Aircraft leasing faces shake-up as risks cloud recovery

Deal puts SMBC in industry's second spot globally after leapfrogging Dublin-based rival Avolon
Aircraft leasing faces shake-up as risks cloud recovery

Leasing companies now control more than half of the world's fleet of aircraft. Picture: Michael Spooneybarger

Global aircraft leasing faces a new shake-up after SMBC Aviation Capital's deal to buy smaller rival Goshawk Aviation for $6.7bn (€6.34bn).

The move comes as firms report a stronger-than-expected recovery — but one increasingly overshadowed by inflation, rising borrowing costs, and the effects of the conflict in Ukraine.

SMBC's deal puts it in the number two industry spot globally, leapfrogging Dublin-based rival Avolon, behind AerCap.

The long-awaited agreed takeover of Goshawk could increase pressure on smaller rivals to follow suit as funding costs rise with higher interest rates, analysts said. Consultant Paul O'Driscoll of advisory firm Ishka told Reuters:

It means only the biggest and strongest lessors can compete at the levels you need to compete at to win.

Leasing companies now control more than half the world's fleet of aircraft and bankers say private equity firms are also hovering over at least one lessor as the industry matures.

SMBC chief executive Peter Barrett, among the crop of leaders that emerged to run the Dublin-led aircraft leasing industry from the roller-coaster empire of Irish tycoon Tony Ryan, has said he expects the industry's growth to continue.

Speaking at the Airfinance Journal conference in Dublin recently, Mr Barrett told delegates that a series of industrial and economic crises would reshuffle the deck.

He did not address longstanding rumours of a tie-up with Goshawk at the event, one of a pair of back-to-back conferences in the world's air- leasing capital.

"You need the motivation of sellers and that is going to change, also because of increased funding costs. That's going to be a factor in whether owners hold these assets or trade them," Mr Barrett told the conference.

AerCap chief executive Aengus Kelly, who shook up the industry by buying ILFC in 2013 and then GECAS last year to secure the number one spot, said size brings increased clout in crucial negotiations with repair shops and jet makers.

"You're just at a different level to the rest of the industry," Mr Kelly told the Airline Economics conference.

"No one wants to do consolidation just to get bigger for the sake of getting bigger... but I would say it's going to be something that will happen over time."

AerCap chief executive Aengus Kelly says size brings increased clout in crucial negotiations with repair shops and jet makers.
AerCap chief executive Aengus Kelly says size brings increased clout in crucial negotiations with repair shops and jet makers.

Leasing pioneer Steven Udvar-Hazy, however, warned against deals for their own sake.

"It's not going to change the total worldwide need for aircraft. It's just a redistribution of who's supplying those aircraft to the airlines," the executive chairman of US-based Air Lease Corp ALN said.

We'd rather add more airplanes than more staff and more bureaucracy. So we'll continue to look at it and if there's a golden opportunity will grab it.

After a two-year absence during the Covid pandemic, delegates at the Dublin conferences trumpeted rising demand.

The speed of the US recovery in air travel has defied expectations, flouting amber warnings from higher interest rates to inflation, high oil prices, and geopolitical risk.

For now, there are shortages of key aircraft after Boeing's two-year 737 MAX safety grounding, then Covid-19 and most recently the confiscation of hundreds of planes in Russia.

Even wide-body jet markets are seeing more tightness after years of oversupply, Mr Kelly told analysts.

Higher ticket prices

Lessors warned airlines they were ready to pass on higher funding costs, which for travellers means higher ticket prices.

"The lessors after many years have leverage over lease rates," said Marjan Riggi, senior managing director for corporate aviation at Kroll Bond Rating Agency.

Whether and how quickly inflation and lower disposable incomes could come back to bite the industry is unclear.

Reuters

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