Business not as usual | Analysis | Airfinance Journal

Business not as usual

Aviation Capital Group expects its airline customers to honour their signed lease agreements, its president and chief executive officer Khanh T. Tran tells Dominic Lalk.

Tran became chief executive officer (CEO) of Aviation Capital Group (ACG) on 1 January 2016. Before assuming leadership of ACG, he was president of Pacific Life with responsibility for its asset management, corporate development, corporate financial and investment management groups and ACG.

Tran is in charge of one of the industry’s largest portfolios: as at 30 June, ACG had more than 450 owned, managed and committed commercial aircraft under its remit. In its latest financial report for the quarter ended 30 June 2020, ACG stated it owned assets worth $12.2 billion, including $9.8 billion of flight equipment held for lease, against $8.5 billion in liabilities, including $7.5 billion in debt financings.

Founded more than 30 years ago, ACG’s owned and managed portfolio includes about 90 airlines in about 45 countries. Asia accounts for nearly 45% of its lessee base. After repossessing all its aircraft from Interjet, ACG is now most exposed to S7 Airlines, LOT American Airlines and Asiana (in that order) in terms of asset values.

In December 2019, Tokyo Century (TC) completed its acquisition of ACG. With the buyout, Tokyo Century plans to improve its aviation business value chain through collaboration among its aviation financing businesses, which in addition to ACG include Japanese operating lease products and aircraft aftermarket-related businesses that leverage expertise in used aircraft and parts. Tokyo Century also has a 49.2% shareholding in Florida-based GA Telesis and, in 2019, it set up an engine leasing joint venture along with All Nippon Airways Trading and GAT.

“Tokyo Century had been a minority shareholder for two years prior to owning 100% of ACG. They got to know us very well. The transition has been very smooth. The folks in Japan are very meticulous and detail-oriented. They spend a lot of time on and with us, especially supporting areas like risk management, financials and marketing. It’s been great to have them so engaged as owners who fully understand and support our business,” Tran tells Airfinance Journal in an exclusive interview.

“Tokyo Century has been particularly helpful finding Japanese lenders and is a source for potential JOLs or JOLCOs ,” says Tran. He adds: “There has also been more cooperation, synergies and conversations with GAT since the full TC acquisition. GAT has bid on aircraft for sale from us and has been a good source of market insights.”


In June, ACG’s liquidity stood at about $1.7 billion and the lessor raised another $1 billion through an unsecured notes issuance this summer. The notes carry a 5.5% interest rate and are due in 2024.

The $1 billion unsecured notes issuance came after the June closing of a $600 million unsecured revolving line of credit with owner Tokyo Century. The facility has an initial term of three years and will automatically extend for additional one-year periods with mutual consent. Also in June, ACG acquired a little more than one-third of its 7.125% senior notes due 15 October 2020, tendering for $205 million of the $600 million aggregate principal amount of the notes outstanding.

Separate from those new financings, in June 2019, ACG amended and restated its senior unsecured revolving credit agreement with a syndicate of lenders, which will mature in June 2024 and has a total borrowing capacity of $2 billion. As of 30 June 2020, $870 million was outstanding under that facility.

Furthermore, ACG has a $1.5 billion commercial paper programme under which it may issue notes in minimum denominations of $250,000 for periods ranging from one to 397 days, and for which the 2019 revolving credit facility serves as a backstop.  This programme is used as working capital, which is later replaced by permanent financings.  As of 30 June 2020, ACG had $348 million-worth of commercial paper outstanding.


Throughout its history ACG has been focusing on narrowbody aircraft, and this is not about to change.

“We will continue to focus on narrowbody aircraft as we’ve done from day one. As you know, they continue to be very liquid assets. We do like selective widebodies; we prefer the 787 and A350 families versus the 777 and A330 programmes,” says Tran.

Based on its financial statements, as at 30 June, ACG had unconditional purchase commitments for 129 Airbus and Boeing aircraft scheduled for delivery through 2025. This is down by 27 aircraft from 31 March, when the US lessor still reported commitments for 156 aircraft through 2025. After accounting for five aircraft delivered during the second quarter After accounting for five aircraft delivered during the second quarter, ACG cancelled a total of 22 aircraft during the three months ended 30 June, all 737 Max units, shaving $1.2 billion off its committed capital expenditure (Capex).

ACG had initially placed orders for a total of 100 737 Max variants. To date that backlog is down to just 72 units. Before the grounding, ACG had delivered seven 737 Max aircraft that are on lease to four airline customers, including a sale and leaseback with China’s Hainan Airlines.

As of 30 June, deposits made in relation to ACG’s remaining $6.1 billion in committed aircraft purchase agreements totalled $875 million. The lessor has estimated Capex committed for the purchase of aircraft of $358 million for the remainder of 2020; $1.4 billion in 2021; $2.3 billion in 2022; $1.1 billion in 2023; $693 million in 2024; and $287 million “thereafter”.

