ISTAT ASIA Singapore was held on October 11-13, 2022
Lessor chiefs wary of potential for further consolidation
By Naomi Neoh, Air Transport Reporter Asia for Cirium Dashboard
Speaking on a lessor panel at ISTAT Asia in Singapore on 13 October, AviLease chief executive Ted O’Byrne believes the economics of the leasing business will continue to drive consolidation.
We’re a commoditized industry. The price of the lowest producer is set by the marginal cost, and in our business, it’s the price of the metal and money. That will continue to drive consolidation as we get to scale.
Ted O’Byrne
But the AviLease executive believes that further consolidation in the leasing sector could see entities becoming too large.
“I don’t want to criticize anyone, but I think [there comes a point where] there’s also diseconomies of scale. There’s a point where the ship becomes too big to maneuvre,” O’Byrne says.
Aviation Capital Group chief executive Thomas Baker also sees the need for scale in the leasing business driving the development of global scale players.
I do think that [at] this part of the curve where we want to be, there are economies of scale. But the second the curve turns negative at some point… where size collapses on itself. You’re too big and can’t be nimble.
Thomas Baker
“[I am] not saying that there is somebody at that size now, but at some point, you become too big to not fail,” he says.
Baker predicts the industry will see the development of a mix of key global scale players “that can compete for certain types of business” and “a large number of other players that will invest to service a specific need or asset that I helpful to [larger players]”.
“The industry will continue to grow the number of players who will stay about the same, but the shape of the industry will change,” he says.
CALC chief executive Mike Poon thinks consolidation will continue.
I think consolidation will still happen even after the pandemic. Passengers are coming back and airlines need the aircraft.
Mike Poon
“Size does matter, but bigger size doesn’t mean more muscle. If you can get the right muscle you need, you will be stronger. Everyone in the leasing industry understands we’re looking for the same asset – narrowbody aircraft like neo, Max or even C919s are the right product for passenger markets. We’re looking for global leasing diversification, and after the pandemic, people are looking for ESG.”
BOC Aviation chief executive Robert Martin disagrees, stating: “Consolidation’s a myth… I don’t understand why people keep talking about consolidation – it’s not happening.”
He points to figures indicating that the market share of the top leasing companies in the world from 2010 to the present “have all come down significantly”.
There are roughly 300 leasing companies in the marketplace today. That number has grown significantly over the last 15 years because as companies consolidate, one plus one never equals two.
Robert Martin
“What we’ve noticed is, one plus one generally equals one and a half. Because when they come together, there’s pressure to sell assets. And they sell them to newcomers entering the market.”
He observes that the AerCap-GECAS merger is not the first such major consolidation.
“Let’s remember AerCap took over the remnants of GPA, ILFC and then, GECAS. You add together all of those fleets and I guarantee you, it’s less than the number of aircraft within those companies when the two of them merged.
AerCap is now the third largest financial institution in the whole of Ireland. We need to think about this. There will be a point, if we go through another downturn, that’s when it becomes a challenge. [Whether you can] roll over your debt with the speed that you need and add to that the capex [capital expenditure] coming in as well.
Robert Martin
“These are risk factors that I’m sure they’ve thought about and can manage, but I think anyone who’s going into consolidation needs to think about this, particularly in today’s world where the regulators seem to be getting into the parts of our business than getting out,” Martin adds.
Further Reading:
ISTAT Asia Key Takeaways: APAC airlines eye used aircraft to meet short-term demand
ISTAT Asia Key Takeaways: Lessors see challenges in secondary market as recession looms
This article was originally published in Cirium Dashboard. Get the view from the top with Cirium Dashboard, to understand key drivers affecting the commercial air transport industry and proactively address changes in the market.
