“to examine the rise of “new age” aviation lessors and the
TRANSCRIPT
“To examine the rise of “new age” aviation lessors and the factors which shall impact their
future success and opportunities in the aircraft leasing sector”
Submitted By: Darragh Patrick McEniry (10368297)
“This dissertation is submitted in partial fulfilment of the
requirements for the Degree of Master of Business Studies,
Waterford Institute of Technology”
Research Supervisor: Mary Cooke
Submitted to: Waterford Institute of Technology
22nd
August 2016
ii
ABSTRACT
“If you want to be a Millionaire, start with a billion dollars and launch a new airline.”
Richard Branson
Aircraft financiers certainly play their part in the above quote. Aircraft leasing has become a
multi-billion dollar industry, serving clients globally. Having developed from humble
beginnings in Shannon, Co. Clare by Dr. Tony Ryan, Ireland has become a genuine leader in
this field. Recent economic issues globally have not dampened the impressive growth of this
industry. However, the sector is not without its issues and significant challenges may stem
this growth in the medium term. Growing competition lessors emanating from emerging
geography are set to challenge legacy lessors, yet little is known about these new entrants.
This study looks to bridge this knowledge gap by engaging industry experts to act as analysts
of these new age lessors and provide an industry led perspective into the challenges set to
face these new players.
A qualitative research approach has been adopted to investigate the research question and
objectives. This consists of nine semi-structured interviews with a combination of industry
stakeholders with vast experience with the leasing sector, thus providing a wide spectrum of
perspectives. These interviews create the foundation of this study to asses these "new age
lessors" prospects by utilising their experience under a broad range of standpoints. Key
weaknesses and business model flaws are identified and discussed. In addition, the impact of
these entrants is developed by those involved within it and future issues are set out.
The study reveals that new age lessors emanating from the Chinese mainland have developed
under government backing and have benefitted from economic issues in the west to expedite
their rise. The findings serve to highlight issues with the business approaches employed at
present, which limit the potential success these new competitors may enjoy, despite their
strong financial clout. Key modifications are provided, in addition to a consensus regarding
the great potential China and their lessors currently possess to become major players.
Unsurprisingly, the future of these lessors and China's economy are deemed intertwined and
so the greatest risk to the development of their leasing industry comes from within. A
roadmap is provided for lessors to alter their existing approach and offset the key risks they
face, in order to successfully challenge the legacy players of the West.
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ACKNOWLEDGEMENTS
There are a number of people I would like to acknowledge and give thanks to, due to their
assistance in relation to this completed dissertation and throughout this academic year.
Firstly, I wish to thank my mother for the sacrifices she has made to help me get to this stage
of my education and for all she has done for me to date. It is very much appreciated and will
not be forgotten. I wish to thank my father for his unwavering confidence and faith in me.
Secondly, I wish to thank my supervisor, Ms. Mary Cooke, for her seemingly unlimited
patience and help with my queries, in addition to her time and efforts throughout the process.
Your constant encouragement was crucial to the completion of this study. I would also like to
thank Dr. Sheila O’Donohoe for her support and guidance throughout the year. Both are a
credit to Waterford Institute of Technology and I am very grateful for their assistance.
Thirdly, I wish to thank my colleagues Darren, John and Liam for their constant humour and
help throughout the year. Our frequent trips for coffees, rolls and dome dinners ensured some
level of sanity was regained when we needed it most and gaining three good friends was an
added bonus to the year. I also wish to thank each member of the MBS programme who has
made the journey so worthwhile and interesting throughout the last twelve months. It was a
pleasure. Last but not least, I must thank Cliodhna for her constant support, advice and
patience throughout the year. You made the year that little bit easier and I am very grateful.
Finally, I wish to acknowledge and thank each participant of my study. Your time and
expertise enabled the successful completion of this study and I appreciate each participants
input and help. Special thanks are reserved for Mr. Gerry Power and Mr. Jack O’ Dwyer, who
consistently and selflessly went above and beyond to aide my research and also provided
guidance towards future career decisions.
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ETHICAL DECLARATION
I declare that this dissertation is wholly my own work except where I have made
explicit reference to the work of others. I have read the Structured Masters’
Programmes Research Policy, Procedures and Guidelines and hereby declare that this
dissertation is in line with these requirements. I have discussed, agreed and complied
with whatever confidentiality or anonymity terms of reference were deemed
appropriate by those participating in the research and dealt appropriately with any
other ethical matters arising.
I have uploaded the entire dissertation as one file to Turnitin® in Moodle®, examined
my ‘Originality Report’ by viewing the detail behind the overall ‘Similarity Index’,
and have addressed any matches that exceed 3%. I have made every effort to minimise
my overall ‘Similarity Index’ score and the number of matches occurring.
Darragh McEniry Date
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“The Rise of the New Age
Lessor; A flight towards
success or failure?”
