Opportunities in China abound – AFJ China 2021
Opportunities in China will remain plentiful, aircraft leasing executives have told the Airfinance Journal China 2021 virtual conference.
“China is in a pretty strong place. It overtook the US as the largest aviation market over the last year. It highlights how much Chinese airlines have been able to maintain a strong amount of domestic flying. From our point of view, our Chinese customers paid all their overdues, they repaid their deferrals on the baseline of the revenues they were able to generate,” the chief executive officer (CEO) of AMCK Aviation, Paul Sheridan, told the conference.
KPMG Ireland tax partner and moderator of the panel, Joe O'Mara, remarked that lease rate factors in China remained mostly stable despite the pandemic.
“You see a very, very competitive lessor market where lease rate factors pre-Covid, post-Covid don’t appear to have any significant changes. How competitive is it to enter China?" O’Mara asks.
“It’s very difficult to win sale and leaseback opportunities in China. It’s so competitive. We haven’t done any transactions in a while, but we will be looking to place some of our Airbus orders there from 2024 because of all the benefits it offers," replies Sheridan, who currently manages a portfolio of 125 aircraft.
"We’re always going to be looking at good credits, underlying government links, SOE status, that kind of thing. But recent times have also shown that you can run a successful private airline in China."
Carine Truong, founder and CEO of Careva Aero Capital, says she has observed strong appetite for investments into the Chinese aviation sector, including from family offices, with a particular interest in cargo conversions and e-commerce express delivery opportunities.
Truong recently left NWS Aviation, a platform with more than 200 aircraft, to launch her own aircraft investment firm. Now on her own, she says Careva focuses on picking up distressed assets in the market, finding value during the crisis. This includes building a fund for cargo conversions.
“Cargo is booming and that will help many airlines tap the e-commerce and cargo segments. It’s been the saviour for most airlines. Airlines should really look for opportunities to cooperate with the e-commerce giants otherwise they could set up their own fleets just like Amazon,” Truong says.
“Loads of lessors are investing in cargo conversions, mostly to help with the declining value of widebody aircraft. This has led to a shortage of cargo conversion capacity in the current market, that’s a problem right now,” she adds.
This could be an opportunity for Chinese players to set up businesses in China to rival Airbus and ST Engineering joint venture Elbe Flugzeugwerke (EFW).
“EFW is not producing enough freighters. The demand is now. China could be tapping that opportunity to become more independent; they are already doing it in the disassembly business,” says Truong.
Investor appetite
“We’ve seen great appetite for cargo conversions. Even from banks. Typically, banks don’t like to finance cargo conversions but when it comes with a big-name lease like SF Express attached then the appetite is great,” Truong tells the Airfinance Journal conference.
Hong Kong-based family offices have registered their interest in the Chinese aviation sector, too: “It’s not just from banks and financiers that we know, but also for example from family offices here in Hong Kong wanting to get into aviation because they view it as a sector with opportunities,” she says.
HNA restructuring
Possibly China’s biggest aviation worry is the HNA stable of carriers, currently undergoing a group-wide restructuring.
Conference panellists, however, believe that the worst is over and that prospects are good for HNA airlines to re-emerge.
“In the grand scheme of things, it hasn’t been as bad as we thought it would be. They
"As long as everybody’s comfortable with the plan for re-emerging, the idea of having a set of airlines with a solid financial footing able to pay everybody on time and keep flying is pretty attractive. It is a ‘it might make you hurt but not cry’ kind of category, in terms of losses. They’ve managed the situation pretty well so far this year,” AMCK’s Sheridan says.
Careva’s founder and chief principal agrees.
“It could have been much worse, just think about Lion Air,” says Truong.
“We know that the next taker will be a big name. One of the favorites is Juneyao because the government wants a Chinese private entity to take over. The next owner will be quite healthy,” she adds.
HNA’s restructuring, however, is not a done deal yet.
“Everything will depend on the debt restructuring. The group still has a very high debt. Apparently the deadline has been extended from end of June to end of September, so we will know by then,” Truong says.
Domestic Chinese traffic is already exceeding pre-Covid levels, the aviation leasing executive notes, but an international recovery is still a long way off. This is also a problem for HNA.
“Those carriers with large international widebody fleets will face more challenges than the smaller narrowbody-only type operators in China. A weakness of Hainan Group is that their share of widebodies is higher. Also, the hub of Hainan is going to be comparatively weaker when international travel resumes. We expect this to be driven through the big hubs in Beijing, Shanghai and Guangzhou. People probably won’t be going to Hainan first,” Truong says.