft. There is a decoupling taking place between ownership of aircraft and operating an airline. You don’t have to own any aircraft to run an airline. I can’t really say what the maximum is. The kind of airlines that tend to be fully leased tend to be start-ups. But if you take any of the flag carriers you will find that a substantial proportion of their fleets are leased. That includes the likes of British Airways and Lufthansa.”