Darragh McEniry
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TABLE OF CONTENTS
Contents: ABSTRACT ....................................................................................................................... ii
ACKNOWLEDGEMENTS ............................................................................................. iii
ETHICAL DECLARATION ............................................................................................ iv
TABLE OF CONTENTS .................................................................................................. vi
LIST OF FIGURES .......................................................................................................... ix
LIST OF TABLES ............................................................................................................. x
LIST OF ABBREVIATIONS ........................................................................................... xi
INTRODUCTION ............................................................................................................. 1
1. Introduction ..................................................................................................................... 1
1.1. Purpose of the study .................................................................................................... 1
1.2. Justification of the study ............................................................................................. 1
1.3. Research Question and Objectives of the Study ......................................................... 2
1.4. Research Methodology ................................................................................................ 2
1.5. Method of Study .......................................................................................................... 3
1.6. Value of the Study ....................................................................................................... 3
1.7. Report Outline ............................................................................................................. 4
1.8. Conclusion ................................................................................................................... 5
LITERATURE REVIEW .................................................................................................. 7
2. Introduction ..................................................................................................................... 7
2.1. Aviation Finance in 2016 ............................................................................................ 7
2.2. Lessors ......................................................................................................................... 8
2.3. Aviation Leasing Characteristics .............................................................................. 12
2.4. Ireland and Aviation Leasing .................................................................................... 15
2.5. Aviation Finance as a Global Business ..................................................................... 16
2.6. Leasing’s Value to Airlines ....................................................................................... 18
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2.7. Traditional Funding Sources ..................................................................................... 20
2.8. Recent Industry Developments: The Rise of the “New Age Lessor” ....................... 22
2.9. Conclusion ................................................................................................................. 25
RESEARCH METHODOLOGY..................................................................................... 25
3. Introduction ................................................................................................................... 25
3.1. Research Problem Identification ............................................................................... 25
3.2. The Research Question.............................................................................................. 25
3.3. Research Objectives .................................................................................................. 26
3.4. Research Method Considerations .............................................................................. 27
3.5. Research Process ....................................................................................................... 28
3.6. Research Design ........................................................................................................ 29
3.7. Research Philosophies Considered............................................................................ 30
3.8. Research Philosophy Selection and Rationale .......................................................... 31
3.9. Research Method Selection ....................................................................................... 31
3.10. Justification of Semi-Structured Interviews .......................................................... 31
3.11. Sample and Selection Criteria ............................................................................... 32
3.12. Interview Schedule and Participant data ............................................................... 32
3.13. Interviews .............................................................................................................. 33
3.14. Data Analysis Procedures Employed .................................................................... 35
3.15. Ethical Considerations ........................................................................................... 36
3.16. Study Reliability Issues ......................................................................................... 37
3.17. Conclusion ............................................................................................................. 37
FINDINGS ....................................................................................................................... 37
4. Introduction ................................................................................................................... 37
4.1. Growth Factors .......................................................................................................... 38
4.2. Prospects.................................................................................................................... 39
4.3. Leasing Attitudes and Outlooks ................................................................................ 40
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4.4. Leasing Industry Experience ..................................................................................... 42
4.5. Aircraft Remarketing................................................................................................. 42
4.6. Transition Costs and the Price of Remarketing ......................................................... 43
4.7. Chinese Lessor Portfolio Risk ................................................................................... 44
4.8. Industry Impacts ........................................................................................................ 46
4.9. Chinese Lessors and Economic Factors .................................................................... 47
4.10. Conclusion ............................................................................................................. 49
DISCUSSION .................................................................................................................. 50
5. Introduction ................................................................................................................... 50
5.1. Objective 1 ................................................................................................................ 50
5.2. Objective 2 ................................................................................................................ 54
5.3. Objective 3 ................................................................................................................ 55
5.4. Conclusions ............................................................................................................... 56
CONCLUSION ................................................................................................................ 57
6. Introduction ................................................................................................................... 57
6.1. Research Question and Objectives of the Study ....................................................... 57
6.2. Summary of Key Findings ........................................................................................ 57
6.3. Study Limitations ...................................................................................................... 58
6.4. Author Recommendations ......................................................................................... 59
6.5. Recommendations for Future Research .................................................................... 60
6.6. Concluding Remarks ................................................................................................. 60
7. Bibliography ................................................................................................................. xii
Appendix A .......................................................................................................................... xii
Appendix B .......................................................................................................................... xv
Appendix C ......................................................................................................................... xvi
Appendix D ........................................................................................................................ xvii
Appendix E ...................................................................................................................... xviii
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Word count: 16581
LIST OF FIGURES
Figure 1: PWC Aircraft Leasing Report - Challenges 2011(Source: PWC) ............................. 8
Figure 2: Commercial Aircraft Order Back Log Development 1990-2015 (Source: Ascend
Fleet, January 2016) ................................................................................................................... 8
Figure 3: Global Distribution of Leased Aircraft 2016 (Source AtlasData) ............................ 10
Figure 4: Lessor Share of Western Built Aircraft 2016 (Source: PWC Report, 2016) ........... 11
Figure 5: Lessor Yield and Finance Cost 2014 (Source: Annual Reports and Airline Analyst
2014) ........................................................................................................................................ 13
Figure 6: Selection of Largest Global Lessors 2016 (Source: Wall Street Journal) ................ 15
Figure 7: Historical Growth in Leased Aircraft Fleets ............................................................ 17
Figure 8: Global Fleet Forecast and Leasing Penetration (Source: PWC) .............................. 18
Figure 9: Aircraft Funding Comparison 2013 vs. 2014 ........................................................... 21
Figure 10: Global Distribution of Aircraft Orders 2014 .......................................................... 22
Figure 11: Selected Lessor Fleet value Comparison 2016 (PWC, 2015) ................................ 22
Figure 12: Total Aircraft Assets Held in China 2008-2014 (Source: CAAC) ......................... 23
Figure 13: The Research Onion (Saunders et al 2007, p.102) ................................................. 29
Figure 14: Aircraft with Ceased Operators - Operating Lessor Managed 2000-2015 (Woods,
citing Flightglobal)................................................................................................................... 43
Figure 15: The Leasing Cycle (Source: Author generated based on participant data) ............ 44
Figure 16: Operating Lessor Fleet Share - By Region (Halliday, citing Flightglobal)............ 45
Figure 17: Historical 737 Classic, 737NG and A320 Market Values (Participant Provided
Estimates) ................................................................................................................................. 46
Figure 18: Chinese GDP vs. the World (Source: Donovan, citing World Bank) .................... 48
Figure 19: Aviation Growth in China vs. the World (Source: Woods, citing CAAC) ............ 49
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LIST OF TABLES
Table 1: Comparison of Research Approaches (Hennink et al, 2011) .................................... 28
Table 2: Interview Schedule .................................................................................................... 33
Table 3: Advantages and Disadvantages of Interview Method (Adapted from Denscombe,
2007, 202) ................................................................................................................................ 34
Table 4: Main Stages of Qualitative Data Analysis Employed (Source: Denscombe et al, 2007
p. 252) ...................................................................................................................................... 36
Table 5: Interviewee Details and Key Information.................................................................. 37
Table 6: Chinese State Backed Airlines ................................................................................... 39
Table 7: Expected Chinese Aircraft Demand 2012-2028 ((DJB, SG and Woods, citing PWC
2012 Figures) ........................................................................................................................... 41
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LIST OF ABBREVIATIONS
ATA – Air Transport Authority
AWAS – Ansett Worldwide Aviation Services
BDO – Binder Dijiker Otte and Co.
