After huge jet orders, budget airlines eye rich seam of aircraft leasing

Tue Oct 21, 2014 5:25pm EDT
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By Anshuman Daga and Tim Hepher

SINGAPORE/PARIS (Reuters) - From Scandinavia to Southeast Asia, low-cost airlines have ordered record numbers of planes in recent years, redefining the jet industry. Now they plan to lease out scores of their new planes, re-ordering the aviation business all over again.

Between them, Indonesia's Lion Air, Malaysia's AirAsia (AIRA.KL: Quote) and Norwegian Air Shuttle (NWC.OL: Quote) have ordered more than 1,400 Airbus (AIR.PA: Quote) and Boeing (BA.N: Quote) jets, worth about $140 billion at current list prices. They're about to test the growing market for rented planes, competing with established finance firms that lease out aircraft to cash-strapped carriers from China to the United States.

Jet makers and the finance companies which dominate aircraft leasing question whether budget airlines have the know-how to succeed, and some in the industry wonder whether they have simply ordered more planes than they need. But the low-cost carriers' sights are trained on new revenue streams, and net profit margins of about 20 percent enjoyed by global aircraft lessors - well above the airline industry average.

"It's the leasing companies that have made money in the last 10 years, not the airlines," Norwegian Air Shuttle's chief executive Bjorn Kjos told Reuters in a recent interview, referring to lessors who buy 30-40 percent of Airbus and Boeing planes. "They have a fantastic bottom line. They earn all the money the airlines should have earned."

For would-be lessor budget carriers, whose orders have boosted aircraft production and secured thousands of jobs, renting out planes provides both insurance against a downturn and diversified revenues. Though such business remains in its infancy, it could also help them hedge currency risk, bringing in revenue in dollars that can also be used to buy jets.

With over 900 jets worth $96 billion at current list prices on order or already delivered between them, Lion Air and Norwegian Air Shuttle in particular plan to become active in leasing. The trend has fueled concern that scores of jets could boomerang back onto the market, undercutting plane values and disrupting the global industry.

To some, such moves confirm suspicions that too many planes have been sold to airlines that don't need them as Airbus and Boeing jostle for market share.

"When people realize demand may not be as believed, things change. Looking for alternative things to do is one of the possible indicators of aircraft over-ordering," said Adam Pilarski, senior vice president at U.S. consultancy Avitas.   Continued...

An AirAsia plane is seen on the runway at Kuala Lumpur International Airport August 19, 2014. . REUTERS/Olivia Harris