By Neil Denslow
With the aviation market beginning to pick up, new aircraft are becoming difficult to find, which is one reason why leasing is becoming a popular option in the Middle East.
|~|keskar.jpg|~|Dinesh Keskar, president, Boeing Aircraft Trading|~|As the industry puts the trials of 9/11 behind it, the leasing and aircraft market are picking up strongly with the Middle East largely leading the way. The big players in the region, Emirates, Gulf Air and Qatar Airways, have all signed big leasing deals over the last year, and start-ups, such as Etihad and Air Arabia, have also begun operations using leased aircraft. The market in the region also looks set for further growth, as more start-ups begin operations and as traditional flag carriers look to make greater use of leasing.
Over the last 12 months, the leasing market has picked up significantly. A year ago, leasing companies were searching for clients but now they are, if not inundated with calls, then certainly a lot busier than they were. “We’ve noticed a big change in the last six months,” notes Gordon Dixon, chief executive, Oasis Leasing. “In the first half of 2003, it was a question of scouring the world for somebody we might be able to persuade to take something, but as we moved into the second half of 2003… we started to get enquiries.”
“The demand has increased so much that new aircraft are very hard to find,” adds Ray Sisson, senior vice president & regional manager, Middle East, Africa & CIS, GECAS. “When you do find them, the expectations over pricing that the airline has — those post-9/11 prices — just aren’t available. There are [simply] more takers for aircraft than there are aircraft in the market,” he continues.
Boeing Aircraft Trading, which sells on or leases aircraft Boeing picks up in part-exchange for new aeroplanes, reports similar results. It signed off leases for four aircraft in March, compared to 26 in the whole of last year, and it has placed almost its entire stock. “The market has really picked up when you can place an aeroplane as soon as you float it,” says Dinesh Keskar, president, Boeing Aircraft Trading. “As early as [the end of the] month I will be running out of inventory,” he adds.
The demand for all types of modern aircraft is picking up, but it is next generation 737s that are most eagerly being sort at the moment. Oasis Leasing, for instance, has two -400 models on leases maturing over the next couple of months, and airlines were competing to take on the aircraft. “In one case, there were two airlines looking; in the other, there was three,” says Dixon.
“The two aircraft I can’t get enough of at present, and am able to place in literally days if not hours, are 737-700s and -800s,” adds Keskar. “If I had 10 of them, I could probably place them all by the end of the day.”
The 73NGs are in demand because they are 150-seaters, which suit small airlines that are beginning operations. “These types are fairly easily placeable because there is a demand for them and the start-ups can afford them,” says Keskar. “It is [also] a lot less risky than having to lease a US$1 million-a-month A340 or 777,” he adds.
Furthermore, unlike the comparably sized A320, there are only a limited number of 737NGs available, as Boeing drastically cut its manufacturing rates during the recent downturn. Last year, for instance, it delivered 173 new 737s, compared to its peak delivery rate of 299 in 2001. “Boeing has really driven down their supply [of 737s],” comments Sisson.||**|||~|sisson.jpg|~|Ray Sisson, senior vice president & regional manager, Middle East, Africa & CIS, GECAS|~|With fewer aircraft being manufactured each year, the wait for new ones to be made and delivered is now becoming longer. As such, start-ups invariably begin operations with leased aeroplanes, as these can be accessed more quickly. Air Arabia, for instance, took two used A320s on lease from ILFC to begin operations, while it waited for new ones, also leased from ILFC, to be delivered by Airbus. “To get a new aircraft purchased takes 12-15 months and some of these guys are in a hurry — they want to start today,” notes Keskar.
A further advantage for start-ups, and existing carriers, of leasing is that it also provides a cheaper and less risky way of adding aircraft. When an aeroplane is owned by the airline, the only way the carrier can get rid of it is by selling it. However, this may prove to be a difficult task, especially if it is an older aircraft that few carriers operate or if there is a wider slump in demand. “You have got more flexibility with leased aircraft than you do with owned aircraft because you can return them [to the lessor],” says Dixon.
“If you are sitting on a fleet of 50 aircraft and 9/11 happens and your passenger demand evaporates, if you’ve got no leased aircraft, you have to put your aircraft on the ground… But then you continue to pay your bank loans, you continue to pay for maintenance, and you then have to pay for parking and everything that goes with [grounding an aircraft],” he explains.
“[However,] if you have got leased aircraft, and you have kept a reasonable spread of maturities on the lease, then at least you have some visibility about how you might reduce capacity in difficult times,” Dixon adds.