“We have cancelled 737 Max aircraft based on contractual rights, but having said that, one of the things that we did very early on, shortly after the grounding, was to push out our deliveries into later years to avoid the ungrounding risks,” says Tran.

“I do believe that the Max is going to come back once the industry recovers. Current 737 operators aren’t going to all suddenly become Airbus operators – they don’t have the crews and the pilots for that – and Airbus alone can’t supply all the narrowbodies the industry will need. The question about the Max is: when it is ungrounded, how long will it take to get back to normal?” asks Tran.

“Covid-19 has also impacted aircraft manufacturers due to temporary closures of certain assembly and supplier facilities. We are in active discussions with Boeing and Airbus to determine the estimated impact and duration of said delays. Our leases contain lessee cancellation clauses related to aircraft delivery delays, typically for delays greater than one year. Our purchase agreements with Boeing and Airbus contain similar clauses,” as noted in ACG’s 30 June financials.

So far in 2020, Boeing’s net orders, including ASC 606 adjustments, are at negative 836, reducing Boeing’s total firm order backlog to 4,496 aircraft. Rival Airbus’s order tally after cancellations has grown by 302 aircraft this year, increasing its total firm backlog to 7,539 aircraft.

The 737 Max lease rates could fall to between $250,000 to $300,000 a month, according to panellists of an Airfinance Journal Asia-Pacific webinar in August. And while rates for aircraft transacted in the sale and leaseback market will be much higher, direct placements by lessors “will be almost free money”, said a panellist.

Before the global 737 Max grounding order of March 2019, 737 Max 8s were producing lease rental rates of $300,000 to 350,000 a month.

Tran says ACG is eyeing more widebody opportunities through its Aircraft Financing Solutions (AFS) programme, “where effectively we offer an airline the ability to finance the aircraft and we arrange everything”.

AFS is a good example of how we can offer our customers the full product line, with operating and finance leases. We have completed AFS transactions on four widebodies and we’re looking to add another widebody aircraft and about half a dozen single aisles this year,” says Tran.

The firm’s AFS programme focuses on the development and marketing of credit-enhanced financing structures that provide ACG’s customers more alternatives and greater access to additional sources of capital for aircraft purchases, while providing improved risk-adjusted returns for the lenders and capital providers involved.

Tran says the “AFS initiative provides ACG with a compelling complement to its core operating lease services, enabling us to offer a broader set of fleet financing solutions to airlines”. ACG managing directors Robert Roy, Andrew Falk and Robert Lewandowski were brought onboard in 2018 to launch the AFS initiative. Previously, the trio collectively served more than 50 years as key members of the US Exim Bank’s aircraft finance team.

In June, ACG structured and provided secured financing for six 737-800 aircraft for Southwest Airlines through the AFS programme.

Delivering aircraft in Covid-2020

As it became obvious that the Coronavirus pandemic would wreak severe havoc with original equipment manufacturer (OEM), airline and lessor delivery schedules, Airbus began delivering aircraft remotely through the e-channel in March. The revamped process allows customers to take delivery of an aircraft remotely via an e-tool, but it also requires significant trust between the parties, because the buyers give up some control.

“We’ve done several e-deliveries since the crisis began earlier this year. I believe we may have been one of the first to execute an e-delivery in March in Toulouse and we did one last month in Tianjin. It is a different process and it is important to have good contractors you can rely on and that you give yourself ample time to do all the last minute fixes that usually come with deliveries,” Tran tells Airfinance Journal.

There are two challenges to delivering aircraft in 2020, says the lessor boss. “Sometimes the customer can’t or doesn’t want to travel to Toulouse or Hamburg because of quarantine/too much downtime and the second thing is that many airlines would like to defer taking deliveries during Covid,” says Tran.

“It takes a lot of mutual cooperation to come to an agreement between us, Airbus and the customer. For example, the most recent e-delivery was supposed to happen earlier, but because the delivery was in Tianjin all parties had to come together to work out a mutually agreeable delivery plan.”

ACG has only delivered “about a dozen aircraft, including an AFS aircraft” during the first half of 2020, says Tran. “Between now and the balance of the year we have another handful of aircraft to deliver,” he notes.

It has been reported across the industry that amid the ongoing Covid-19 pandemic, and the uncertainty it has created, most airlines are looking to defer, if not outright cancel their direct orders with the OEMs, as well as their agreements with lessors. ACG has not been spared but says it has not run into significant issues to date.

“With signed lease agreements we would expect our customers to take deliveries of their aircraft. Because of Covid, we try and work far in advance with our customers to discuss any necessary delivery flexibility and, to date, it has worked out well for everyone,” says Tran.

