the continued evolution of commercial operating leasing · source: flight fleets analyzer...

flightglobal.com/consultancy

The Continued Evolution of Commercial Operating Leasing18th January 2017

Rob Morris, Global Head of Consultancy

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flightglobal.com/consultancy 2

Definitions

Operating Leasing Fleet & Dynamics

Competitive Landscape

Operating Leasing Outlook


Definitions

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Operating leasing is what share of the market?

32.2%

38.4% 37.2%

21.1%

27.3%

45.4%

32.3%

20.5%

42.4% 42.3%

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All jets, allstatus

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SA & TA,pax only, inservice &stored, by

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Typically use single and twin-aisle, in service /

stored, by units = 42.4% todaySource: Flight Fleets Analyzer, 6th January 2017


Operating Leasing

Fleet & Dynamics

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Operating lessor share of fleet has stagnated since

peak in 2009

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Single-Aisle Twin-Aisle Share of Fleet

Source: Flight Fleets Analyzer (passenger aircraft in service / stored)


737-800 & A320ceo represent more than half of the

lessor fleet today

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Source: Flight Fleets Analyzer (passenger single and twin-aisles only, in service / stored)

737-800 and A320ceo actually represent

~35% of the total fleet today


How do lessors select their assets?

Lessors favour assets that have liquidity

The aircraft most preferred by lessors today are single-aisles

A320 and 737 families

Lessors business model drives portfolio strategy, can differentiate on

Age

Aircraft category (Regional, Widebody, Turboprop, Helicopter)

Volatility of values must be considered in hand with depreciation

Ratings estimate downside risk on future base value

Capital markets are the main financing source to purchase these assets


The Herfindahl-Hirschman Index (HHI) is a recognised

measure of liquidity

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Source: Flight Ascend Consultancy analysis


Ratings use historical volatility to forecast a downside

risk envelope

Source: Ascend Values & Ratings, 2008 build A330-200 (PW), 2% future inflation

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Downside Volatility BV CMV


750 aircraft added to lessor portfolios in 2016….

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Source: Flight Fleets Analyzer (passenger single and twin-aisles only)


….but 400 aircraft exited the portfolio

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Operating lessors acquired 43% of new commercial jet

deliveries in 2016

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Speculative backlog includes >2,300 aircraft

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A320neo and 737 Max 8 dominate the

backlog but A321neo is also significant


Competitive

Landscape

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The top 20 lessors account for close to 80% of the

total lease fleet today


2017 Ranking (by Fleet +

Backlog)Manager Current Fleet

Order

Backlog

Current Fleet

CMV ($mn)

2016 Ranking (by Fleet

+ Backlog)

1 AerCap 1,150 348 30,713 1

2 GECAS 979 311 23,699 2

3 Avolon (Inc CIT) 571 260 20,217 9

4 SMBC Aviation Capital 446 200 14,677 4

5 Air Lease Corporation 262 365 11,449 3

6 BOC Aviation 276 188 11,260 5

7 BBAM LLC 388 16,531 7

8 Aviation Capital Group 257 126 5,852 8

9 ICBC Leasing Co 266 47 11,769 12

10 AWAS 236 15 6,415 10

11 Macquarie 202 40 5,181 11

12 Aircastle 192 5,447 17

13 ALAFCO 59 125 1,812 14

14 Boeing Capital Corp 177 1,412 13

15 China Aircraft Leasing 82 91 2,888 15

16 CDB Leasing Company 142 23 5,357 18

17 ORIX Aviation 163 4,173 16

18 Standard Chartered 116 12 3,952 20

19 Jackson Square Aviation 119 5,088 19

20 BoCom Leasing 111 4,595 21


China is a huge source of new lessor capital

Domestic domiciled Chinese lessor

ICBC, CDB Leasing, Minsheng, AVIC International Leasing, Bo Comm Leasing, CMB

Financial Leasing, Changjiang Leasing Company, Ping An Leasing, ABC Leasing,

SPDB Leasing, CITIC Securities, Everbright Financial Leasing, CCB, Industrial Bank,

etc

Chinese money invested offshore

Accipiter, Avolon

ICBC Leasing and Bohai’s “bid” for AWAS


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Although the operating leasing market appears highly

competitive it is also highly concentrated


80% of the fleet is managed

by top 20 lessors


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The competitive dynamic has hardly changed in the

recent past but more competition than 10-years ago



Operating Leasing

Outlook

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Aviation demand cycle

Demand side weakening, trends suggest may be past cyclical peak

Indicator Current level Trend

Passenger traffic Above trend growth for sixth year running; 6.1 estimate for

2016. Led by India. China. LCCs and y-o-y recovery in Russia.

Growth rate was above 6% for most of 2015 and >7% during

summer. H2 2016 has seen demand lag supply slightly.