CAGR – Compounded Annual Growth Rate
CEO – Current Engine Option
CMV – Current Market Value
EIS – Entry into Service
FAA – Federal Aviation Authority
GECAS – General Electric Commercial Aviation Services
IATA – International Air Traffic Association
ISE – Irish Stock Exchange
KPMG - Klynveld Peat Marwick Goerdeler
LCC – Low Cost Carrier
NBA – Narrow Body Aircraft
NEO – New Engine Option
NG – New Generation
OEM – Original Equipment Manufacturer
PE – Private Equity
POA – Plan of Action
PWC – Price Waterhouse Cooper
ROI - Return on Investment
RPKG – Revenue per Passenger Kilometre Growth
WBA – Wide Body Aircraft
CHAPTER ONE
INTRODUCTION
1
Chapter One
INTRODUCTION
1. Introduction
In this chapter, the purpose of the study will be defined and a justification provided. The main
objectives of this report is outlined and the method of study to be used shall be illustrated.
This chapter’s aim is to outline the rationale behind the study, its value and illustrate the
research methodology to be utilised.
1.1. Purpose of the study
The purpose of this study is to examine the research question and to highlight that the
financing needs of the aviation leasing industry has created a unique scenario, allowing the
rise of new age lessors from the Far East to be accelerated recently. In the coming years, the
injection of fresh capital from emerging geography will be welcomed, as it will ensure the
sustained growth of the industry in order to meet client demand. However, the rapid influx of
investment from non-traditional sources and their accompanying aggressive expansion plans
leaves questions about the long term sustainability of this approach by these new comers.
1.2. Justification of the study
A lack of recent academic investigation of this area highlighted the fact that further research
was necessary in order to bridge this knowledge gap. Little is known about the firms involved
other than their financial clout and countries of origin. Secondly, aviation financing is highly
topical, with its frequent appearance in Irish media publications. This is likely to remain the
case, as the demand for financing deliveries of new aircraft peaks when long term financing
becomes unattractive for many traditional financiers and thus allowing new players in.
On the one hand, record order books of aircraft manufacturers reflect a period of strong
orders buoyed by strong demand in the emerging markets. On the other, there are a number of
issues in the markets which may make these orders more difficult to finance, and potentially,
more expensive. The European Sovereign debt crisis, and increased difficulty of accessing
US dollar funding has raised funding pressure. This “perfect storm” is unusual. A number of
predominantly European banks who have historically played a key role are retracting from
the market. This is causing tensions in the funding market, which have been heightened by
the ongoing bank deleveraging process, which in part reflects the impact of new regulations
such as Basel III. Conversely, in tough economic times and a low interest rate environment
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attractive yields are harder to find. As a result, investors have sought alternative locations for
funds and some have chosen aircraft financing industry for new opportunities. Given that
Ireland has become a major player, as a prime location for this industry, such a study would
be both justified and very relevant to modern commerce in Ireland and abroad.
The author of this study would also cite career aspirations and a strong personal interest in
this field as key reasons behind the decision to complete this study. With this, one can
increase their personal knowledge of the area and complete a study from which others can
learn in the future.
1.3. Research Question and Objectives of the Study
The research question specific to this dissertation can be stated as follows:
“To examine the rise of Chinese aviation lessors and the factors which shall impact their
future success and opportunities in the aircraft leasing sector”
The objectives of this report are:
To examine the nature of the suitability of business models currently employed by
fledging lessors in detail and explore the challenges to their future success
To illustrate the developments which have aided the rise of the new age lessor and
resulting industry impact
To identify the potential impact of Chinese economic issues on the development and
abilities these new age lessors to compete effectively in the future
1.4. Research Methodology
In order to properly research this topic, a number of data collection methods were considered.
As the research is both qualitative and exploratory in nature, the author has deemed
interviews to be the most appropriate primary data collection method. According to
Liamputtong (2010), it is believed that authors research should influence the research model
employed and not the opposite so that the author shall fully investigate a topic. The
interviews were semi-structured in nature and were conducted in person with key personnel
of significant experience and expertise in the area of aviation finance globally. The author has
used a sample of nine aviation finance industry professionals from both Ireland and abroad to
gather data on this topic.
3
1.5. Method of Study
This study shall be divided into two main sections. The literature review will account for the
first section and will serve to explore the existing research relating to the research topic. Prior
to the current study, a review of secondary research will be carried out in order to fully
understand this expanding sector. This allows a more accurate picture of the topic to be
created and ensures this author’s perspective accurately depicts the current status of aircraft
leasing.
The second section of this report shall consist of primary research into the research problem,
which this author has compiled personally. In order to investigate the research question and
objectives, several interviews were completed with industry professionals. Each interview
served to further the author’s knowledge of this sector. The different fields of expertise of
each respondent provided diverse viewpoints on the industry. The interview process consisted
of prepared questions for each respondent and ensured all answers could be developed and
clarified if necessary, so the author could gain a clear insight into their opinions. The data
collected from each expert was then compared to the data compiled as part of the literature
review. The process served to formulate a discussion and a final conclusion.
1.6. Value of the Study
This study may add value to and serve to assist many individuals and organisations such as:
Practitioner
The findings illustrated in this report will serve to provide the Aviation Finance sector with
relevant and up to date information on the health of their industry after several years of
substantial expansion and growth.
Given the forecasted funding issues for this sector in the medium and long term, the findings
of this report will serve to identify new potential sources of capital emanating from the Far
East and the opportunities available in the region.
The findings may serve as a tool for new age lessors to have their current approach to leasing
critiqued by industry experts and to use this knowledge to ensure sustainable success.
The findings of this report will serve to highlight an opportunity to legacy lessors to learn
more about their new rivals in Asia and to gauge the correct reaction required to keep their
current, respective market footholds.
4
Academic
The findings may be used to contribute to the existing research and understanding of this
global sector in relation to its development and the future investment partners which may
become involved in the industry.
In addition, existing knowledge may be expanded to incorporate the ongoing development of
Asian backed entities as significant players in this industry and to understand their business
offering and techniques more clearly from a neutral standpoint
Investor
An expanded knowledge of this asset class and its merits as a future investment shall serve to
increase its use amongst many investors and allow this asset class to develop as a more
common place investment location for long term investment capital globally.
