Aircraft leasing market on brink of new surge

A report from Frost & Sullivan says that the global fleet of aircraft leasing firms grew by 7.34 per cent from 5757 aircraft in 2008 to 6180 aircraft in 2009.

The fleet is predicted to grow at an annual of 5.7 per cent from 2010-2015, meaning that the total number of aircraft owned by the leasing firms is expected to reach 8646 by 2015.

"Banks from China and sovereign wealth funds from the Middle East have shown interest in purchasing the aircraft of leasing companies," says Frost & Sullivan Financial Analyst R Madusudanan. "The assets of aircraft lessors are likely to stimulate interest among asset management companies that are scouting around for stable incomes over the long term."

With airlines facing liquidity challenges, sale-and-leaseback transactions can be used to bolster the liquidity position and strengthen the balance sheet.

Due to the recent decline in air traffic the number of airlines defaulting on lease payments has increased. This has become a major problem for leasing companies, for obvious reasons.

So naturally, leasing companies are ensuring that they lease only to credit-worthy airlines.

There is also an incentive to increase security deposits and maintenance reserves to limit the downside for the leasing firms in case of bankruptcies.

"The lease rentals and the market value of the aircraft have dropped from the levels attained in 2008," says Madusudanan. "The drop has been disproportionate across various aircraft types."

Frost & Sullivan expects that aircraft rentals will pick up by the fourth quarter of this year or the first quarter of 2011; and the rentals for new-generation aircraft are expected to increase at a faster rate than that of older aircraft due to higher demand for the former.