Leasing makes it easier to get rid of an aircraft when demand falls or when it is superseded by a new model, as the plane can be handed back to the lessor. The airline therefore no longer needs to worry about what price it will get for the plane — the residual value — when it comes to sell it. Instead, the lessor manages this risk, which also frees up capital for the airline. “An airline’s core business isn’t necessarily owning aircraft,” comments Sisson. “[Instead,] they probably want to spend their funds elsewhere… and leave the fleet structuring and the asset-based value risk with the lessors who specialise in managing that risk,” he adds.
The advantages of leasing are further enhanced in countries with no taxes, as there are fewer financial benefits to ownership. Airlines that have to pay taxes can write off the depreciation on the values of their aircraft, which cuts how much tax they pay. For government-owned carriers, or those operating in a tax-free environment, however, depreciation is not an issue. As such, the core issue is really the cost of equity, and a leasing company will almost always have cheaper access to funds than an airline, as it operates in a more secure business.
“If you think about it on a pure investment basis, airlines tend to be risky, therefore there is a risk premium built in to the cost of equity… but a leasing company with, in our case, 20 aircraft of different types with different lessees around the world, has got diversity and is therefore less risky than somebody who is purely an airline operation,” says Dixon.
Leasing companies, especially the largest ones, GECAS and ILFC, which both have many hundreds of aeroplanes, are also able to get economies of scales that are not simply available to airlines. This affects both the credit they are able to secure from banks, and also the price they pay the manufacturer for new aircraft. However, while the larger players may get cheaper aircraft, small leasing companies argue that they are more receptive and flexible to their clients’ needs.
“Where there are advantages [to being small] is in the ability to make quick decisions, and the ability to be creative on financing structures; you don’t have a predetermined model that you have to follow,” says Dixon.
“Furthermore, if you are a company that owns 500 aircraft you don’t tend to get too interested in doing one or two at a time. You are looking to do big hits every time,” he adds. “We actually want to do one- or two-[plane deals] because... we want to keep diversity.”||**|||~||~||~|However, GECAS’s Sisson, who notes that he has personally worked on a number of one- or two-aircraft deals, denies that the big leasing companies are not receptive to the needs of smaller airlines. “We [GECAS] want to work with every airline in the world,” he says. “Airlines that are today doing one-aircraft deals may become 20-aircraft deals in the future,” he adds. “Where we have an advantage is that with the General Electric Company behind us, we have a balance sheet that supports large orders…. [but] there is no deal that is too small for us, or too big.”
Because of the advantages offered by leasing, the region’s more commercially minded airlines have long made use of it. Gulf Air, Qatar and Emirates all have mixed fleets of both owned and leased aircraft, with Emirates’ big order at last year’s Paris Air Show typifying its balanced approach. It bought 21 A380s outright, with two more to be leased from ILFC, and then ordered 26 777-300s, all of which will be leased; 14 from GECAS and 12 from ILFC. “[Leading] Middle East carriers have moved from historically being a solely buying market to taking a very sophisticated view of managing their fleet,” says Sisson. “They have done a very good job of blending and balancing their ownership, and now we are also seeing a lot of leased aircraft from a lot of different lease partners,” he adds.
Beyond these leading players, Middle East carriers have traditionally not leased aircraft, partly because their government backing meant that they were not worried about costs of operations, and partly because of a cultural reticence. “There is a culture of ownership [in the Middle East]… while there is a historical perception of leasing that you are renting a car — it’s never really yours,” says Dixon. “But, there is more than one application of leasing; finance leasing can give them ownership,” he notes.
Liberalisation in the region’s aviation markets may, however, force traditional airlines to overcome their reticence about leasing and start to worry more about balancing the books. Saudi Arabian Airlines, for instance, currently owns all of its planes, and even has two 747s and a 777 in storage, but once its home market is opened up to competition and, if it is ever privatised, it will have to adopt a more commercially minded attitude towards its fleet management. “With the restructuring that is going on in the Saudi Arabian market, I think Saudia is going to start looking at how can it maximise its cash flow,” says Sisson. “I think they are a very attractive airline, and I think most lessors would like to do business with them,” he adds.
Other airlines in the region heading towards privatisation, such as Kuwait Airways, are also likely to become more commercially minded and hence make greater use of leasing in the future. As such, it is likely that leasing will become a much more common model of ownership in the region. “When you look at [Middle East airlines’] order positions, and you look at what is going on in the banking market, then the likelihood is that they will end up doing more leasing than they have done historically,” says Dixon.||**||