September 10, 2014 / 9:14 PM / 3 years ago

Li Ka-shing sets new course for $200 billion aircraft leasing market

5 Min Read

Hong Kong tycoon Li Ka-shing speaks at the "Li Ka-shing Centre for Health Information and Discovery" at Oxford University in Oxford, southern England, in this May 3, 2013 file photo.Oli Scarff

SINGAPORE (Reuters) - Asia's richest man, Li Ka-shing, aims to buy his way into the global aircraft leasing business as his flagship investment firm holds talks with lessors on building a portfolio of planes, people with direct knowledge of the matter said.

In a potential series of deals, the Hong Kong tycoon's Cheung Kong (Holdings) Ltd (0001.HK) is in discussions to form a joint venture with Mitsubishi Corp's (8058.T) MC Aviation Partners leasing arm, one executive said. Li's firm is already bidding for a $5 billion fleet of 100 planes that lessor AWAS Aviation Capital Ltd has put up for sale.

The move by Li, who runs a global business spanning everything from property to energy, is part of a strategy to recraft the group's investments outside Hong Kong, targeting stable returns in a fast-growing industry. As global air travel booms, carriers are opting to lease new planes rather than buying them, saving on huge capital outlays upfront.

"They (Cheung Kong) have their fingers in a lot of pies at the same time," said one executive, who declined to be identified as the information is not public. "They have huge ambitions and are looking to become a top global lessor."

Mitsubishi Corp and MC Aviation declined to comment. Cheung Kong didn't respond to requests for comment from Reuters.

Analysts say Li will be looking to take full advantage of his group's financial muscle to make a success of the new strategy. However, as interest in the aircraft leasing sector grows, that approach may push target valuations higher.

"Obviously, buying a large fleet would sort of indicate that they are trying to get big overnight. But I'm not really sure this is the best time to get into the market," said Ilya Ivashkov, a New York-based senior director at Fitch Ratings.

"It seems like things are definitely getting a little bit overheated, especially in some pockets of the market," he said.

Industry publication Flightglobal estimates the top 50 lessors have a total fleet of more than 7,500 planes valued at nearly $200 billion. Dominating the pack are GECAS, a unit of General Electric Co. (GE.N), and International Lease Finance Corp, now part of AerCap (AER.N), the world's two biggest lessors.

But lessors backed by Chinese state-owned banks are also growing as the world's second-biggest economy provides much of the potential growth in demand for aircraft. Plane maker Boeing Co (BA.N) estimates China alone will need over 6,000 new aircraft over the next 20 years.

Financial Clout

Li's companies have raised about $9 billion just this year by selling stakes in Hong Kong firms. The group is on the hunt for stable investment options in well-regulated markets outside its home market, where expansion opportunities are becoming limited.

The venture with MC Aviation, which owns and manages about 100 mostly-narrow body jets, will give Cheung Kong access to a pool of about 20 aircraft. It will help the firm tap into the management expertise of Mitsubishi's fully-owned Tokyo subsidiary, which was set up in 2008 with over 20 years of experience in aircraft leasing.

Details of the venture are still being worked out and an announcement is expected in a couple of weeks, one executive said. For Mitsubishi, the transaction will bring some returns on its investment in MC Aviation, which could also strike other deals with Cheung Kong as the new entrant grows its leasing business, the executive said.

The plans for MC Aviation and AWAS deals aren't the only aircraft leasing avenues Li is exploring. Cheung Kong has also approached large lessors to buy about 20 planes in a single transaction, executives said.

Aircraft leases offer fixed incomes for long periods and are often seen as safe transactions. Priced in U.S. dollars, aircraft are comparatively easy to re-lease to different geographies.

Besides AWAS, another Dublin-based aircraft lessor, Avolon, has attracted Asian interest. China's sovereign wealth fund, China Investment Corp, has teamed up with state-owned aerospace and defense company, Aviation Industry Corporation of China, in its bid to buy Avolon, Reuters previously reported.

Over the past few years, access to cheap funding has driven expansion plans of the leasing arms of Asian groups, including Bank of China (601988.SS), Industrial and Commercial Bank of China (601398.SS) and Sumitomo Mitsui Financial Group Inc (8316.T).

"The key thing that drives stability in our sector is the strength of the balance sheet in the leasing companies and we have seen some consolidation over the last year," Robert Martin, chief executive of Asia's No. 2 lessor BOC Aviation, said in a recent interview.

Additional reporting by Timothy Kelly in TOKYO and Donny Kwok in HONG KONG; Editing by Kenneth Maxwell

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