Analysis-Aircraft leasing faces upheaval as cloud takeover risks | The mighty 790 KFGO

By Tim Hepher

PARIS (Reuters) – Aircraft leasing around the world faces further upheaval this week after SMBC Aviation Capital agreed to buy smaller rival Goshawk Aviation for $6.7 billion.

The move comes as companies report a stronger-than-expected U.S.-led recovery but increasingly overshadowed by inflation, rising borrowing costs and the effects of conflict in Ukraine.

SMBC’s deal puts it the industry’s second-largest in the world, overtaking Dublin-based rival Avolon behind AerCap.

The long-awaited takeover of Goshawk, which was confirmed by the company on Monday after a Reuters report last week, could increase pressure on smaller rivals to follow suit as funding costs rise with higher interest rates, analysts said.

“That means only the biggest and strongest backers can compete at the levels you have to compete to win,” consultant Paul O’Driscoll of consulting firm Ishka told Reuters.

Leasing companies now control more than half of the world’s aircraft fleet and bankers say private equity firms are also hovering over at least one lessor as the industry matures.

SMBC chief executive Peter Barrett, among leaders who have emerged to lead the Dublin-led jet leasing industry from Irish tycoon Tony Ryan’s roller coaster empire, said he expects that the industry continues to grow.

Speaking at the Airfinance Journal conference in Dublin two weeks ago, Barrett told delegates that a series of industrial and economic crises would reshuffle the cards.

He did not address long-running rumors of a tie-up with Goshawk at the event, one of two back-to-back conferences in the airline leasing capital of the world.

“You need the sellers’ motivation and that will change, especially due to the increase in financing costs. That’s going to be a factor in whether owners hold those assets or trade them,” Barrett told the conference.

SMBC declined to comment further on the Goshawk deal after Monday’s announcement.

AerCap chief executive Aengus Kelly, who shook up the industry when it bought ILFC in 2013 and then GECAS last year to secure the top spot, says size brings increased leverage in crucial negotiations with repair shops and aircraft manufacturers.

“You’re just on a different level than the rest of the industry,” Kelly said at the Airline Economics conference last week.

“Nobody wants to do consolidation just to get bigger to get bigger… but I would say that will be something that will happen over time.”

Rental pioneer Steven Udvar-Hazy, however, warned against deals for themselves.

“It will not change the total global need for aircraft. It’s just a redistribution of who supplies these planes to the airlines,” said the executive chairman of the American company Air Lease Corp.

“We would rather add more aircraft than more personnel and more bureaucracy… So we will continue to look at it and if there is a golden opportunity, we will seize it,” he said.

HIGHER RENTAL RATES, RATES

After a two-year absence during the coronavirus pandemic, delegates to Dublin conferences have trumpeted growing demand.

The speed of the resumption of air travel in the United States defied expectations, ignoring orange warnings ranging from higher interest rates to inflation, high oil prices and geopolitical risk.

For now, there is a shortage of key planes after the two-year grounding of Boeing’s 737 MAX, then COVID-19 and most recently the confiscation of hundreds of planes in Russia.

Even widebody markets are seeing heightened tension after years of oversupply, Kelly told analysts on Tuesday.

Lessors have warned airlines they are prepared to pass on higher financing costs, which for travelers means higher ticket prices.

“After many years, lessors have leveraged rental rates,” said Marjan Riggi, senior managing director of business aviation at Kroll Bond Rating Agency.

But it’s unclear if and how quickly inflation and falling disposable incomes could come back to bite the industry.

David Power, special adviser to Aergo Capital and former chairman of Orix Aviation, sees inflation as the hangover from years of central bank stimulus, but remains reasonably manageable.

“Growth is the cause; inflation is the effect. And the other reason for inflation is the massive liquidity injected into the system at very low interest rates,” he said at the Airline Economics event.

Others fear it could trigger a recession and cut traffic.

Leasing veteran Norman Liu, who built GECAS on the ruins of Ryan’s leasing empire in the 1990s, warned financiers of a return to inflation without growth and wondered how long the resumption of travel would last.

“While everyone talks about a great summer for travel, when you talk to people about fall…is travel no longer a novelty?” Liu told the Airfinance conference. Log.

“In the stagflation environment, what does this mean for the industry?” Liu added.

(Additional reporting by Padraic Halpin; Editing by Alexander Smith)

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