Today we begin our annual analysis of the increasingly complex world of freighter aircraft leasing. In this multi-part series, we start with an overview of how aircraft leasing has evolved from a relatively straightforward agreement in which a company that owns an aircraft leases it to an airline, to the complex and dynamic set of agreements which exist today.
What could be simpler? Airline financial analysts have it easy when it comes to deciding how best to augment their freighter fleets, right? If demand justifies additional aircraft, the analyst just has to make a case to either purchase or lease the desired aircraft based on a few simple financial calculations, and by considering how the plane will be deployed once in service.
If only it were that simple.
Because the market for air freight is anything but predictable, lessors must be acute in their ability to develop products and options which fit the market – and with more leasing options available now than in the past, the decision much more complicated than just “Do I lease or do I buy.” We will get to those options, but first we start with a bit of history.
In the early 90s aircraft leasing was still a young industry, which served primarily to connect aircraft with airlines that either could not afford to purchase them, or needed a short-term solution for miscalculated fleet planning, says Steve Rimmer, Chief Executive Officer, Altavair. Leasing supplied only about 10% of the total number of aircraft in operation at the time, and because of the risk involved, lessors could charge lease rates that provided them with sold returns on their investment.
Fast-forward to today’s market, where aircraft are perceived as a mature and stable asset class, and both the number of lessors, and the volume of aircraft in their portfolios, has grown tremendously. Nearly 40% of passenger aircraft in operation today are on lease, and the number is about 30% for freighters (based on estimates that 545 out of the world’s freighter fleet of 1,840 turboprop, narrowbody, and widebody freighters currently in service are leased. To hear more insights from Altavair’s Steve Rimmer, we invite you to join us at Cargo Facts Symposium, 2 – 4 October at the Ritz-Carlton on Miami’s South Beach where Steve will speak on an opening panel about air freight market trends. To register, or for more information, visit www.cargofactsymposium.com
First, just what is a “lessor”? For purposes of this analysis, we include those companies that own aircraft, and lease them to airlines. This eliminates the group of aircraft managers – companies which don’t own aircraft themselves, but which manage aircraft on behalf of the owners.
Quite a few lessors both own aircraft and manage aircraft for others, and as well have some of their own aircraft managed by other lessors. The freighter aircraft leasing business is a tangled mass of public and private businesses, of various kinds, many of which have subsidiaries of their own (some of which are sometimes treated as lessors in their own right).
Further, lessors often create special-purpose vehicles (SPVs) to handle the financing and leasing of small groups of aircraft, sometimes even a single aircraft, within their portfolios. It can sometimes be easy to treat an SPV as though it were a lessor in its own right, but we have tried to keep them subsumed within the parent lessor.
There are many ways one could try to separate the threads of this tangle, but in producing the chart, we have treated as a lessor only those companies that own and lease aircraft.
Second, regarding the lessors’ portfolios, again there are choices to be made. Our choice is to count only those aircraft currently owned, in freighter configuration, and either on lease or available for lease. We’ll use GECAS as an example here. GECAS, in its media releases, often refers to the fact that its Cargo Aircraft Group has “nearly 100 freighters.” But this includes not only freighters currently on lease to airlines, but also aircraft on order. Since GECAS has placed orders for 737-800 passenger-to-freighter conversions with both Aeronautical Engineers (twenty) and Boeing (five), and announced thirty additional -800 orders which have not yet been allotted to a particular conversion house, the in-service total – which is what we show – is still considerably less than 100.
Likewise, GECAS has a 747-400BDSF and a 727-100F currently in storage. The 727 is almost certainly not going to fly again, so we do not include it in our total. The 747, on the other hand, could possibly see service again, so we do include it.
Obviously, this is a judgement that has to be made on a case-by-case basis, and while some cases, like the 727-100F, above, are clear-cut, others, like the 747-400BDSF, are not. Not all currently parked 747-400 freighters are going to fly again, but this one might, so we keep it in the count.
And finally, lessors, with few exceptions, are notoriously averse to publicity and do not publish detailed fleet information. Nor do federally required ownership records provide much clarity, as often ownership will be held through a trustee – often a bank. So, the original data from ch-aviation, and our interpretation of it will almost certainly be less than 100% accurate.
Tomorrow, we’ll continue with a closer look at some of the of lessors with freighters in their portfolios, and look at how lessor freighter portfolios are changing, then, in Part III, turn to the carriers that lease those freighters.