Forward leasing data reveals that the fundamentals in the leasing sector are better than headlines suggest, opines the president of one of the world's largest leasing companies.
“I am not going to be the guy that is saying that the leasing market is booming, but those who are saying the market is in decline are wrong,” said Philip Scruggs, president and chief commercial officer of AerCap in an interview with Airfinance Journal. “Aircraft leasing continues to grow and demand for our product remains robust.”
To get an idea about how well the market is performing, AerCap looks at how far in advance aircraft are being leased. The way to track that is by looking at how many aircraft will need to be leased for the remainder of the year, and for the next year, at the same point annually.
“Last year we had a solid performance, and we are in a better position than last year, and that is surprising because that is not what people are talking about in our industry,” says Scruggs.
According to AerCap’s data from the last week of September, the lessor had 39 aircraft with leases that are expiring in 2017, as opposed to last year when it registered 61 units. The good news follows through for 2018 - last year the lessor had 150 aircraft expiring but now it has 133 units.
“That is nothing for a platform where we lease 300 aircraft per year. To have just 39 aircraft that are coming off lease, we are feeling pretty good. Remember back in 2012, we had the bankruptcies of Malev and World Airways, so we had 40 airplanes sitting on the tarmac.
“To have 39 expiries for the whole year, I am feeling bullish about the market.”
Scruggs adds that the numbers are “out of date" as AerCap has leased three more 737-800s In the last week.
737-800 bow wave
The lessor has no 737-800s available until the second half of next year – another move that he is “surprised by" due to the increased availability of the narrowbody units in early 2016.
He points to recent meetings with two carriers, “which are operating in weaker parts of the market but are beginning to experience growth again and need additional 737-800s”; however, he had to turn their business away as there is no available 737-800 feedstock from AerCap.
AerCap, like GECAS, is experiencing what Scruggs calls the first “bow wave” of 737-800s, as the lessors’ 2001-03 orderbooks start to redeliver.
“We had never experienced so many 15-year-old 737-800s coming onto the market, as production started in 1998. It was the first big wave of 15-year-old aircraft from the legacy ILFC orderbook and also the GECAS orderbook."
While the lessor’s outlook might sound too upbeat for industry observers who are noting an increase in aircraft pop-ups, Scruggs notes his view is not necessarily inconsistent with those observations.
“I am looking strictly at the used aircraft market and I do think the OEM's backlog at Boeing and Airbus is weaker than they think,” he says, adding: “What I can say is that, based on our numbers for used aircraft, there is still underlying demand from many airlines and they need aircraft to meet that demand.”
He adds: “It is not surprising to me that there are pop ups, who really believes all the orders from likes of Lion Air and Vietjet will be delivered. Those orders aren’t reflective of their vision of what is happening imminently."
This year AerCap will sell approximately $2 billion in assets. It is also actively buying back its own stock because it is trading at 90% of book value.
“We are looking at shareholder interest, and we are looking at what we should we do with excess capital, and when we see our stock trading at a discount to book, we believe that represents an attractive opportunity.
“We sell airplanes above book values and then we buy back our own airplanes at 90% of book value. It is a good trade, right?”
AerCap announced a $250 million buyback in the second quarter that will run through 31 December 2016. The repurchase is the lessor’s third announced this year.
It follows a $250 million buyback announced on 31 May, which runs through 30 September 2016, and a $400 million buyback announced on 23 February, which has already been completed.
As the second largest lessor by fleet size, but the largest by dollar value, Scruggs says he is unfazed by the fact that the third largest lessor could be potentially controlled by Asian money, following the rumoured sale of CIT Aerospace to Bohai Leasing.
“I don’t expect that they will have any competitive advantage over anyone else. Those guys all need to go offshore to raise US dollar debt, so people that are more likely to have a funding advantage are the Japanese.”
He admits there is still heavy competition in the sale and leaseback market, particularly from the Chinese and Japanese, but notes an uptick in volume coming through.
The long-term upward trend in traffic, he says, underlines the resilience of the industry performance despite "fear talks" such as Brexit and the debt crisis in China. He points to the IATA report with world air traffic expected to grow by 6.2% in 2016, with 3.8 billion passengers, up from 3.6 billion in 2015.