The pandemic brought new prominence to the aircraft leasing industry, as airlines, with their balance sheets battered by the crisis, increasingly have turned to lessors to supply their aircraft needs. But this prominence could accelerate a wave of consolidation in the industry, Aircastle CEO Michael Inglese said.
The wave has already started, with the $30 billion merger of Aercap and GECAS last year. Aercap CEO Aengus Kelley last year said the sector is ripe for further consolidation. Inglese agrees. “We will see more consolidation in the lessor space as the industry grows and matures over the balance of this decade,” he said during the lessor’s most recent fiscal quarter results call. “And I think we’ll be positioned to play in it, if and when we find the right opportunity.”
Consolidation comes at a good moment for the lessors. Before the pandemic, lessors accounted for 40-45 percent of the global fleet. Now, aircraft owned by lessors comprise 60-65 percent of the world’s aircraft, a percentage most expect only to grow. Part of this is financing. Lessors are better able now to raise money, and banks are more likely to see lessors as a safer bet than airlines struggling with the pandemic.
Part of this also a shift in the way airlines view lessors. “Leasing is not any longer a poor airlines’ choice for financing,” Air Lease Corp. Executive Chairman Steven Udvar-Hazy said at the Skift Aviation Forum in November. Even financially healthy airlines like Delta Air Lines see lessors as an increasingly attractive way to finance aircraft purchases, he said.
And part is aircraft availability. Inglese noted that demand remains robust — and is continuing to grow — for next-generation single-aisle aircraft, like the Airbus A320neo family and the Boeing 737 Max.”The speed of the recovery has brought about a surge in demand for new technology narrowbody aircraft,” he said.
But both airframers have huge backlogs for those jets. At current production rates, an airline would have to wait up to 11 years for an A320 ordered today. Airlines that need those narrowbodies soon should turn to lessors or face very long waits, Airbus Chief Commercial Officer Christian Scherer said earlier this week.
Airbus has ambitious plans to ramp up production of its A320-family aircraft, but Inglese is skeptical that the airframers, Boeing included, can achieve their goals. “I don’t think many people who don’t work at Airbus or Boeing are believing that, given what’s going on in the world in the context of supply chain and how that can get ramped,” he said.
Although Inglese was bullish on the demand for new aircraft, he was cautious about the industry’s overall recovery. Air travel demand is picking up in Europe, North America, Latin America, and domestic Russia and Australia. But Southeast Asia, where Aircastle has some exposure, remains largely shuttered. Most recently, the lessor is working with Garuda Indonesia, which declared bankruptcy and returned three aircraft to Aircastle, on lease deferrals. Overall, deferrals are down. Aircastle’s strategy is focused on lease extensions and other measures to aid airlines, like Garuda, that are facing headwinds, Inglese said.
The Omicron variant has put a damper on the recovery, although Inglese said government reactions to the variant “present a significant risk” to the airline industry. “If we’ve learned anything from the past two years, making predictions during the pandemic is difficult,” he said. “So the only assurance I can make today is that Aircastle remains vigilant, nimble and is focused on collecting cash and supporting our customers. The Omicron variant will pass, and our long-term perspective on the industry remains positive.”
Aircastle reported lease revenues for its most recent fiscal quarter were up 13 percent from the previous quarter, a sign of the industry’s upward trajectory, Inglese said. Revenues were $191 million, and the lessor reported quarterly cash flows were up 118 percent compared with the same quarter in 2020. Aircastle reported a net loss of $62 million, which includes $45 million in aircraft impairment charges.