Development of Aircraft Leasing
As with any high growth industry, the number of new entrants has outpaced the supply of aircraft available for purchase, resulting in a recent trend of diminishing returns for investors. The trend is likely to continue, however the bulk of new entrants have chosen to focus on one element of the market (region, aircraft type, aircraft acquisition method). This approach is inherently limiting, presenting significant risk to the business and as a result, investor returns. It is therefore critical a leasing company structure itself to achieve the following goals:
- Broad Aircraft Acquisition Strategy: Lessors must have the capability to pursue growth through various channels, including direct orders from the manufacturers, portfolio acquisitions (and trading) and sale leasebacks. The channel which will yield the highest returns can change rapidly depending on the macroeconomic and competitive environment; lessors without an active presence in each of the aforementioned channels will miss opportunities as they arise.
- Large and Well Diversified Portfolio: There are varying views on the ideal portfolio size, however many believe 800 to 1,000 aircraft should be the target. A minimum portfolio size of 500 aircraft allows economies of scale to offset the fixed costs and SG&A of the business and justify a team which is significantly large and diverse to cover the entire market and find attractive opportunities. The portfolio should also be well diversified, both from a credit and geographic perspective, but also from an aircraft type perspective. To capitalize on opportunities that will yield higher returns, a lessor must “see the entire market” which is achieved through experience managing all mainstream aircraft types and discussing opportunities for each on a regular basis with customers. A lessor that focuses exclusively on narrowbodies will have no visibility into trends in the widebody market and will therefore miss opportunities to capitalize.
- Access to Attractive Financing: Many opportunities arise out of the cyclical nature of the aviation business and to capitalize on them requires reliable access to attractively priced financings regardless of market conditions.
- Beneficial Tax Jurisdiction: Several locations around the world have emerged as highly efficient tax jurisdictions in which to own aircraft. This is due not only to the overall corporate tax rate, but also to the tax treaties in place between these locations and other countries.
- Experienced and Motivated Team: In order to achieve and preserve the size, stability and opportunity mentioned above, a large and experienced team is critical. A marketing team which is of sufficient size to create and maintain relationships with all significant airlines around the world, supported by legal and technical and contracts teams that can process transactions quickly and efficiently and to the customer’s satisfaction. A portfolio team to acquire assets at the right prices, as well as buy portfolios and trade mid-life aircraft to secure higher returns. Equally important is a pricing department that will accurately evaluate potential opportunities to ensure returns are being maximized, consistent terms are offered across various proposals and a risk team that will manage credit risk and ensure proper portfolio diversification while monitoring changing market conditions while addressing any problems that develop proactively.
We at Aperture Partners believe that no matter what approach the company chooses, only qualified and experienced team can distinguish the lessor, drive the overall company profits and thus bring necessary investor returns.