Frost & Sullivan Says Falling Interest Rates Are Good News

The lack of available capital for the procurement of new aircraft and falling interest rates are the two major factors triggering growth in the world aircraft leasing market. During 2008 and 2009, the aircraft leasing industry had been reeling under the impact of the frozen credit markets and the slump in air traffic. Due to the financial crisis, there were difficulties in arranging funds. This led to an increase in the number of parked aircraft and a decrease in the market value/lease rentals of aircraft.

Despite these impediments, the aircraft leasing industry was able to maintain healthy profitability, as falling interest expense has allowed leasing companies to maintain good profit margins. Airlines have been able to raise equity funds of $4.8 billion and debt of $25.7 billion between January 2008 and October 2009. Most of the aircraft leasing firms that were up for sale were not distressed assets, but were up on block as a result of their parent company's poor financial health. Trends indicate that the aircraft leasing industry is poised for a growth upswing within the next 4-5 years.

New analysis from Frost & Sullivan "World Aircraft Leasing Market - Market Outlook and Investment Analysis", reveals that the fleet of the leasing firms grew by 7.34 percent from 5,757 aircraft in 2008 to 6,180 aircraft in 2009. It is expected to increase at a compound annual growth rate (CAGR) of 5.76 percent from 2010-2015. The total number of aircraft owned by the leasing firms is expected to increase from 6,180 aircraft in 2009 to reach 8,646 aircraft in 2015.

"Banks from China and sovereign wealth funds from the Middle East have shown interest in purchasing the aircraft of leasing companies," says Frost & Sullivan Financial Analyst R. Madusudanan. "The assets of aircraft lessors are likely to stimulate interest among asset management companies that are scouting around for stable incomes over the long term."

When lessors buy aircraft from airlines in a sale-and-leaseback transaction, they tend to avoid pre-delivery payments (PDPs) and the cost of servicing PDPs. With airlines facing a dearth of liquidity, sale-and-leaseback transactions can be used to bolster the liquidity position and strengthen the balance sheet. Due to the decline in air traffic, the number of airlines declaring bankruptcy and defaulting lease payments has increased. This has become a huge restraint for leasing companies, as it negatively affects operating income.

To overcome these restraints, leasing firms are ensuring that they lease aircraft to creditworthy airlines. There is also an initiative to raise the security deposit and the maintenance reserve to limit the downside for the leasing firms in case of bankruptcies. Leasing companies closely monitor the financial performance of airlines.

"The lease rentals and the market value of the aircraft have dropped from the levels attained in 2008," says Madusudanan. "The drop has been disproportionate across various aircraft types."

Aircraft types that had overcapacity witnessed the maximum decline. Aircraft rentals would pick up steam only by the fourth quarter of 2010 or the first quarter of 2011, and the rentals for new-generation aircraft are expected to increase at a faster rate than that of older aircraft due to higher demand for the former. Better fleet utilization and stronger deals with good underlying credit will ensure profitability for the long haul.

FMI: www.frost.com