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Asian aircraft leasing companies manage their way through Covid-19 crisis
Lessors with strong balance sheets assist long-term clients with sale & leaseback transactions
13 May 2020 | Michael Marray

AIRCRAFT lessor Avolon, which is owned by HNA Group and Orix Corporation, has said that as a result of the Covid-19 pandemic it has received requests from customers for relief from payment obligations under their leases amounting to more than 80% of its current owned and managed customer base.

While releasing its Q1 earnings on May 6, Avolon said that these lessees account for more than 90% of the annualized contracted rental cashflow of the current owned and managed fleet.

The requests have taken a number of forms including, but not limited to, requests for short-term rent deferrals for part or all of monthly rental for a specified period of time.

Avolon said that as of March 31 it was engaged in active dialogue with its customer base, and had agreed a number of rent deferral arrangements for an average of three months. It is expected that some form of short-term rental deferral arrangement will be agreed with a majority of its customers. 

Given the ongoing impact on its customers’ operations, the company anticipates that additional requests for rent relief will be received, and that a number of lessees will fall behind on their rental obligations, with a related increase in Avolon’s trade receivable balance.

However, analysts note that the big global leasing companies had a buoyant 2019, and took advantage of plentiful bank debt and access to the bond markets to put funding in place. So, they are generally entering the crisis from a strong position.

Over the past decade the centre of gravity in global aircraft leasing has shifted to Asia, and a number of major lessor owners across the region are entering their first downcycle.

In 2015, Bohai Leasing, part of the HNA Group, acquired Avolon in a US$7.6 billion deal. In 2016, Avolon in turn acquired the US$10 billion aircraft leasing business of New York based CIT Group. HNA Group subsequently ran into difficulties and, as part of an asset disposal programme, in November 2018 sold a 30% stake in Avolon to Orix Corporation of Japan.

Another major Chinese lessor, China Aircraft Leasing Group Holdings, is owned 35.83% by Everbright and 29.30% by Friedmann Pacific Asset Management, with the other 34.87% floated on the Hong Kong Stock Exchange. It has a fleet of 134 aircraft owned and managed, and is targeted to grow this number to 352 by 2023.

China Development Bank unit CDB Aviation has a fleet of 233 aircraft with commitments for 158 more, giving it an owned, managed and committed number of US$9.3 billion. Bank of Communications Financial Leasing has grown fast and built up a US$10 billion owned, managed and committed aircraft portfolio, while ICBC Leasing and Minsheng Financial Leasing also have large portfolios.

BOC Aviation has also grown strongly. Bank of China led the way among Chinese bank owned lessors with its 2006 acquisition of Singapore Aircraft Leasing Enterprise, renaming it BOC Aviation. In 2016 it was listed on the Hong Kong Stock Exchange.

Airlines are currently looking to generate cash, as well as seeking government support, and lessors with strong balance sheets are able to assist their long-term clients with sale & leaseback transactions.

On May 11, BOC Aviation announced that it had signed a purchase and leaseback agreement with Southwest Airlines for ten Boeing 737 MAX 8 aircraft, and on May 8, the company announced the signing of a purchase and leaseback agreement with Wizz Air for six new Airbus A321neo aircraft. The six aircraft are expected to deliver in 2020 and 2021.

One Hong Kong entity which has built up a large fleet is Goshawk Aviation, controlled by Hong Kong based New World Development unit NWS Holdings and Chow Tai Fook Enterprises. It owns and manages a fleet of 242 aircraft.

Meanwhile, back in 2014, Mitsubishi Corporation, through its 100% subsidiary MC Aviation Partners, entered into an agreement with Hong Kong conglomerate Cheung Kong (Holdings) Limited to establish a joint venture dedicated to aircraft leasing.

The Japanese have been major players for decades, and have also expanded over the past decade, acquiring aircraft leasing companies, spare engine portfolios and specialized financing companies.

In 2012, Sumitomo Mitsui Banking Corporation acquired the aviation leasing business of Royal Bank of Scotland, RBS Aviation Capital, renaming it SMBC Aviation Capital.

Sumitomo Mitsui Finance and Leasing Company (SMFL) also has a joint venture with German aero engine manufacturer and servicer MTU Aero Engines. In December 2018, SMFL and Sumitomo Corporation reached an agreement through which SMFL acquired 65% of the shares of Sumisho Aero Engine Lease from Sumitomo Corp. The company relaunched operations under the name SMBC Aero Engine Lease B.V.

In 2013, Jackson Square Aviation, a full-service aircraft leasing company based in San Francisco, became a group company of Mitsubishi UFJ Lease & Finance Company Limited (MUL). And in 2014, MUL acquired Engine Lease Finance, one of the largest spare engine lessors.

And on the financing side, in March 2019, Mitsubishi UFJ Financial Group acquired the aviation financing business of DVB Bank (DVB) from the DZ Bank co-operative banking group in Germany. The DVB loan portfolio stood at around US$6 billion. 

Last December, California based Pacific Life Insurance Co, the majority shareholder in Aviation Capital Group, entered into an agreement to sell its remaining shares to Tokyo Century Corporation. Tokyo Century initially acquired a 20% stake in Pacific Life in 2017.

This steady flow of M&A deals throughout the last decade, together with rapid organic growth via orders placed with the aircraft manufacturers, plus sale & leaseback transactions with airlines, has built up a vast fleet owned by these Asian entities.

They compete against major global players such as General Electric unit Gecas, Amsterdam based AerCap, Dubai Aerospace Enterprise, Carlyle Aviation Partners, and California based Air Lease Corporation (ALC).

On May 7 ALC released its first quarter earnings, which were only just beginning to be impacted by the pandemic, and which saw a small 1.9% increase in earnings versus the same quarter last year.

In a statement, leasing industry veteran and ALC chairman Steven Udvar-Hazy, noted the extreme disruption caused by the pandemic, but added that airlines will want to increase their utilization of leasing versus owning aircraft. He also suggested that the crisis will thin out the ranks of aircraft lessors.

"The operating environment for our airline customers is challenging in the near-term," he said. "We believe that as our customers work through these difficulties, they will become increasingly attracted to leasing models to restore their fleet, in an industry with fewer leasing players."

Many lessor orders are also being postponed. During its first quarter, Avolon said that it materially re-profiled elements of its order book to better align to the current market outlook, reducing future aircraft commitments in the 2020 to 2023 timeframe from 284 aircraft as at December 31 2019 to 165 aircraft as at March 31 2020.

Those changes included cancellation of orders for 75 unplaced B737MAX aircraft in the 2020-23 timeframe, rescheduling the delivery of 16 B737MAX during the 2020-23 timeframe to 2024, and the re-profiling of 9 A320neo family aircraft from 2020/21 to 2027.

Avolon's lease revenue for the first quarter was US$644 million, while delivering US$154 million in profits. It ended the quarter with US$5.5 billion of total available liquidity, including US$4 billion of unrestricted cash and US$1.55 billion of undrawn secured debt.

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