China has long had the demand for aircraft and the funds to finance them. It’s not surprising that a domestic leasing business has taken off. It’s a fast-growing business, still has some lessons to learn, but is learning these lessons very rapidly.
For example, the asset management side of leasing has not been very mature in China, and “most leasing companies did not focus on asset management until the last two years,” explains Johnny Lau, CEO of Hong Kong’s Astro Aircraft Leasing.
Lau says Chinese leasing companies started up around 2008, and their first priorities were growth. “They generally have banks as shareholders, and wanted to increase their size instead of profits. The object of most transactions was to get a bigger share of the bank’s balance sheet, so the leasing unit would have a more important say in the organization.”
Asset management is crucial to reducing risk and improving profitability of leasing, but the Chinese lessors simply were not focused on these considerations. As a result, in a few cases, lessors simply missed the timing of redelivery, and aircraft were stranded for a few months before they found a new home. “The leasing companies simply forgot they were coming off lease.” Lau recalls. “They forgot they had to get secondary leases and redeliver.”
“That taught some painful lessons,” Lau says. “It raised the eyebrows of the bosses.” As a result, Chinese lessors have put more resources into asset management. They know they have to have a good plan 18 months before a lease expires to fund a new home for each aircraft.
Lau, as both CEO of his own firm and chief consultant in Hong Kong for the Aviation Business Services of PwC, helps clients deal with asset management challenges. He sees plenty of leasing opportunities in the rapidly growing Chinese market, and a more mature Chinese leasing sector eager to exploit these opportunities.
Lau says the largest Chinese lessors are now venturing abroad as well, into international markets, including Latin America. He sees Chinese leasing firms as having grown more disciplined toward the documentation needed in global markets as well. “They are using good law firms and advisors, so they do not miss too many deals.”
Of course, the fastest-growing market remains China itself, with double-digit traffic growth in 2017. Airlines, except those in the troubled HNA Group, are buying aircraft and ordering 200 to 300 new planes a year.
Chinese lessors still do not lease out engines, although Lau says there may be some talk about this option. Most lessors want to stick with narrowbodies to limit risks, but this has squeezed profitability in narrowbody leasing. So more investors are at least looking at the widebody market. And the part-out business is also growing with the China Aircraft Leasing Group and several other firms active.