One of the world's two largest aircraft leasing operations
queued up to change hands last week in a $4.2 billion deal
betweenAmerican International Group (
), the diversified insurer rescued at the brink of collapse by
public funding in 2008, and a consortium of China-based
The deal gives a group including New China Trust and the China
Aviation Industrial Fund an 80.1% stake in ILFC. It provides
options to purchase an additional 9.9% of the company, valuing
the entire enterprise at $5.3 billion.
The deal stresses the global demand from airlines as Boeing
and Europe's Airbus ramp up production of the new, fuel efficient
737Max and A320neo jetliners. And it highlights the rush of
investment capital into the leased services industry, which acts
as a middleman in a rising number of new aircraft sales.
ILFC and GE Capital Aviation Services find themselves under
siege as airlines and smaller, publicly traded leasing firms
compete for the efficient new jets. The Airbus A320neo is
expected to enter service in 2015, the Boeing 737Max two years
But airlines, hampered by spotty credit ratings and wary
banks, often don't have the financial clout necessary to upgrade
their fleets. Leasing deals with financing account for 45% of new
aircraft deliveries, up from 10% about 20 years ago, analysts
ILFC gives the China-based buyers a network with more than
1,000 aircraft. It has commitments to purchase 229 of the new,
fuel efficient models and purchase options on 50 more.
In China and elsewhere, airlines are increasingly prone to
lease rather than buy, thereby avoiding big outlays of cash and
leaving leaner balance sheets, says Richard Aboulafia, vice
president at the consultancy Teal Group.
"Getting aircraft off their books is a big driver of a massive
increase in leasing," he said. "Banks and funds are investing in
leasing companies and in the aircraft themselves. There is a lot
of third-party cash moving into this business."
Airlines aren't the only industries turning to the leasing
Wal-Mart leases thousands of steel containers for cargo ships
hauling goods from China and elsewhere to West Coast ports. In
the construction trades, builders of all stripes rent
earth-moving equipment and lifts by the week or month rather
invest in costly gear.
According to the American Rental Association's forecast,
demand is also booming for medical equipment, machine tools and
computers. In 2013, leasing industry revenue will grow 7.6% to
$33.5 billion, says the ARA.
The action has helped place the Commercial Services-Leasing
industry in a No. 13 ranking among the 197 industries tracked by
IBD. The group includes aircraft, container freight and
construction/industrial equipment leasing operations.
These includeUnited Rentals (
),H&E Equipment Services (
),Air Lease Corp. (
),Fly Leasing (
), Mobile Mini (MINI),CAI International (CAP) andTextainer Group
The common denominator across the group: The struggle to keep
equipment utilization high.
Lessors typically buy planes from Boeing and Airbus and lease
them to airlines for monthly fees. Leases generally run 5 to 12
The financing arms of diversified players like GE and AIG once
gave their aircraft leasing arms an edge against smaller players.
But capital markets are opening doors for new entrants and
smaller leasing players to fund purchases for customers.
At the large end of the spectrum, in addition to AIG's sales
of ILFC, Japan's Sumitomo Mitsui Bank in October closed its $7.3
billion purchase of No. 4 leasing firm, RBS Aviation Capital.
At the opposite end of the scale, in early December, private
equity firm Onex acquired a 50% stake in BBAM for $165 million.
BBAM manages aircraft rented by Fly Leasing.
Los Angeles-based Air Lease went public in April, 2011 and has
focused mainly on airlines in emerging markets. Founder Steven
Udvar-Hazy also launched and spent decades building AIG's
aircraft leasing business before leaving in 2010.
Across the business, says Jamie Baker, analyst at JPMorgan,
"fuel-efficient narrow bodies currently represent the sweet spot
for aircraft demand." In a report, he said Air Lease andAerCap
Holdings (AER) boast two of the industry's youngest fleets.
Netherlands-based AerCap recently sold a portfolio of
securitized loans to Guggenheim Partners in a $1 billion deal
that reduced the age of its fleet and lowered "near-term
re-leasing risk," said Wells Fargo analyst Gary Leibowitz, in a
With the new 737Max and A320neo due out soon, leasing firms
are maneuvering not to get stuck with older fleets as customers
demand newer jets. No one wants to take the last of the older
models coming off manufacturing lines.
