A lessor's market?
In a world characterized by speed, buying a plane is a particularly slow process. Unlike other transactions, three to five years can lapse between the initial purchase agreement and the point of delivery. How the market ebbs and flows is anybody’s guess. Cargo, in particular, has experienced significant market fluctuations in recent years. Decreased tonnages resulting from the recession of 2008 kept levels low throughout 2009, before recovering strongly in 2010.
2011 was another tumultuous year for air cargo, International Air Transport Association statistics revealed. Despite weak freight traffic throughout the year — propelled by the softening of the Asia-Pacific market — global freight volumes improved 0.2 percent, year-over-year, in December.
Such fluctuations have led some freight carriers to forgo the traditional means of acquiring an aircraft — purchasing it — in favor of a more flexible approach: leasing. It has also led some airlines to recant their decision to buy a plane and take a sale-and leaseback approach, Airbus’ senior vice president of leasing markets Andy Shankland says.
He says Airbus has recently seen an influx of carriers leasing a purchased aircraft before its delivery date — a trend Shankland expects to grow with time. His colleague Andreas Hermann, vice president of freighters at Airbus, agrees, especially as it relates to the airfreight sector.
“Leasing particularly comes in handy in industries with cyclical behaviors, and the cargo industry is predominated by that,” Hermann says. Freight carriers are increasingly attracted to the level of flexibility allowed by leasing, he says, “given that lease terms, as well as timing and direction of that term, are subject to negotiation.”
The leasing phenomenon
Forty years ago, less than 1 percent of the global air fleet was leased; today, that figure is 40 percent, according to Boeing statistics. Kostya Zolotusky, managing director of capital markets development for Boeing Capital Corp. expects this number to increase even more in the future, rising to 50 percent. Propelling this surge is the fact that the aggregate costs of buying versus leasing are about the same, he says.
“If airlines lease an aircraft, they don’t tie up their own equity,” Zolotusky says. “And
airlines, generally, have fairly expensive equity relative to the leasing companies. Leasing companies, because they’re financial institutions, tend to have better credits and, therefore, cheaper access to equity.”
Like Zolotusky, Shankland says the decision whether to buy or lease an aircraft is, above all, financial. In addition to demanding a significant investment up front in the form of down payments, purchasing a plane requires carriers to secure cash financing for the delivery, he explains. “The overall financing through cash requirements when you buy a plane are quite onerous,” he says, “particularly for a smaller airline.”
Mid-sized airlines are also feeling the sting, Shankland says. Because they, like smaller carriers, lack the capital of major global airlines, handing over the cash required to purchase an aircraft can be constraining. It’s a problem that has only worsened with the recent economic downturn, many aviation experts maintain. “I think that over the years, both passenger and freighter airlines have learned that if they have cash, there’s pressure to keep it in their bank accounts, rather than let everybody else have it,” Shankland says.
Not that all carriers let this philosophy dictate their spending behavior, he asserts. Shankland says some of the larger, richer airlines view lessors as middlemen and prefer to arrange financing directly with the manufacturer.