Chinese competition tough on aircraft lessors

Dubai's DAE aims to place new order this year following integration of Dublin’s AWAS, but no new acquisitions

Dubai Aerospace Enterprise is eyeing A320 and 737 Max aircraft as part of its 400 plane order. Courtesy Dubai Aerospace Enterprise

The international aircraft leasing industry, which accounts for more than 40 per cent of the world’s commercial air fleet, is facing intense competition from China due to low interest rates, availability of capital and surging air travel demand in Asia, UAE lessors said.

“Capital has been coming in to this sector for the last 5-7 years, more recently from China, where there are around 54 leasing companies looking to grow,” Mounir Kuzbari, managing director of UAE-based Novus Aviation Capital, told journalists at an aviation financing roundtable event at the DIFC on Thursday.

“Probably you won’t have 54 leasing companies in China in 10 years, there will be some retrenchment, merging and consolidating, but the fundamentals are there.

“[The leasing industry involves] a mobile asset, growth industry, and travel demand is strong. Particularly in China and India, there is huge potential for aircraft leasing.”

Asia-Pacific has witnessed significant growth in travel demand in recent years, with traffic from the region climbing 10.8 per cent year-on-year in November 2017, the fastest growth of all world regions, according to the International Air Transport Association (IATA).

China is expected to overtake the US as the world’s largest aviation market by 2022, IATA predicts, and an increasing number of Chinese banks and lessors are entering the fray, including subsidiaries of Bank of China and China Minsheng Banking Corporation.

In total, Chinese capital is expected to snap up more than a third of the estimated $261 billion aircraft leasing market by 2022, according to industry data analyst FlightGlobal.

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Two-thirds of aircraft leased to clients by DAE Capital, the leasing arm of state-backed Dubai Aerospace Enterprise (DAE), are delivered to the Middle East or Asia, a proportion that is set to grow, DAE chief executive Firoz Tarapore told the same event in Dubai.

“The centre of gravity for aviation is moving eastwards. As airlines in the Middle East and Asia have proliferated, the value proposition for Asia travel has expanded and the number of aircraft being ordered are gravitating further east,” he said.

An increasing number of aircraft lessors have set up headquarters in Dubai, Singapore and Hong Kong to capitalise on such a growth in demand, whereas in the past the main leasing hubs were in the US and Ireland, he added.

In addition, Chinese appetite for leasing-related insurance services is “incredible – around 17 Chinese insurance companies [with aviation businesses] are part of our member base”, said Ali Asghar, COO of Elseco, a specialist risk management and insurance underwriting provider.

DAE Capital anticipates strong demand from Asia for its new asset management unit, Aircraft Investor Service (AIS), which launched last month and seeks to build a $5bn portfolio of assets in the coming years.

“We manage around $9bn on behalf of US and European clients today and if you ask me what that would look like in a couple of years’ time, it will include not only more of those, but also clients from points either here or east of here. There are a ton of investors in Asia who want to do this but don’t quite know how,” Mr Tarapore said.

This year would be a “relatively” straightforward year for DAE, Mr Tarapore predicted, as the company focuses on integrating Dublin-based AWAS into its operations following last year’s acquisition.

DAE hopes to place another aircraft order, but such a purchase is unlikely within the coming 12 months.

“Our focus is on making sure what we’ve bought is properly digested,” he said.