Global Crisis Blog

From Crisis to Opportunity:  Airline Leases Take Off

By Shlomo Maital

Our new book Global Risk/Global Opportunity (SAGE 2010) stresses that  in every aspect of the current global crisis (which, we argue, has not ended, but has simply changed its form, shape and nature), risk can be transformed into major business opportunities.

Here is an example.

The Farnborough International Airshow opened Monday in the UK. It is the aircraft industry’s largest trade show.  Wall Street Journal Europe reports that “demand for planes is rising” and “money is returning to the aviation market”.  However, the industry is changing radically.

Global deleveraging (the desperate effort of individuals, families, businesses, banks and governments alike to reduce debt burdens) is making credit scarce. Airlines are finding it harder (and less worthwhile)   to buy planes with borrowed funds, especially when nervous capital markets punish companies that have high debt-equity ratios (leverage) and banks are reluctant to part with their cash.

This has created a boom in aircraft leasing.  It was predictable long ago.  Just as most people now buy cars, in many countries, with leasing agreements,  so airlines are shifting to leasing.  According to the WSJ,  fully a third of all aircraft are not owned by the airlines but are leased.  In the ’70s and ’80s, that fraction was 10-15 percent.  The leasing giants are GE Capital (world’s biggest) and BOC Aviation (a unit of Bank of China).

Aircraft leasing has many advantages.  Airlines that fail to meet payments lose the planes in the wink of an eye; aircraft leasing firms are good at this.   Unlike buildings, which cannot sprout legs and fly,  planes can — so leasing firms can quickly sell foreclosed planes without loss.  Look for leased aircraft to rise to fully half of all aircraft flying, within the next few years.   Leasing companies buy large numbers of aircraft (GE Capital is about to do so), and borrow money with the aircraft themselves as collateral.   Sound like mortgage-backed securities?  Not quite.  In the downturn, planes have maintained their value (unlike houses).  And they can move anywhere, quickly.

If you are in financial services, and are looking for a growth engine within an industry that remains troubled, consider this one.   It meets a major need of struggling airlines to renew their aging fleets, without putting massive amounts of debt on their balance sheets.  Ask yourself, what are the core competencies needed to become a successful aircraft lessor?   Do I have those competencies?  How can I innovate within this industry?  Where are their hidden niche markets?

Source:   “Airplane leases take off”, WSJ Europe,  by Daniel Michaels, Monday July 19, 2010, p. 1.

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