Booming market for the aircraft leasing industry

The sizable portion of the growth in the aircraft leasing industry can be attributed directly to consistent demand from the emerging markets, rising per-capita GDP, growth in passenger traffic and increasing international tourist travel. Airlines lease aircraft to either reduce the financial burden associated with procuring aircraft or to provide flexibility to meet variations in demand.

A strong demand from APAC and global RPK (Revenue Passenger Kilometres) is anticipated to grow to a whopping 14,500 billion by 2030 from 6,000 billion in 2015. In line with the broader aviation industry, the aircraft leasing industry has registered an impressive growth over the past two decades and is forecasted to grow to $314.8 billion by the year 2020. However, at present, Europe leads the leasing market and this is expected to be replaced by APAC.

The business model in the industry is quite simple, aircraft leasing companies either directly purchase planes from aircraft manufacturers such as Airbus or Boeing or engage in sale-leaseback transactions with global airlines on existing fleets, for this, lessors receive a monthly rent. The major cost items for the lessors are selling, general and administrative overheads, depreciation and financing costs. The industry functions with two major types of operating leases.

The companies operating in this industry compete with aircraft manufacturers, financial institutions, other leasing companies, aircraft brokers and airlines. The competition for a leasing transaction is based on several factors such as lease rates and terms, delivery dates, condition of the aircraft and availability in the marketplace on the types of aircraft that can meet customers’ needs. Thus, owing to these factors such as geographical reach, diverse aircraft portfolio and success in remarketing the fleet enable companies to effectively compete with one another.

GE Capital Aviation Services, the world’s largest aircraft leasing firm boasts of a portfolio of 1,670 aircraft and serves 230 customers in around 75 countries. The next in line is AerCap Holdings, which post acquiring International Finance Lease Corporation (ILFC) in 2014 from American International Group (the insurance conglomerate) became the second-largest aircraft leasing company. Additionally, prior to the acquisition, AerCap had one of the youngest fleets in the industry and the portfolio included a meagre 373 aircraft. However, after the acquisition, AerCap became the world’s second-largest aircraft leasing company, serving more than 200 customers in 90 countries. The combined fleet grew to a massive 1,300 aircraft (owned and managed) with an attractive order book and assets worth $45 billion. Although the ILFC acquisition remains the most prominent events in the industry in recent times, there have been others too, for instance, RBS Aviation Capital, one of the largest companies in the industry was sold in 2012 by RBS (Royal Bank of Scotland Group) to Sumitomo Mitsui Banking Group. A new entrant, Avolon Holdings was founded in 2010 and experienced rapid growth. It had an aircraft fleet of 182 by the end of 2013. In 2014, Avolon got listed on NYSE with a market cap of $1.6 billion (the largest ever listing on the NYSE by an Irish-founded company) with a fleet of 235 by the year end. Further, in 2015, Bohai Leasing acquired Avolon for $7.6 billion and its combined fleet further grew to 418 by the end of 2015. In 2016, Avolon agreed to acquire the leasing business of CIT Group creating a combined business including 886 aircraft.


In addition to the above, Televisory examined the data of three major players in the industry, BOC Aviation (the US), AerCap (Ireland) and Air Castle (the US). AerCap’s and BOC Aviation’s net cash interest margin interest (NIM) increased by 4.7% and 1.9% respectively, while Air Castle’s NIM decreased by 0.4% (2015) in comparison to the previous year. The net interest margin is a measure of operating efficiency of a financial firm like a leasing company. AerCap and BOC Aviation’s lease yield increased by 3.7% and 0.9% points on a YOY basis, whereas Air Castle’s yield decreased by 0.3% points on a YOY basis. In 2015, BOC Aviation had the lowest fleet yield, this was despite the fact that BOC Aviation has a higher revenue at 1.22x of Air Castle. This was attributable to the higher net asset value of BOC Aviation at 1.70x of Air Castle.


The total revenues of BOC Aviation and AerCap increased, whereas that of Air Castle declined by less than a percentage on a YOY basis in 2015. Although the entire revenue of BOC Aviation is derived from lease contracts, the revenue generation is diverse for AerCap and Air Castle (sale of aircraft and other maintenance services). BOC Aviation faced lessees’ reduction by 2 in 2015 from 2014, however, revenues increased by 4.1%. This led to an increase of 0.8% in revenue/lessee to $15.7 million. On the other hand, for Air Castle, the number of lessees reduced by 1 on a YOY basis, revenues decreased by 0.7% to $801 million, translating into a 1.1% decrease in revenue/lessee. Moreover, for AerCap, basic lease rents increased by 41% to $4.6 million primarily attributable to the acquisition of 1,004 aircraft between Jan. 2014-Dec. 2015, including aircraft acquired as part of the ILFC acquisition transaction; partly offset by re-lease and extensions at lower rates. Thus, AerCap’s revenue per lessee increased by 51.6% in spite a reduction of 4 lessees. The operating expenses include depreciation of flight equipment held for lease, SG&A expenses and financing costs. The cash OPEX increased for all 3 companies on a YOY basis. The increase for Air Castle and BOC Aviation can be attributed to increase in general, selling and administrative expenses by c. 5.7% and 15.6% on a YOY basis. However, for AerCap cash OPEX increased on account of increase in leasing expenses. 


The CAPEX to depreciation and CAPEX to revenue ratios for Air Castle and BOC Aviation declined in 2015 in comparison to 2014. This can be attributed to lower CAPEX incurred in 2015 on account of increased number of managed aircraft and decline in a number of owned aircraft. The CAPEX for AerCap increased by 39.9% to fund the purchase of aircraft under aircraft purchase agreements with Airbus and Boeing. Furthermore, based on their current order book, AerCap expects to incur, on an average, CAPEX worth $5 billion per year. This is in order to satisfy contractual purchase obligations which include both aircraft acquisition costs and pre-delivery payments.

This is an exciting time for the industry, which is supported by the strong air transport demand. The competition within the industry is only going to heat up further with the industry experiencing consolidations. Thus, looking forward, jet fuel prices are projected to increase from $52.10/bbl (2016) to around $64.90/bbl (2017). Therefore, in the given scenario, airlines will have a higher dependence on leasing companies to cater their need of new fuel-efficient aircraft instead of gas guzzlers. This will further pressurise leasing companies to invest considerable capital in order to meet the dynamic demands of the industry.

Also Read:- Battle of the Low-Cost Carriers

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