Growth trajectory resumes for Ireland’s aviation leasing industry

Around a quarter of the world’s commercial aircraft are owned by companies based in Ireland. This is a powerful indicator of the scale and importance of Ireland’s world leading aviation leasing industry.

“Irish aviation leasing remains a critical enabler of the global aviation industry and a highly valuable contributor to the Irish economy,” says Elizabeth Bowen, director of Aircraft Leasing Ireland (ALI) the Ibec group representing the aircraft leasing sector. According to Bowen the industry is responsible for 8,543 full-time equivalent jobs, an economic contribution of $975 million annually, and spending with Irish suppliers of $327 million each year.

To put the scale of the Irish industry in context it is estimated that over half of the global aviation fleet is leased, and Irish-based companies account for 50 per cent of the market. That amounts to several thousand aircraft with a total value of anything up to a trillion dollars.

“The number of commercial aircraft in the world is not gigantic,” says Dr Thomas Conlon, professor of finance at the UCD School of Business. “It’s around 30,000. In terms of monetary value a new narrowbody aircraft will cost anywhere between $60 million and $110 million. We don’t necessarily know what the different buyers pay because of the deals the bigger airlines and leasing companies get for ordering large numbers of aircraft.”

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There has been a slight dip in leasing’s market share of late, but this is likely to be temporary.

“During the pandemic the operating leasing share of the global fleet was reported to have topped 60 per cent, but that share has reduced to circa 55 per cent,” says Julie-Ann Sherry, aviation and international asset finance partner with Mason Hayes & Curran.

“The sustainability agenda, global macroeconomic factors and the geopolitical inflationary environment have eroded airline profitability despite their efforts to offset this by increasing yields,” she says. “If these challenges persist airlines’ cash flows and balance sheets will weaken. It is anticipated that the operating leasing share of the global fleet will increase to pandemic levels of circa 60 per cent.”

The Irish industry has emerged from the pandemic in a strong position. “There have been many positives for leasing over the last 12 months, the primary one being the continued strong bounce back in customer demand,” says Joe O’Mara, head of aviation finance with KPMG. “Global traffic is back above pre-Covid levels for the first time, driving a lot of demand for aircraft leasing groups.”

Turbulence continues, however. “The key challenges have been the volatile interest rate environment and the supply chain challenges faced by the two aircraft manufacturers Airbus and Boeing,” says O’Mara. “The scale of the pace of interest rate rises created difficulties in pricing transactions and raising capital. While the manufacturer issues have resulted in positive movements on aircraft values, which is generally positive for the lessors, it has had a negative impact on the trading environment and negatively impacted on the growth potential for some leasing groups.”

Leasing remains a very attractive option for the vast majority of airlines, as Conlon explains. “There are around 1,000 airlines in the world and only about 20 of them have an investment grade credit rating that allows them to borrow cheaply and gives them access to the capital markets on favourable terms,” he says. “For example, Ryanair doesn’t need to lease aircraft because it has its own cash and is able to borrow cheaply if it needs to. Leasing might be the cheaper option for those without an investment grade credit rating. It can also be advantageous for them to do a sale and leaseback deal where they buy the aircraft and immediately sell it to a leasing company.”

“The main attraction of leasing for airlines is that it enables the airline to operate aircraft without a huge capital investment,” Sherry adds. “This reduces the initial outlay of the airline, but it also places the long-term ownership risk with the lessor.”

There are other advantages, according to O’Mara. “Utilising the leasing channel provides airlines with significant flexibility in managing their fleet, can assist them in accessing newer technology aircraft, and can help them manage residual value risk.

“Running an airline is a very complicated business. You need to manage capacity in an environment where demand can fluctuate significantly, deal with significant labour challenges, and ensure you have an appropriate strategy for managing fuel costs, not to mention the ever-increasing regulatory framework they face. Given those issues it makes a lot of sense to outsource the provision of your aircraft to specialists. This is why we have consistently seen the percentage of leased aircraft grow over time.”

Looking to the future, Elizabeth Bowen sees the industry playing an increasingly important role in supporting the aviation sector in meeting its sustainability goals. “In 2024 lessors will continue to support the wider industry to achieve net zero carbon emissions by 2050. As owners of almost half the global fleet of aircraft, the leasing community has the experience and global influence necessary to move the needle and drive aviation towards a sustainable future. The ALI Sustainability Charter demonstrates our community’s leading position and commitment to supporting the wider aviation industry to achieve net zero carbon emissions by 2050.”

O’Mara believes the industry outlook is positive. “Over the last number of months KPMG has interviewed the CEOs of the major leasing groups, and the mood is cautiously optimistic. Demand continues to drive optimism, and while there are some concerns about a slowdown in the US and Europe there is an expectation that the recovery across Asia will continue strongly in 2024. The key headwinds are around the manufacturers, both regarding aircraft and engines, and their ability to deliver new aircraft to service that demand.”

The fundamentals are certainly healthy and provide a sound foundation for continued growth. “Air travel levels anticipated to exceed pre-pandemic level of 4.5 billion recorded in 2019,” Sherry points out. “The International Air Transport Association (IATA) expects that some 4.7 billion people will travel in 2024, an historic high. The IATA also predicts that airline industry operating profits will reach $49.3 billion in 2024 from $40.7 billion in 2023 and total revenues in 2024 are expected to grow by 7.6 per cent year-over-year to a record $964 billion.”