So is the operating lease dead?

Dino D'Amore
By Dino D'Amore June 6, 2016 10:13

So is the operating lease dead?

The leasing industry, like any other highly competitive and close-knit environment, is one of smoke and mirrors – Everyone is trying to stay below the parapet until their deals are secure, but sometimes one must tell it how it is in the interests of fair play if nothing else. So why don’t we use this Monday morning post IATA, ILA Berlin and pre Chi-Stat to sort out a few things.

Will leasing ever reach 50% market share? As things stand, no. If oil were to go increase to $120 a barrel and higher, the goalposts would have moved and this could be possible as airlines cash reserves would be severely diminished. But today, with airlines largely in the black, the lessor fleet share will remain static at best and may even diminish slightly over the next two or three years as those huge airline orders work their way through the production lines.

But this fascination with 50% market share is all a bit silly, and is vanity at best. The real fact is that the leasing share has continued to grow in a market expanding far faster than anyone would have dreamed before John Leahy first put the letters n.e.o. together.

So, is the operating lease dead? The short answer is no, as the business remains stable on a global basis. This question, raised on Friday here by Howard Millar, has caused a sizable flurry of emails from lessor CEOs across the globe with a large number of bankers joining in. The simple answer is that the operating lease product has developed over the past thirty years into a fleet management solution, rather like the insurance business, which has evolved into a risk management solution offering, for example, the natural evolution of business to provide customers with an ever-greater breadth of options to increase margins. Operating leasing is alive and well in the aircraft and engine leasing sectors.

It should also be added that without the operating lease product, many start-up airlines may have struggled to get off of the ground. It is true to state that the operating lease has led to a boom in airline expansion over the past 30 years. Would Ryanair even exist today, for example, had it not been for operating leases on BAC-111s that Steven Udvar-Hazy funded for Ryanair before the airline had its first owned 737?

Howard Millar did have a very important point that should be considered by all: In the past a start-up airline used operating leases to get off the ground as it may not have had the 15% cash down payment for new aircraft. But now that airline investment is an attractive proposition, this equity investment can be found cheaply with ease and thus the operating lease avenue for many is not required. Millar argues that this might be a further evolution in the sector taking place at the moment.

The “CAIT” concept has least led to a healthy debate between bankers, lessors and even OEMs. One of the disadvantages of mortgage-style REITs is the lack of control the investors have over the secured assets, which limits the ability to limit risk. That said, this should not be too much of a concern if the loans are repackaged and sold on. We will continue to watch and report how this product develops.

Finally, I take this chance to say that when it comes to CIT Aviation, sure, our report from two weeks ago that Century Tokyo are interested in part of the portfolio stands, but it is also the case that my thinking has not changed from February when I stated that Avolon is the best fit to purchase CIT’s aviation portfolio and I would be very surprised if it did not.

Dino D'Amore
By Dino D'Amore June 6, 2016 10:13