Freight traffic Recovery seen in 2015 slowed in H1/2016. YTD to Nov 2016 =

3.2%. Express/regional freight performing better.

Capacity significantly exceeding demand YTD. However,

October and November showed much better growth. May

have turned corner?

Yields US has seen declines of 5-10%, but still well above 2008/09

levels. Aug-Nov 2016 showed decline of c5%. Costs are

increasing (US labour, jet fuel up 50% in Jan 2017), so yields

need to increase.

Yields have been falling since December 2014; However, this

has not been a major concern yet, as costs are down by

>10% as a result of falling oil prices. Now costs are

increasing, yields have stabilised.

Load Factors Still near historically record levels. Asia much lower – emerging

evidence of overcapacity in some areas?

US, Middle East load factors showing slight decline. Europe

mixed. China and India at historic highs.

New aircraft orders Around 1,570 net orders for commercial jets. In 2016 with book

to bill around 1.0. 2016 Single-aisle still >1.0 (GREEN), but

twin-aisle and RJ around 0.5 (AMBER)

Order intake fallen sharply from the levels of 2011-2014, but

new programmes sold out for several years, with limited slots

now available, driving downward trend

Deferrals &

cancellations

Deferrals have ticked up following recent airline capacity

adjustments from prior low level. Cancellations now just above

average, although this is lower if normalised for fleet size

Both cancellations and deferral rate increasing in H2 2016.

Most canx due to OEMs cleansing order book but deferrals

reflect fleet plan adjustments (Southwest, American, Turkish,

Emirates, etc)


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Passenger jet fleet forecast to increase by 10,600

units in next ten years

Source: Flight Fleets Analyzer, Flight Fleet Forecast

If leasing share remained at today’s 42.4%

share then the portfolio would grow by a net

4,000 aircraft over the next ten years


50% penetration is unlikely to be achieved any time

soon

Global passenger fleet at end of 2022 (excluding RJs) is predicted to be ~25,500 aircraft

Leasing fleet in service would need to be ~12,750 aircraft

Equivalent leasing fleet today is 7,220 aircraft

So net addition of 5,530 aircraft required over next seven years

Flightglobal Fleet Forecast predicts delivery of 11,500 commercial passenger jets through 2022

~40% of the operating lease fleet from seven years ago has been replaced; on today’s fleet this equates

to 3,100 aircraft that could be expected to exit the leased fleet in the next seven years

So to achieve 50% fleet market share by 2022, under this scenario lessors would need to add 8,450 new

aircraft (5,530 growth plus 3,100 replacement) to their portfolios over the next seven years – that’s

equivalent to 75% of new deliveries predicted over that period (and worth US$643 billion in 2015EC)

Even to maintain today’s 42% market share under this scenario would require ~6,600 new

deliveries – 57% of all new deliveries (US$490 billion)

2016 Analysis


50% penetration is still unlikely to be achieved any

time soon

Global passenger fleet at end of 2026 (excluding RJs) is predicted to be ~28,900 aircraft

Leasing fleet in service to achieve 50% would need to be ~14,470 aircraft

Equivalent leasing fleet today is ~8,300 aircraft

So net addition of ~6,200 aircraft required over next ten years

Flight Fleet Forecast predicts delivery of ~17,100 commercial passenger jets through 2026

~40% of the operating lease fleet from seven years ago has been replaced; on today’s fleet this equates

to 3,300 aircraft that could be expected to exit the leased fleet in the next 7-10 years

So to achieve 50% fleet market share by 2026, under this scenario lessors would need to add 9,500 new

aircraft (6,200 growth plus 3,300 replacement) to their portfolios over the next ten years – that’s

equivalent to 55% of new deliveries predicted over that period

Even to maintain today’s market share under this scenario would require ~7,300 new deliveries –

43% of all new deliveries


Operating lessors acquired 43% of new commercial jet

deliveries in 2016

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Lessor Direct Delivery Lessor PLB at Delivery Non Lessor Delivery

Source: Flight Fleets Analyzer (passenger aircraft only)

Lessor direct delivery in 2016 was 20%,

backlog for 2017 indicates same level of

delivery expected


Conclusions

The share of the commercial passenger fleet managed by operating lessors is

unlikely to achieve 50% within the next ten years

The net leasing portfolio growth is estimated to be around 6,200 >100 seat

aircraft over the next ten years

Further portfolio additions (estimated around 3,300) will be required to replace

aircraft that will exit the fleet through sale at end of lease and retirement / part-

out

At current delivery levels the portfolio is expected to remain at ~42% - 43% of the

overall fleet


Rob Morris

Head of Consultancy

+44 (0)20 8564 6735

+44 (0)7730 213189

[email protected]

the continued evolution of commercial operating leasing · source: flight fleets analyzer...

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