In addition, airline bankruptcies are a constant worry. In
developing countries, smaller carriers don't always pay their
bills. Mexicana went bankrupt in 2010, roiling the leasing
industry. Hungary's Malev folded early this year. AMR Corp.,
parent of American Airlines, remains in bankruptcy.
Lessors track their jets constantly in case they need to
repossess them, said Helane Becker, analyst at Dahlman Rose &
Co. The "Cape Town" treaty of 2001 made it easier for leasing
firms to repossess aircraft. In the event of a default, leasing
firms may recover a share of loans by selling jets at
After Superstorm Sandy struck the East Coast in late October,
shares in United Rentals and H&E Equipment Services ticked up
on views for increased demand of power tools, generators and
construction gear. But there's also a bigger trend at work,
"There's been a large secular shift in nonresidential
construction from owning equipment to rental," said Neil
Frohnapple, analyst at Northcoast Research. "In the early 1990s,
rental accounted for about 10% of the equipment used by
contractors. That's moved up to more than 40%. The trend has been
accelerating because of uncertainty in the economic downturn.
Contractors don't have much of a backlog of work, so they don't
want to buy a new piece of equipment."
Kaplan Associates estimates that by 2014, the industry's
rent-ownership mix will be about 50-50.
Construction companies rent bulldozers, excavators, aerial
work platforms and pumps. United Rental and other lessors buy
earth-moving machines and other gear from manufacturers such as
Terex and Deere.Caterpillar (CAT) has its own equipment leasing
Leasing fleet utilization rates are high, with some 70% to 75%
of equipment at work. Even in good times, about 20% of gear stays
in the yard, undergoing repair and maintenance. Lease durations
vary. Construction firms rent equipment for a day, two weeks or
"Low 70s utilization, where it is now, is about as good as it
gets," said Oppenheimer analyst Scott Schneeberger. "They want to
have the right amount of fleet on hand to get a good return on
invested capital. They don't want to add too much fleet, in case
the economy goes into a recession again."
Construction equipment leasing is a fragmented industry.
United Rental and RSC Holdings, the industry's two largest
players, combined in a $1.9 billion merger in May. The
combination still holds less than 15% market share. Large
competitors include Hertz Equipment Rental and Sunbelt
By focusing on service and by expanding its fleet, United
Rental has been able to gain share from smaller mom and pop
leasing firms, said Frohnapple. Based on the Gulf Coast, H&E
has been getting a lift from oil and energy industry customers,
Container Freight Leasing
In cargo shipping, global credit trends have worked in favor
of leasing firms, pushing up rental rates.
After the financial crisis hit in 2008, production of
containers -- steel cargo boxes that transport everything from
toys to bananas -- slowed sharply. As global trade plunged, old
containers were sold for scrap.
By 2010, a global shortage pushed new container prices to a
record. Lessors passed on the cost of new containers in higher
Meanwhile, bank capital for shipping companies dried up amid a
glut of capacity. Capital-constrained shipping lines increasingly
relied on leasing rather than owning containers.
Moeller-Maersk, the largest container shipping operator, is
one of a few that buys its own containers. Container leasing
companies -- such as Textainer,Tal International (TAL), CAI
International andSeacube Container (BOX) -- purchased nearly
two-thirds of all new containers built in 2012, says Sterne
Dahlman Rose's Becker says that leasing firms now account for
45% of the 30 million containers in use worldwide. She sees that
climbing to 60% over the next three to five years.
"Shipping companies are making the decision not to invest in
the business," she said. "In an environment where the market is
relatively weak and rates for container ships are low, it's
easier for them to lease containers for five or six years. The
check is a lot smaller than buying them."
In 2012, only about 2.5 million new containers will be built.
New containers cost about $2,500, down from a peak of $3,000 set
a year ago. Containers last about 15 years. With utilization
high, used container prices and gains on sale of used equipment
remain high, says Sterne Agee. Mobile Mini has specialized in
buying older containers, refurbishing them with security systems,
and transporting them to construction work sites, where they hold
equipment, or to schools or government agencies, to be used as
mobile office units, says Joe Box, analyst at KeyBanc Capital