1.7. Report Outline
Chapter One provides the reader with an introduction to this topic and the rationale behind
commencing this study which has guided the author and shaped the study.
Chapter Two provides an in depth analysis of the available literation and theories which are
applicable to the area of investigation. The purpose of this literature review is to educate the
reader as to the existing research related to this field and provide a background to the analysis
which this author has carried out.
Chapter Three outlines the research methodology which has been adopted for the purposes of
carrying out this investigation. Justification for these decisions shall be provided, in addition
to a frank discussion as to the possible advantages and disadvantages of the methods chosen.
The author shall also outline the limitations of this study and the participants involved.
Chapter Four presents the findings of the study stemming from the collected primary data.
These findings are presented in a manner mirroring the aforementioned research objectives,
using several relevant key headings to provide structure to the illustration of results.
Chapter Five serves to provide a forum for the discussion of the relevant literature analysed
by the author and the findings of his data collection endeavours, whereby definitive answers
to the relevant research objectives and overall research question are provided.
Chapter Six consists of a summation of the study itself, in addition to relevant final comments
and recommendations based on the findings of this study and potential areas of future study.
5
1.8. Conclusion
Ireland is a world leader in relation to all forms of aviation finance. With this, an up to date
status report on this industry appears apt and given its rapid expansion, an in depth analysis
of these new lessors operating abroad in relation to their strength and prospects appears apt.
This study shall be of benefit of all those interested in Irish commerce, global investment
options and especially those with a keen interest in aviation financing industry and its future
direction over the next five to ten years.
CHAPTER TWO
LITERATURE REVIEW
Chapter Two
LITERATURE REVIEW
2. Introduction
Aircraft finance has become a fashionable destination for investors of late, with many
emanating from Asia. However, little investigation into these new entities has occurred. This
author intends to explore the dramatic rise of the “new age lessor”. Specifically the
emergence of strongly backed Chinese lessors, hungry for portfolio expansion and market
share thus posing strong potential competition for legacy players
2.1. Aviation Finance in 2016
Aviation financing is in vogue at present, “as the demand for financing deliveries of new
aircraft peaks at a time when long term financing becomes unattractive for some of the
traditional banks” (PWC 2015, P. 2). Firstly, record order books of aircraft manufacturers
reflect “strong orders buoyed by both new aircraft types and strong demand in the emerging
markets” (Ascend, 2012, P. 4). There are a number of issues in the aircraft finance market
which “make these orders more difficult to finance, and potentially, more expensive, such as
limited access to dollar backed funds” (Deutsch Bank, 2012, P.16). Several European
financial houses who enjoyed a long run affinity with leasing have exited. It has resulted in
issues in the funding market and has been exacerbated “by the ongoing bank deleveraging
process, which in part reflects the impact of new regulations such as Basel III” (PWC, 2015,
P. 5). Considering the economic issues experienced from 2008-2011, it is suggested that
issues in the West have allowed capital rich lessors from the Far East to emerge more easily
than many thought would be possible (Wall Street Journal, July 2016). PWC (2011) provide
the challenges lessors face:
8
Figure 1: PWC Aircraft Leasing Report - Challenges 2011(Source: PWC, 2011.P.14)
Figure 2: Commercial Aircraft Order Back Log Development 1990-2015 (Source: Ascend Fleet, January 2016)
2.2. Lessors
Habib and Johnsen (1999, P.5) outline the leasing sector as follows: “Lessors appear to have
invested substantial resources through the 1980s and early 1990s to establish general
knowledge of secondary market redeployment opportunities for used aircraft. They also
appear to have invested, ex ante, to establish specific knowledge of redeployment
opportunities for particular used aircraft.” In its Annual Report (2003, P.iv), ILFC, amongst
the first leasing firms established, outlined its business offering as follows: “International
9
Lease Finance Corporation is primarily engaged in the acquisition of new commercial jet
aircraft and the leasing of those aircraft to airlines throughout the world. In addition to its
leasing activity, the Company regularly sells aircraft from its leased aircraft fleet to third
party lessors and airlines” (ILFC, 2003). AWAS, another legacy lessor, states: “At AWAS we
pride ourselves in our ability to optimise return on investment through the effective
management and remarketing of our assets” (AWAS, 2009, P.v).
Leasing companies comprise of “technical, legal and marketing teams that hold extensive
knowledge of this niche market, study carrier capacity requirements, and monitor the use of
their aircraft by clients” (Gavazza 2010, P.10). These “monitoring” costs, as Eisfeldt and
Rampini (2009) and Rampini and Viswanathan (2010) highlight, imply that per-period
charges are larger on leased assets versus owned aircraft. Furthermore, Gavazza (2010), using
aircraft prices and aircraft lease charges, argues that lease rates are 20% higher than implicit
rental rates. This leaves airlines facing a decision between leasing’s higher per-period costs
and ownership’s higher transaction charges. Barrington (1998, P. 17) notes: “The airlines
that use operating leases consider that the flexibility such leases provide makes up for the
fact that the cash costs of the leases can be greater than the cost of acquiring the same
aircraft through ownership.” Morrell (2001, P. 17) lists “no aircraft trading experience
needed” as an advantage of airlines leasing these assets, and “a higher cost than, say, debt
finance for purchase” as a drawback.
In the event of default on a lease prior to bankruptcy, a lessor can seize the aircraft more
easily than a secured lender can in both U.S. and non-U.S. bankruptcies (Krishnan and
Moyer, 1994; Habib and Johnsen, 1999). In U.S.-based Chapter 7 bankruptcies and in most
non-U.S. bankruptcies, a lessor can repossess the asset more rapidly than a debt holder can
(Littlejohns and McGairl, 1998). Thus, since defaults and bankruptcies are frequent in the
airline industry, leasing enhances the efficiency of redeployment by exploiting its stronger
ability to repossess assets through increased client monitoring.
Eisfeldt and Rampini (2009) argue that leasing is particularly attractive to operators who lack
financial strength or have cash flow issues. The clients to lessors are often in their infancy,
display volatile capacity requirements, and are considered to be a high risk customer base due
to increased default likelihood, according to the same authors. Hence, lessors frequently get
aircraft returned, which leads them to further specialize in redeployment and remarketing
(Littlejohns and McGairl, 1998).
