Jetrader - Spring 2015 - 18

made this product even more attractive to
airline clients."
At the same time, 2014 posed challenges
to the aviation leasing industry. "There
was geopolitical strife in Europe, and
this coupled with the soft economy there
presented a headwind for the industry,"
Kuzbari said. "For different reasons new
aircraft deliveries and orders in China were
challenging. So there certainly were regions
of the world that probably underachieved
relative to where people would have likely
pegged performance one year ago."
Nevertheless, 2014 was very good for the
majority of lessors, concluded Phil Seymour
IBA's president and COO. "There were very
few unplaced aircraft partly due to no significant global events - Ebola aside - and
the developing resilience to such factors,"
he said.

2015 Could Be Just as Good,
If Things Go Right
According to the experts, 2015 should
see a continuation of the trends noted
in 2014. This includes a growing demand
for aircraft for both passenger and freight
usage; continued success by the aircraft
OEMs in delivering a record number of
new aircraft to customers; and ongoing
low interest rates that will keep the cost
of leasing down for airlines big and small.
Based on its data, Novus expects airline to increase their profitability in 2015,
thanks to a combination of lower aircraft
acquisition costs and a sustained period
of low fuel prices. However, the continuation of low interest rates won`t necessarily translate into more airlines signing
leases, said Kuzbari. In fact, "the latest
Boeing Capital Corporation Current Aircraft
Finance Market Outlook anticipates lessors
funding around 40 percent of new deliveries in 2015, despite airlines having access
to historically low borrowing costs from
a range of financing sources," he noted.
According to Novus, the decision to buy
rather than lease is a symptom of the airline industry's increased liquidity. "With
the latest IATA forecast suggesting global
net profitability of $25 billion in 2015, the
most profitable - and creditworthy -
airlines will be generating significant
amounts of cash from their operations
that will be available to pay down accumulated debt and/or finance new aircraft
deliveries," said Mamoun Kuzbari. He added

2015 should see a continuation of the trends
noted in 2014. This includes a growing
demand for aircraft for both passenger and
freight usage; continued success by the aircraft
OEMs in delivering a record number of new
aircraft to customers; and ongoing low interest
rates that will keep the cost of leasing down for
airlines big and small.
that $13.2 billion of this global net profit
will be earned by North American carriers.
"The result is that major U.S. carriers
are already suggesting a contraction in
their near-term external financing requirements," Kuzbari said. The flip side: Airlines
in other parts of the world will still be faced
with lower net profits in 2015; motivating
them to lease aircraft and helping to keep
the leasing business profitable. In fact,
should the North American move away from
leasing drive some lending companies out
of the market, "lease rates should start to
rise as a consequence of higher risk costs
for lessors, in dealing with less profitable
airlines, coupled with lower demand for
assets from the portfolio-building newer
lessors as they achieve critical mass and
become more selective," he said.
The big question stalking any 2015 leasing forecast is the unexpectedly lower cost
of aviation fuel. Much depends on how
long the price of aviation fuel remains
depressed. If history is any indicator, prices
will climb again one day once demand
catches up with supply. The only question
is when this will happen.
Lessors willing to gamble that gas
will stay cheap for awhile may stick with
their older, less fuel-efficient aircraft a
while longer rather than buying newer
gas-sipping models this year. Those airlines that must refresh their fleet may opt
to lease less-expensive older used aircraft
for the same reason.
"Fuel accounts for up to one-third of an
aircraft's operating costs," said David Yu.
"A lower fuel price significantly alters the
operating cost equation for each kind of
aircraft, and can change the business cases
being considered by airlines at leasing time."
The airlines' increased cash reserves
and low fuel costs are not the only factors that could affect the 2015 global

18 The official publication of the International Society of Transport Aircraft Trading

leasing industry. The decision by low cost
carriers to make large volume aircraft
purchases - such as India's budget airline
IndiGo ordering 250 Airbus A320neos last
year - allows them to negotiate bigger
purchase discounts from the OEMs, which
Mamoun Kuzbari fears could skew the operating lease market.
"If the airlines concerned cannot use the
new aircraft, then lower acquisition costs
will enable them to undercut the operating lease market by passing through some
of the discounts to lessees in the form of
lower lease rentals," Kuzbari explained.
Another scenario: If such an airline fails
and its cheaply bought aviation assets are
sold at distressed prices, "a financially liquid purchaser could step in and buy the
aircraft and/or delivery slots at sufficiently
below market rate to gain a competitive
advantage from being able to offer lower
lease rentals."
These are just some of the things that
could go awry in 2015 for the global leasing market. Others include airline mergers
and acquisitions: "Their effects take a long
time to deliver but can be significant or
provide purchasing power and economies
of scale when eventually realized," said
IBA's Seymour. "In the longer term, this
may create pressure on values and lease
rates for aircraft delivered in reasonable
numbers but in high concentrations with
a few carriers."
At the same time, things could go right
this year for the global leasing market.
Certainly, the fundamentals are right:
Growing demand for aircraft, low fuel costs,
and continued minimal interests are all
elements that, when properly managed,
can motivate airlines to lease rather than
buy. We'll just have to wait and see how
the market actually behaves over the next
12 months.

Jetrader - Spring 2015

Table of Contents for the Digital Edition of Jetrader - Spring 2015