Aircraft Leasing in Full Flight
Grounded for several years after the financial crisis, aircraft lease securitization is reaching new heights thanks to growing passenger demand, particularly in the Middle East and Asia Pacific. Carriers around the world are leasing more planes in order to expand their fleets quickly, and a number of lessors that serve them are bundling contracts into collateral for bonds. Issuance reached $4.6 billion in 2016 and could be even higher this year. Here are some factors driving issuance, and some potential risks for investors.
Across the globe, demand for regional aircraft is rising as local carriers expand their fleets in order to feed new short-haul routes. Brazilian manufacturer Embraer expects the need for 70-130 seat regional jets to rise to 6,400 in the next 20 years; the existing worldwide fleet is 2,670.
Aircraft lessors already account for nearly half of widebody/narrowbody orders at Boeing and Airbus. Increasingly they are also driving orders for smaller, regional aircraft from the likes of Embraer, Bombardier and ATR. Among the biggest buyers: GE Capital Aviation, AerCap, and Air Lease.
Nordic Aviation Capital, the world’s largest turboprop lessor, has bulked up by acquiring the assets of key regional jet lessors, including Jetscape Aviation of Fort Lauderdale, Fla., and Dublin, Ireland-based Aldus Aviation. Nordic also acquired all 25 ATR-made regional planes that Air Lease Corp. decided to unload in order to focus on expanding its fleet of large-gauge aircraft.
There’s no getting around it, turboprops are noisy and can be downright uncomfortable. But they operate more efficiently at lower speeds than do jets, making them a better fit for emerging travel markets like India or small island nations like Indonesia.
Older aircraft are staying in service longer, thanks to fleet demand and low gas prices, which make them economical to operate. Nine of the 18 public aircraft lease securitizations completed since 2014 were backed predominantly by this type of aircraft, according to Moody’s Investors Service.
It’s getting hard to find good help. Over 14,000 pilots at major airlines are projected to retire by 2022, forcing these carriers to hire pilots away from the regional players. In addition, the Federal Aviation Administration introduced new rules in 2013 requiring extensively more flight hours by a first officer (or co-pilot) to obtain the necessary license to fly a U.S. commercial or cargo plane.
Pilot shortages contributed to Republic Airways’ bankruptcy filing in February 2016, forcing it to ground aircraft. The nation’s No. 2 regional carrier also cited an oversupply of 50-seat planes that fell out of favor for the major airlines it serviced. Republic has announced plans to emerge from Chapter 11 in the first quarter, after renegotiated operating agreements with American, Delta and United.
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