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Shleifer and Vishny (1992, P.10) contend that “the institution of airline leasing seems to be
designed partly to avoid fire sales of assets.” Due to the airline industry being regarded as
highly cyclical, both airline profits and aircraft values carry large financial risk, and they are
almost perfectly correlated (Gavazza 2010). Leasing allows airlines to offset an element of
the asset-ownership risk to operating lessors. The price discounts estimated by Pulvino
(1998) show that even the lowered risk - ownership ratio displayed can cause issues. Lessors
are assumed to offset this risk in a better manner through their knowledge of global markets,
their scale economies, and their diversification of aircraft portfolios types operating in diverse
geographic locations (PWC, 2015). Moreover, the largest lessors (e.g. GECAS) belong to
financial conglomerates, which allows them to diversify the aggregate risk of aircraft
ownership and to have a lower cost of funds, thanks to a higher credit rating (Clarke, 2007).
Figure 3: Global Distribution of Leased Aircraft 2016 (Source AtlasData)
Lessors can infiltrate this sector through three main avenues; (1) they acquire asserts directly
from an OEM; (2) they purchase assets from carriers and lease them back (so called sale-and-
leaseback transactions); and (3) they purchases aircraft from other competitors who have
these assets on lease to clients (Gilligan, 2004). By adopting this approach, a lessor can
develop a portfolio of assets that can be scaled up or down, which depends on the economics
of aircraft ownership and firm strategies (Clarke, 2007). The maturity of this portfolio of
assets is under constant review, due to age sensitive nature of the assets and the value which
they may command on the open market. Gilligan (2004, P.46) examined the relationship
between leasing percentage and aircraft age and observed “that the leasing percentage is
rather constant in the data over the age of aircraft”. Gavazza (2010) contributes that leased
assets are almost one and a half years the junior of airline owned portfolios.
11
Lessors have differing business models. Some focus on new or near new assets with a
preference towards short-haul aircraft types (e.g. Boeing B737 or Airbus A320) (Francis,
Schofield, & Flottau, 2011). Others have portfolios that are older, as they deem value exists
in aircraft that are deemed mid-life. Leasing companies have differing capital structures.
Some are part of large global financial corporations. Others are standalone entities backed by
private equity investors. In recent times, we have also seen” the use of state owned finance
houses doing the will of the government towards infiltrating this sector and providing cheap
finance to domestic leasing entities in their infancy” (Anselmo & Jackman, 2012, P. 31).
Figure 4: Lessor Share of Western Built Aircraft 2016 (Source: PWC Report, 2016)
Gritta and Lippman (2010) provide the history of aircraft leasing since 1960s. Previously,
many airlines utilised the finance lease as an alternative source of funding to gain aircraft.
This gave a major advantage over purchasing the asset outright, i.e. since it was off-balance
sheet financing, the resulting obligations under the lease appeared in the footnotes alone of
the airline balance sheets. Short-term lease agreements were deeply unpopular at the time.
The situation has been altered over the last thirty five years. Since 1976, finance lease are
required to be reported as both a leasehold asset and a long-term liability (Gritta and
Lippman, 2010). As a result, airlines completely altered their approach to aircraft finance.
Short-term operating leases became in vogue, as they are not reported on companies’ balance
sheets. By strategically violating the criteria for capital leases, the airlines once again pushed
the leases off the balance sheet, thus surging the popularity of leasing (Morell, 2001).
12
Gavazza (2010) examined how the liquidity of an aircraft, as an asset, affects whether or not
carriers lease the aircraft they operate, the optimal maturity of lease contracts and the mark-
ups of lease rates over aircraft prices. The results suggest that more-liquid assets are more
likely to be leased, due to their shorter operating leases, longer capital leases; and the fact that
they call for lower mark-ups of lease rates.
2.3. Aviation Leasing Characteristics
Aviation finance is capital-intensive, given its incredible start-up costs. For example, in 2011,
a Boeing 787 Dreamliner costs between US$185–218 million and an Airbus A380-800 starts
at US$375 million per aircraft (Cameron & Serena, 2011, P. 23). Financial institutions now
benefit from the maturity of this asset market, which has led to “a standardisation of the
documentation for the leasing and financing of aircraft” (Deutsch Bank, 2012, P.12). Given
current economic issues, balance sheet commitments from large strategic and traditional
financiers require substitution, and “private equity and hedge funds stand ready to fill this
gap” (Millbank, 2012, P.56). The emerging markets in Asia, the Middle East, Africa and
Latin America only add to the desire for new funding sources to fund such assets (PWC,
2015).
International Accounting Standard (IAS) 17 (2010, 23) defines that “a lease is an agreement
whereby the lessor conveys to the lessee, in return for a payment or series of payments, the
right to use an asset for an agreed period of time”. Leasing agreements are placed into two
main sections, namely a finance lease and an operating lease. Finance lease is defined by the
IAS 17 (201) as “a lease that transfers substantially all the risks and rewards incidental to
ownership of an asset. Title may or may not eventually be transferred”. The related risk
ownership and costs include “accountability for loss, wear and tear, and obsolescence,
whereas ownership benefits encompasses the right of use, gains from asset value appreciation
and possession of the property title” (IAS 2010). Conversely, given that the lessor keeps
ownership, “operating leases serve to divide the legal ownership from its economic use, and
so the asset is an inherent form of collateral in that type of contracts” (Graham, Lemmon,
and Schallheim, 1998; Sharpe and Nguyen, 1995, P. 42).
An additional difference between these forms of leasing is based on the fact that an operating
lease is not capitalized by the lessee, and thus represents a form of off-balance sheet
financing (associated finance obligations remain). Based on this, and according to Gritta,
Lippman, and Chow (1994, P. 32), “the percentage of operating leases in total leases in the
13
US increased from 13% to 82%. Other benefits such as no residual value risk or lower
financial outlay requirements help explain this growth”.
