The global airline industry
has taken off
in the last few years, driven by the worldwide economic recovery
and the proliferation of budget carriers in the developing world.
As a result, many airlines across the world are looking for
airplanes to expand their fleets.
When airlines are unable or unwilling to acquire aircraft on
their own (for reasons such as the availability of airplanes or
credit), they turn to the aircraft leasing industry. Leasing
companies have reaped a windfall fromthe rapid growth of the
aviation industry, particularly from airlines operating in
What is the aircraft leasing industry?
The aircraft leasing industry owns a large number and variety of
aircraft, which are then leased to airlines. Commercial airplanes
typically have a useful life of 20-30 years. However, airlines
can't reliably project their aircraft needs that far into the
Aircraft leasing companies offer airlines an alternative to
owning their own planes. Photo: The Motley Fool.
By contrast, aircraft leases usually run no more than 12 years
(and often closer to three to seven years). Thus, leasing an
airplane involves a much smaller commitment from an airline. In
effect, aircraft lessors act as middlemen in the market,
distributing planes to airlines that can operate them profitably
over the course of their useful lives.
How big is the aircraft leasing industry?
In the U.S., most major airlines own the bulk of their fleets and
are moving further in that direction . However, the aircraft
leasing industry is still massive and growing thanks to strong
demand from emerging markets.
As of 2011, six top publicly traded aircraft leasing companies
in total owned nearly 4,000 airplanes valued at approximately $90
billion. Since then, the aircraft leasing market has continued to
grow due to favorable market conditions.
How does the aircraft leasing industry work?
The aircraft leasing industry provides a number of services.
First, airlines with limited access to credit can turn to this
market to expand and modernize their fleets. Second, airlines
that want to avoid the 25-year commitment of owning an airplane
can instead lease planes. Third, if an airplane model is sold out
for many years into the future, airlines can try to lease the
plane rather than wait to buy it.
Aircraft leasing is a particularly big business in emerging
markets. Photo: Volaris.
Aircraft leasing companies generally acquire airplanes in one
of three ways. First, they may place orders for new planes
directly with the manufacturers. Second, they may enter into
sale-leaseback transactions with airlines that have already
ordered planes. (In this role, aircraft leases become a
substitute for debt financing.) Third, they may buy used
In sale-leaseback transactions, the aircraft leasing company
already knows which airline will lease the plane. Otherwise,
these lessors rely on contacts with dozens of airlines in order
to secure leases for the planes they have purchased.
As the initial lease term expires, the aircraft leasing
company will often give the airline an option to renew the lease
or buy the plane. If the airline is not interested in keeping the
plane, the leasing company can either place it with a different
customer or sell it.
Different aircraft leasing companies adopt different
strategies for purchasing and selling aircraft. Some only buy new
planes and sell them before they get too old. Others prefer to
buy older planes at a discount and keep them through most of
their useful lives. Some companies are more opportunistic and
will buy both new and old planes.
What are the drivers of the aircraft leasing industry?
One key driver of the aircraft leasing industry is demand for new
airplanes. With the global aviation industry expanding rapidly,
many airlines are looking to get their hands on new planes. High
are also driving replacement demand, as airlines retire old
planes in favor of more fuel-efficient models.
A second key driver is the interest rate environment. The
present low interest rate climate is great for aircraft leasing
companies, because they generally carry large debt loads to
finance their aircraft purchases. Lower interest rates thus mean
The third key driver for aircraft leasing companies is the
airlines' access to credit. Most U.S. airlines are buying an
increasing proportion of their planes outright, as they are
benefiting from the same low interest rate environment that is
boosting aircraft leasing companies' profits.However, airlines
with weak credit metrics and those in emerging markets tend to
have trouble getting loans, no matter their situation. As long as
air travel continues to boom in emerging markets, there should be
plenty of eager customers to power the future growth of the
aircraft leasing industry.
More from The Motley Fool:
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Aircraft Leasing: Investing Essentials
originally appeared on Fool.com.
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