A recent report entitled World Aircraft Leasing Market from Frost and Sullivan a global consultancy service, predicts that aircraft leasing will pick up steam towards the end of 2010 and the beginning of 2011. The report says new-generation aircraft rentals will increase quicker than older aircraft rentals although profitability is expected across the whole sector.

Falling interest rates are also expected to trigger growth in the air leasing sector. The report says that in 2008 and 2009, the leasing market maintained healthy profitability thanks to low interest rates. This was despite an increased number of parked aircraft and a fall in the market value/lease rentals of aircraft.

In 2009, the total fleet of aircraft held by leasing companies accounted for more than 31% of the world's active fleet. The aircraft fleet of all leasing companies grew from 5,757 aircraft in 2008 to 6,180 aircraft in 2009. However, the value of all the aircraft held by the leasing companies fell from $164.18bn in 2008 to $158.87bn in 2009.

The report acknowledges that many aircraft leasing companies were put up for sale over the past two years. But it says that this was usually due to the poor financial health of the parent company and not because of distressed assets.

Demand from China and the Middle East

The report also says that demand from China and the Middle East will keep the industry buoyant over the next 4-5 years. A Frost and Sullivan analyst said: "Banks from China and sovereign wealth funds from the Middle East have shown interest in purchasing the aircraft of leasing companies. The assets of aircraft lessors are likely to stimulate interest among asset management companies that are scouting around for stable incomes over the long term."

Some of the Chinese leasing firms mentioned in the report are BOC Aviation, ICBC Leasing, Hong Kong Aviation Capital (HKAC), CDB Leasing, and Dragon Leasing. Some of the aircraft leasing firms from the Middle East mentioned in the report are DAE Capital, Aviation Lease and Finance Corporation, Oasis International Leasing (Waha Capital), and Low Cost Aircraft Leasing.

The report said that the overall fleet belonging to leasing firms grew by 7.34% from 5,757 aircraft in 2008 to 6,180 aircraft in 2009. The number is expected to increase at a compounded annual growth rate of 5.76% from 2010 to 2015. The total number of aircraft owned by the leasing firms is expected to increase from 6,180 aircraft in 2009 to reach 8,646 aircraft in 2015. The narrow-body aircraft segment is expected to grow at a faster rate than the other two segments (Wide-Body Aircraft and Regional jets) during the forecast period. The report noted that over 65% of the aircraft ordered by the leasing firms are narrow-body types.

A statement from Frost and Sullivan said: “As airlines are finding it difficult to finance fleet expansion due to scarcity of funds, there is a growing trend among airlines for leasing an aircraft rather than buying it. The penetration of the leasing industry is expected to increase from the current levels of 31.53 %.”

The statement continued: “Sale and lease back transactions enables the lessors to buy aircrafts at competitive prices and increases the internal rate of returns of the lessors. Airlines are facing a dearth of liquidity coupled with the frozen credit markets; sale-and-leaseback transactions can be used to improve liquidity position and strengthen the balance sheet.

More airlines declaring bankruptcy

With a slump in traffic, the number of airlines declaring bankruptcy and defaulting lease payments has increased. This has become a huge restraint for leasing companies, as it has a negative impact on their operating income. The lease rentals and the market value of the aircraft have dropped from the levels of 2008. The number of parked aircraft has increased, which has led to a fall in the market value of aircrafts and lease rentals.

In the past, some of the leasing companies were growing by leveraging the strength of their parent companies. They were severely affected when the parent company was under distress. After the consolidation of such leasing companies, the market is likely to witness a dominance of medium sized companies with a fleet of 700-800 aircraft. These mid-sized firms are likely to rely on internal sources of financing thereby making them financially independent of their parent company

The report concluded that the growing mortgage/securitization market and increasing liquidity in the credit market are likely to contribute to market recovery in 2010 and 2011. As the leasing cycle has already bottomed out, the market is poised for growth, with attractive returns. Hence, many new participants are likely to enter the market. The rentals and market values of the aircraft are expected to start rising after Q1' 2011. Better fleet utilization and stronger deals with good underlying credit are likely to be the major factors for sustaining profitability in the long term.