Some form of a downturn was always expected in the financial markets following the end of cheap money and the onset of aggressive monetary policy. For now, though, events of the past two weeks do not appear to have caused panic among operating lessors.

Rather, the string of bank failures has likely sparked a rethink about upcoming business plans, including M&A activity, Aircastle’s chief executive officer, Michael Inglese, tells Airfinance Journal.

“It’s still early days, but if you are one of the investment grade lessors that thought it was going to the bond market this week or next, you are probably not going. Nobody wants to run across the street when there's a lot of traffic,” he says. “At a minimum, it's going to cause a short-term term pause for people to think about what's happening and where this is going.”

Bond spreads are a “little wider” than a few weeks ago, he observes, but “nothing has blown out; the world isn’t ending".

Against this backdrop, the US Federal Reserve is expected to raise rates again on 22 March as it battles to tame inflation.

US annual inflation fell to 6% in February from a peak of 9.1%, and it slowed to 8.5% from a high of 10.6% in the eurozone. In the UK, the annual rate of consumer price inflation rose to 10.4% in February, up from 10.1% in January.

But the expected halt in business activity could prompt certain lessors to refrain from the various sale processes that are taking place in the market.

“If my borrowing costs just went up 100 basis points in a week, I need to somehow factor that into what $6 billion worth of assets is actually worth,” Inglese  says, adding: “There's a lot of window shopping, but there's not a lot of shopping bags in the street just yet. This just adds another wrinkle to a very volatile land we've been living in for the last year.”

This pause in activity could also explain the 25 bids that Air France's recent RFP is rumoured to have attracted, as lessors reassess and possibly redirect their growth plans. 

Greg Conlon, the chief executive officer of High Ridge Aviation, in a recent conversation with Airfinance Journal stressed the importance of viewing M&A as an opportunity rather than a strategy, adding that potential buyers should determine if acquisitions are accretive to the business on their own. 

For Aircastle, the banking system stress “creates friction and tension” around what refinancing costs could be. The lessor faces debt maturities in September and then again next year.

“But that is the same for everyone looking to refinance," Inglese adds.  "I was at the JP Morgan conference and everyone was positive, but people are now borrowing money at 6% when they used to borrow money at 2%. That is the new reality.”

And with higher costs and increased volatility, lessors could see fewer trades in the secondary market.

“Nothing happens in a vacuum. If it's affecting the primary financing market and the trading volumes of those with big orderbooks and looking to sell big portfolios, then it's affecting the secondary market for mid-age and older aircraft and their buyers,” he says. “Those buyers need to figure out if they can finance purchases and I think those people are having a harder time making the math work. Compared with two weeks ago, it feels like there could be less trading this year.

"But as I said earlier, it's too early to draw big conclusions.”

More delays

Aircastle's net debt-to-equity leverage remains elevated compared with its pre-pandemic figure — an increase to 2.7x from 2.2x — due to the crisis and Russia’s invasion of Ukraine, he says.

"It wasn't because we borrowed more money, it was because we took big hits to earnings and equity  like everybody else,” he explains. “But three times is kind of the upper limit for maintaining investment grade, which we think is very important to our business model, and our shareholders agree with that.”

But this positioning means Aircrastle has less ammunition for near-term growth and will need additional equity from its shareholders in the next couple of years.

In February, the lessor closed a new $300 million unsecured revolving credit facility with Mizuho Bank.

At the time, Inglese said the new facility with Mizuho was “yet another example of the outstanding shareholder commitment that bolsters its investment grade rating."

The ownership structure with Marubeni Corporation and Mizuho Leasing "strengthens its conservative debt profile," he added. 

Still, the additional equity is needed to remain relevant in the secondary market and to take advantage of opportunities.

“The industry is set up for more consolidation. And I think that is why there are big portfolios for sale. I don't think those floating around are the only ones that the world will see,” he says. “It is about convincing our shareholders when is the right time to take that kind of step.”

As of 30 November, Aircastle owned 241 aircraft and other flight equipment with a net book value of $6.6 billion. It also managed nine aircraft with a net book value of $289 million on behalf of a joint venture with Mizuho Leasing.

Inglese estimates that capital expenditure will be higher in the fourth quarter but would not be drawn on an exact amount.

“If you take our nine-month number and add a little more that seems reasonable. We don't have an orderbook, so our model gives us flexibility, especially with all the new-tech engine issues and delays.”

He points to India’s Indigo, which is Aircastle’s largest lessee and has roughly 30% of its fleet grounded due to Pratt & Whitney Geared Turbofan engine problems.

“It is a very big issue,” he says. "People are doing what they can. The magnitude of this obviously seems bigger than with previous new technology introductions. And maybe it is also because India is such a larger and more significant market than in the past."

Such disruptions defined the aviation sector in 2022 and Inglese agrees with ALC’s executive chairman, Steven Udvar-Hazy, that supply chain troubles will continue throughout 2023 and likely into 2025 due to parts and labour shortages. 

Lessors now manage 53% of the global passenger fleet by value after their positions increased during the pandemic due to the flexibility and financial support they offered airlines.

Their roles are expected to increase as airline focus on lowering debt burdens but ease again once balance sheets recover. 

As expected, a growing industry has attracted new entrants, including Pimco-backed High Ridge Aviation and Avilease, which is funded by Saudi Arabia's public investment fund. 

But will these new lessors change the competitive balance?

“I am not convinced of that. I think the market needs hundreds of billions of dollars of capital to finance what's going to get delivered. Everyone is saying they (the new lessors) will have a $10 billion book in five years. Is there enough growth and available stuff to get to that number? I wouldn't be entirely shocked," he says. "It will be a combination of the market needing more money and people deciding that this didn’t turn out as good as they thought. You saw that with AMCK, Goshawk and others.”

And as this new operating environment plays out, Aircastle will carry on “as it always has done.” Inglese say he remains confident that there will be opportunities to resume growth and restore profitability in what is going to be a “much bigger industry” by 2030.