Due to an annual ROI of twelve to fifteen percent, aircraft leasing remains amongst the
profitable aspects to enter within this industry and draws a strong investor base (Leverage
Finance, 2012). For example, investing in airline stocks such as Delta Airlines or Ryanair
provide half this return per annum with higher volatility at present. The first and second lease
cycles of passenger aircraft are “preferred by investors and lenders, due to more stable
risk/reward ratio” (Clarke, 2007, P. 56). That is not to say that “mid-life” narrow body and to
a lesser extent wide body aircraft, do not offer opportunities to lessors to, as Aergo Capital
have illustrated rather well (Irish Independent Report, 2016). In the meantime, freight aircraft
(i.e. aircraft used solely for the transport of goods) represent the second most popular asset
type with “a ROI of around 12%” (PWC, 2015). However, actualising such substantial
returns is based on “an accurate assessment of market trends and a thorough understanding
of the direction that the industry is heading towards” (PWC, 2015, P. 17).
Figure 5: Lessor Yield and Finance Cost 2014 (Source: Annual Reports and Airline Analyst 2014)
Typically, airlines lease aircraft for seven years, although this period has been extended to up
to 10 or 12 years in some recent transactions (Deutsch Bank, 2012). The lessor oversees the
return of rental income from a client and “oversees the technical management of the aircraft
during its lease period” (Clarke, 2007). The individuality of contracts leave such terms open
to alteration as agreed between parties. Airline leases are often less expensive as “major
leasing companies enjoy the benefit of bulk pricing, low margin financing and higher
debt/equity ratios than an airline can or should maintain” (ATA USA 2010, P. 7).
Leasing is now a preferred choice for most airlines today. Operational benefits such as fleet
elasticity, increased access to delivery slots and cash flow measures play a key role. As a
14
result of the above shift, leasing’s market share has increased from “around 12% of the
global fleet in 1990 to over 32% today” (Ascend, 2015, P.12). The lessor market share is
likely to increase again, as airlines look to fill the aforementioned funding gap. This may
potentially increase to a share of “around 50% by 2020” (Avolon, 2015, P.4).
The relationship between lease and debt has undergone plenty debate. Several authors side
against the traditional finance theories and argue that leases complement debt. Eisfeldt and
Rampini (2009, P.14) prove that, due to the ability to repossess the asset, “the debt capacity
of leasing is higher than the capacity of security lending”. Lewis and Schallheim (1992,
P.46) contend that leasing can increase a firm's debt capacity by “selling any extra non-debt
tax shields”. They conclude that the leasing and borrowing dynamic can complement each
other within the firm's capital structure. Similar to this, Ang and Peterson (1984, P.46) find
leasing to be “positively correlated to the company’s debt ratio and that lessee’s used more
long-term debt”, than those who avoid leasing entirely.
The leasing market has been overshadowed by two large lessors, namely GECAS and ILFC
(now AerCap). Beyond this, the Top 10 consists of a variety of operations of a comparably
smaller scale. The ‘Big two’ dominate the market in terms of financial clout, fleet size and
value, and dwarf most competitors. GECAS and ILFC currently operate larger portfolios than
Delta Air Lines, the world’s largest airline by number of aircraft.
A variety of more recently formed lessors (e.g. HKAC, Avolon, Jackson Square etc.) have
emerged looking to challenge the status quo, with funding from a variety of sources,
including sovereign wealth funds (e.g. Saudi Arabia), high net worth individuals and PE
funds. Many of these have moved to quickly gain scale portfolio size, through “the
acquisition of existing companies, purchase and lease back transactions and acquisition of
portfolios from competitors” (PWC, 2015, P.23).
15
Figure 6: Selection of Largest Global Lessors 2016 (Source: Wall Street Journal)
2.4. Ireland and Aviation Leasing
Ireland has long been regarded as the leading jurisdiction for aviation finance and leasing.
The development of the aviation sector in Ireland can be traced back to the 1970s when the
late Dr. Tony Ryan founded Guinness Peat Aviation (GPA) in Shannon, County Clare.
Notwithstanding its failed flotation in the early 1990s, GPA played a pivotal role in forging
Ireland's reputation as a key centre of activity in the global aviation finance industry (Avolon,
2015). While other jurisdictions, most notably Malta, Singapore and the Cayman Islands,
have put forward cases to challenge its status, Ireland has continued to improve its offering in
a concerted effort, not just to retain its existing businesses, but to compete effectively in the
global marketplace (Investec, 2012).
Overall the sector contributes over EUR300 million in corporation tax to the Irish exchequer
annually (FAEI 2015). According to Oxford Economics, the aviation sector contributed about
s €4.1 billion (2.6%) to the Irish GDP in 2015. Along with this, the aviation sector is known
to have created 54,000 jobs in Ireland with 26,000 being directly supported by the aviation
sector (FAEI). In all, nine of the world’s ten largest aircraft leasing companies are located in
Ireland and recent figures put the number of aircraft managed in Ireland at 3,500 or 50% of
the entire global fleet of leased aircraft.
16
The Irish Stock Exchange ("ISE") has formulated a dedicated exchange for aviation related
debt and other instruments utilised by the leasing sector here. Key to this development is the
international recognition of the capital markets as a key source of financing for aircrafts and
aviation related assets. These markets accounted for $15bn or 15% of the total funding needs
in 2013 (ISE Press release, 2014). Current listings include a $927M EETC from International
Airlines Group, amongst many others.
2.5. Aviation Finance as a Global Business
There is growing competition especially from the Far East as new aircraft deliveries in that
region outpace the more mature European and US markets. This is drawing leasing activity
towards that region. In addition, a number of countries, particularly Singapore, are actively
targeting the aircraft leasing industry with changes to their tax regimes. There are a number
of countries that are tailoring their air safety regulation activities and aircraft registers to
attract business from the leasing industry, with Ireland a prime example followed. With this,
the global nature of this fluid industry is certain to be a positive for investors with many
opportunities.
“At present, there are 23,000 western built jet airliners in service in the world of which 33%
(approx. 7,700) are on operating leases and are owned by leasing companies and financial
institutions“ (IATA, 2015, P.27). In addition, the world fleet is “currently growing at 3.3%
per year, while operating leasing is growing at 5.5%, which serves increasing demand
globally” (Ascend, 2015, P.1). The operating leased fleet is “currently valued at about $175
Billion, consisting of 30 lessors that have fleet values over $1 Billion, the two largest have
fleets valued over $40 Billion” (Anselmo and Jackman, 2012, P.24). Given the asset values
involved, the wide variety of asset types and the scope for investment within the structure of
this industry, investment opportunities are certain to emerge on a regular basis as the industry
looks to bridge potential funding gaps going forward. It is clear this new asset class is to
emerge as a strong alternative to the more traditional assets which attract investors globally.
