Lessors are struggling to maintain liquidity amidst the weak economic scenario in aviation. Airline-owned leasing firms are selling off their leasing arms to consolidate and streamline their core air travel operations. The critical situation has led to some M&A scenarios in the aircraft leasing industry.

Lessors and airlines are dependent on various institutions such as banks, capital markets, debts, and asset-backed security (ABS). In the pre-pandemic scenario, banks were key financial providers to the aviation industry and were extending credits with less scrutiny. However, the situation changed post-pandemic, banks are now taking a much more conservative approach. The COVID-19 pandemic has brought the banks to a very cautious state concerning the aviation industry. This has shifted the focus of banks to largely state-owned carriers with sufficient support and access to funds. Highly rated leasing firms, with a diverse portfolio and financing options and efficient risk and asset management will be in a better position to leverage the post-pandemic aviation market. In 2020, capital markets increased their contribution to the aviation industry.

As of mid-2021, there were nearly 90 new airlines in various stages of investments and negotiations to begin operations. These new start-ups are focusing on low-cost business models that will be the recovery engines of the industry and is a key focus area for lessors. Declining leasing rates, potentially reduced debts and other fixed costs for new carriers, a significant increase in parked aircraft, and early retirements leading to wider availability of aircraft are key parameters driving these investments.

There is potential for consolidation in the aircraft lessor market (even pre-pandemic). Several new entrants are seen in the aircraft lessor market from Asia during the last decade. Difficulty in risk management, a fragmented airline market, and a huge difference in the performance of stronger and other carriers are some of the key factors that will drive M&A activity in this sector. AerCap, the leading global aircraft lessor, has been acquiring some firms in recent years, becoming a significant portfolio consisting of aircraft, engines, and helicopters. The firm now collectively has more than 300 global customers and is also the biggest client of Airbus amd Boeing. The most notable acquisition in the aircraft leasing industry is the acquisition of General Electric Capital Aviation Services (GECAS) by AerCap in 2021 for nearly $30 billion. The aircraft lessor market is still fragmented, and the top market leaders contribute to less than one-half of the aircraft market, which is significantly less compared to other industries. Post the acquisition of GECAS, AerCap will have 2,098 aircraft in its portfolio. AerCap’s fleet share for leasing will constitute almost 36% of the total fleet owned by all lessors globally. While AerCap has consolidated its position as the market leader, significant competition is expected among the other major lessors.

North America and Europe are the highest performing regions in the aircraft leasing market, having the best legal environment and regulations for market participants. The overall impact of the COVID-19 pandemic was low in these regions as there were minimal changes in aircraft repossession and rent collection rates. Europe is a key pioneer in aircraft leasing with several leading lessors based in Ireland, which has extensive support infrastructure along with a strong talent pool.

Author: Nripendra Bahadur Singh