“Airbus has been flexible to some degree, but their focus on delivering aircraft makes it quite challenging and they are very cash focused,” reveals Tran.

Distressed lessee requests

“Since the start of the Covid-19 pandemic, we have seen an increase in delinquent rental payments from certain of our lessees. As of 30 June, most of the lessees of our owned aircraft have requested some form of rental relief. We evaluate such requests on a case-by-case basis. Our evaluation and approvals of such requests are based on factors including our assessment of (1) the long-term viability of the lessee and its shareholder/owner support , (2) our existing security package with respect to the relevant aircraft, (3) the strength and history of our relationship with the lessee and its affiliates and (4) potential ability to facilitate other commercial transactions or objectives with the lessee in exchange for granting a deferral,” says Tran.

Deferrals granted have generally involved near-term deferrals of a portion of contractual rent payments, including interest, and are generally scheduled to be repaid during the remainder of 2020.

“Generally, we’ve been offering a relatively short deferral period to those who requested it, and with a pretty rapid repayment. I’m happy to say that a number of customers we did this with very early on this spring are already repaying us now. There have been a few customers who have now come back to us for more help and we will consider such requests case-by-case basis and strive to generally stay within the consistent framework of short-term deferral and rapid repayment,” adds Tran.

ACG notes that a number of its customers did not approach the firm for relief, and “some have walked away from their requests when they saw our framework for rent relief was not going to be free money”.

Tran says: “As of 30 June, deferral agreements in place was approximately 6% of our annual 2019 operating revenue and therefore quite manageable from our perspective. Our collections in July were north of the 70% you noted.”

He agrees that the market is experiencing a surge in sale and leaseback (SLB) demand but ACG has been selective in pursuing SLBs.

“We have not done any SLBs since Covid. It is surprising how aggressive the SLB market continues to be, with lease rate rental factors in many cases are sub-.7, in the low .6 range. Taking on additional aircraft with such lease rental factors doesn’t make sense for us. We think that SLBs in this market should command a premium but that’s not what we’ve been seeing lately, so we haven’t done any,” reveals Tran.

Airline bankruptcies and PBH requests

“We avoided exposure to some of the bigger bankruptcies like Avianca, LATAM, South African Airways, Thai Airways, etc, and have very limited exposure to Aeromexico and Virgin Australia,” says Tran.

ACG has run into some trouble with delinquent Mexican carrier Interjet, which has had more than 60 Airbus aircraft repossessed by different lessors since the beginning of 2020 after defaulting on its lease rentals.

“Interjet was our large exposure at one point and we have repossessed all our aircraft from Interjet and getting them back into our possession was more expedient than expected. We don’t have an interest in the reconstituted Interjet. We would prefer to keep our aircraft for placements elsewhere, even if it means they’re staying on the ground a little longer. They’re good assets, A320neos and A321neos, and we should be able to find new homes for them that further diversify our portfolio” says Tran.

“We’re concerned about India. We’ve had some not so good experiences in India in the past, with Kingfisher and then Jet,” says Tran. ACG has placed narrowbodies with Airasia India, Goair, Indigo and Spicejet.

“Another region of concern is Latin America, and the carriers in Israel are on our radar, too,” says Tran. ACG has placed aircraft with 10 operators in Latin America, including seven each with Aerolineas Argentinas, Copa and Brazil’s Gol; in Israel, ACG has A321neo aircraft placed with Arkia, and 737-800 and 787-9 aircraft with El Al.

As Airfinance Journal went to press, Arkia was still advertising two A321LR aircraft as available “for immediate wet or damp lease”. At the start of 2020, when Airbus was still struggling to keep up with A321neo demand, it was almost unthinkable that A321neo aircraft would be found in the secondary market, least of all A321LRs.

China’s HNA Group continues to be distressed, but carriers owned by the conglomerate have not stopped paying entirely.

As it became more apparent that the Covid-19 crisis would last much longer than anticipated at the beginning of the year, more airline lessees are resorting to seek usage-based aircraft rental agreements, also known as power-by-the-hour (PBH) arrangements. Under-administration LATAM and Virgin Australia are among airlines which have requested PBH deals; under-hibernation Airasia X too.

“We took a good look at the Virgin Australia RFP but it doesn’t work for us. We have two aircraft with them, which we are planning to take back,” says Tran.

He adds: “The question with parked aircraft is that you have to make a judgment call as to whether you are better off giving someone PBH without even any minimums, or to preserve your asset. As you know, it takes a lot just to place an aircraft with a new lessee, so unless warranted I’m not sure why anyone would agree to PBH.”

Transaction SnapshotAviation Capital Group | Amendment to revolving credit facility | 06-19 | $2bn

Financial Close:
$2,000.00m USD
Full Details

Transaction SnapshotAviation Capital Group | Commercial loan | 03-20 | $650m

Financial Close:
$650.00m USD
Full Details

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