“In 1990, there were 1,200 aircraft on operating lease, representing 14% of the
commercial jet fleet” (Kruglinki, 1996, P.3). In ten years, the number on lease had risen to
3,400, accounting for 24% of the total and by 2010, the market had reached 6,800 leased jets,
representing over 36% of all commercial jets (Ascend, 2015). The majority of these include
popular A320 and 737 designs, increasing numbers of Boeing 777s and A330s and a large
amount of older equipment (Anselmo and Jackman, 2012).
17
N
Figure 7: Historical Growth in Leased Aircraft Fleets
The leased aircraft share of the global fleet is expected to increase further as global passenger
traffic and commercial jet fleets maintain strong underlying growth trends, forecast at
CAGRs of 5.6% and 4.1%, respectively between 2011 and 2030. This represents incremental
airline fleet growth of 40,000 aircraft over the next 20 years, with between 16,000 and 20,000
additions to the leased fleet. Growth of passenger air travel in emerging countries and regions
plus the growth of low-cost carriers globally are important drivers of aviation growth and
represent key growth opportunities for aircraft lessors.
Based on FAA submissions, “”the commercial air carrier industry will grow by a remarkable
3.7% over the next five years (to 2020)” (2011). System capacity in available seat miles (the
industry measure of aviation related travel demand globally) is “to expand from 4.5% in 2011
and is expected to grow at an average annual rate of 3.6% through 2031” (FAA, 2011, P.
14).
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Figure 8: Global Fleet Forecast and Leasing Penetration (Source: PWC)
2.6. Leasing’s Value to Airlines
Trubbach (2013, P.20) contributes that large LCCs with “enough funds to cover the
acquisition costs of newly built aircraft” often only use their aircraft for a short time span
before resale, fuelled by “large concessions from OEMS”. Most LCCs lack this financial
clout and therefore cannot execute a similar fleet strategy when they are fledging enterprises,
hence the key role of lessors.
Gavazza (2010) found that high-volatility airlines lease and low-volatility airlines own
aircrafts. This is caused by high-volatility airlines expect to adjust their capacity more
frequently and therefore value leasing more than low-volatility airlines. His 36 empirical
analysis shows that leased aircrafts are parked inactive less frequently than owned aircrafts,
and when under the condition of being used leased aircrafts have a higher capacity utilization
than the owned aircrafts.
Mancilla (2010) provides that a reduction in the requirement for leased aircraft during times
of economic turmoil, which furthers the theory that operating leases have become a
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significant management tool during a recession. This is due to leasing permitting carriers to
alter capacity quickly, minus the associated asset value risk.
Again, Gavazza (2011) examined the commercial aircraft leasing market with the intuition
that more liquid assets decrease the cost of external financing, this making leasing more
attractive. This is caused by that more liquid assets are more redeploy able and less specific,
which you find in aircrafts. Since more than half of the commercial aircrafts are leased and
there exists an active secondary market, which as mentioned makes aircrafts liquid assets.
One of Gavazza’s findings was that more liquid the aircraft was the more likely to be leased,
and to be an operational lease. Leasing allows also carriers to transfer some risk to the
operating lessors. The lessors are assumed to take the aircraft ownership risk through their
economies of scale, knowledge, diversification of aircrafts and geographic regions, echoing
the work of Pulvino previously.
Oum, Zhang, and Zhang (2000) performed a study about the optimal demand for leased
aircraft. Empirical results based on the model suggested that the optimal demand by 23 major
airlines in the world would range between 40% and 60% of their total fleet, for the reasonable
range of premiums of operating lease.
Clark (2007) explains a relevant advantage of aircraft lease against a loan. Under a loan
structure the repayments are made with constant principal and declining interest, whereas
under a lease structure the repayments are of a mortgage style, with constant payments. The
disadvantage of the loan structure is that it places a burden on the airline cash flow in the
early years, thus the constant payment stream of the lease structure is often the preferred
option.
Gilligan (2004) found an inverse relationship between depreciation and trading volume for
less reliable brands of used business aircraft. Conversely, the author found an increase in the
direct relationship between depreciation and trading volume for aircraft models with
relatively high lease rates.
Gritta and Lynagh (1973) show that airline companies that experience financial difficulties
are the ones that show higher rates of aircraft leasing. For these companies, the paper
suggests that leasing may be the solution today but it also may be tomorrow’s problem.
Airlines appear to be damaging their financial structure, by carrying long-term obligations of
leasing arrangements which accounting authorizes to hide.
20
Likewise, empirical findings from Deloof, Lagaert, and Verschueren (2007) indicate that
leasing is negatively correlated with profitability: firms with low profits and high growth
need more external financing and will therefore have higher fixed-claim financing. Within
airline industry, Erickson and Trevino (1994) expected there would be negative correlation.
The authors criticized that previous leasing literature ignores the effects of profitability on
leasing which results in model misspecification. After performing the tests, lease ratios were
found to be statistically unrelated to profitability.
With all these advantages it is not hard to understand why aircraft leasing penetration rate is
nowadays 39% (according to Ascend), meaning that, on average, airlines fully own 61% of
their fleet.
2.7. Traditional Funding Sources
The need for financial capital is clear and growing. Aircraft are, by definition, long life
capital intensive assets that generate sustained returns in a growing global marketplace.
Institutional investors have developed an improved risk appetite for aircraft assets in both
equity and debt form (Ascend, 2015). This is evolving into increased issuance by leasing
companies and airlines of capital market type instruments.
To date, this active segment of the financial services market is focused largely on dollar-
denominated assets as aircraft are traded around the world using the US currency (Millbank,
2012). With large pools of capital resident in other key currencies, and aircraft operating with
carriers that are centred in those currency blocks, the scope to develop aircraft financing
structures that tap currencies other than the dollar is material.
Another crucial factor to take into account is the diverse support provided to local aviation
industries by the individual government agencies (PWC, 2013). A recent example comes
from Russia where in March, 2014 the local authorities re-introduced a tax exemption on the
import of certain aircraft (including Boeing 737 and Airbus A320) for local carriers (PWC,
2015). The re-introduction allows local operators to save around 40% (approx. $1 billion) on
additional duties and fees. However, not all aircraft operators enjoy the change with the
foreign 50-110-seaters remaining under a normal tax regime. As a result, it hinders their
ability to compete against the operators of their Russian counterparts. Moreover, there is a
chance that Boeing 737 and Airbus 320 might also lose their tax exemption privilege once the
“Irkut MS-21” aircraft model is introduced to the market (Gavazza, 2010).
21
Figure 9: Aircraft Funding Comparison 2013 vs. 2014
Historically, the Export Credit Agencies of the key airframe and engine manufacturing
countries, such as the US, UK, France, and Brazil, have recognised the importance of aircraft
manufacturing to the national economies, and so supported aircraft export by offering
guarantees to cover the losses of commercial banks that were lending to relatively risky
airlines (FAEI, 2015). While traditionally, this type of guarantee-based funding has been used
as a backup, over the last four years ECA backed funding has become the funding source of
choice and has been used by “strong” airlines Etihad, Ryanair, and various Chinese carriers
(Anselmo & Jackson, 2012).
We must note that commercial banks still provide the required funding, ECAs provide
guarantees to make good any specific losses incurred by the funding bank in case of default.
Consequently, the credit risk for banks is not the airline, but the sovereign risk of the ECA
involved. The cost of financing through ECA-backed guarantees has historically been lower
than commercially available bank debt. But, due to the New Aircraft Sector Understanding,
the cost has increased since 2013 as premiums are more aligned with market ratios (PWC,
2014).
As aircraft deliveries peak over the next few years, at a time when long term US dollar
financing becomes scarcer for the major European banks, there are significant challenges for
the industry as a whole to find finance for the new deliveries (Ascend, 2015). All the major
22
players in the industry including manufacturers, financiers, airlines and lessors will need to
work harder to attract new investors to the industry.
Figure 10: Global Distribution of Aircraft Orders 2014
2.8. Recent Industry Developments: The Rise of the “New Age Lessor”
After seeing continuous growth since the late 1970s, the operating lease fleet share had
stagnated since 2008. However, that period of apparent stabilization witnessed the rise of a
new player, one that is making a big impact in the industry: the Chinese operating lessor.
Reports from credit rating agencies S&P and Fitch, highlight cautious concern towards these
newcomers, reflected in ratings ranging from BBB- to C grade investments (Reuters 2015).
Figure 11: Selected Lessor Fleet value Comparison 2016 (PWC, 2015)
23
The mainland Chinese operating-lessor fleet has grown from a mere 30 aircraft at the start of
2008 to over 780 aircraft today, representing 9% of the global lessor jet fleet (Investec, 2012).
Including lessors in Hong Kong and Bank of China subsidiary BOC Aviation based in
Singapore, the Greater China share rises to 13.5%. The mainland lessor fleet has grown at a
staggering compound annual growth rate of 38% since 2010, although lessors are still very
much focused on China, with two-thirds of their fleets on lease to Chinese operators (IAA,
2014). The preference of these lessors towards sale and lease back transactions compounds
this (Investec, 2012).
Figure 12: Total Aircraft Assets Held in China 2008-2014 (Source: CAAC)
Flightglobal’s Fleets Analyzer database shows 15 Chinese mainland-based operating lessors
with in-service fleets, but that number is growing as other platforms come online (CAPA,
2014). The mainland Chinese lessors can be divided into three categories: domestic
domiciled, Chinese money invested offshore and Chinese airlines. The domestic-domiciled
lessors base their operations in China and they include mainly the leasing arms of the major
Chinese banks, but also the insurance companies (Ping An Leasing) and manufacturers
(AVIC). Many also hold finance leases in addition to operating leases.
The second category involves Chinese money invested into leasing companies abroad. The
first big example of this was Hong Kong tycoon Li Ka-shing’s investment in 2014 into
Accipiter, a new leasing platform currently operating out of Dublin (Irish Independent
Report, 2014). Although this case did not involve mainland money, the endorsement of the
operating leasing business model by one of Asia’s wealthiest and most respected investors
sent a strong message to the Chinese community (Investec, 2012). This was followed by
24
Bohai’s acquisition of Dublin-based Avolon, perhaps the first, rather than last move in this
direction. These acquisitions further stress that, should Chinese lessors acquire already
established aircraft lessors in Ireland, it would offer them strong bargaining power and
influence in the global aviation industry with manufacturers (Investec, 2012). This is because
it would bring together airlines, leasing and ground handling within one group.
Finally, Chinese airlines are also participating in creating new leasing companies. Motivated
by tax and financing reasons, they lease aircraft to their own airlines using both finance and
operating leases (PWC 2013). Although these lessors do not match the traditional lessor
mold, they may also decide to set up a more global leasing platform as other airlines have
done recently (i.e., Lion Air and Transportation Partners). The number of leased aircraft in
China is forecast to rise 12.5% a year from 2014 to 2019, faster than the 9.3% a year from
2009 to 2014 (Frost & Sullivan).
Leasing overall has grown an average of 32% a year from 2009 to 2014 in China, making it
the world's largest leasing market with CYN2.63 trillion of assets (Frost & Sullivan).
Penetration of leasing in China reached 5.1% at the end of 2015, considerably lower than in
the more developed markets of the US (23.2%) and the UK (28.6%), suggesting considerable
future opportunities (Frost&Sullivan).
For now the gap between the international market leaders and Chinese rivals is large - the
fleet value of the biggest, BOC Aviation, is less than a fifth of GECAS and a quarter of
ILFC's (Reuters, 2015). But Chinese financiers in the aircraft industry have been growing
rapidly for a decade, with additional impetus provided in 2007 when Beijing lifted a 10-year
ban on banks conducting leasing, which had been imposed in response to reckless investment
and poor management in the 1980s and 1990s. In 2007, China permitted state banks to have
leasing units, but the more recent activity in the sector follows Dec-2013's central
government increased urgency for Chinese lessors to become some of the world's largest by
2030 (Reuters, 2015).
For context, the market value of leased aircraft in China is $34.3bn according to Ascend,
which represents approximately 17.1% of leased aircraft globally (2015). Of the 44 lessors
with exposure to China, the largest on a notional basis are ICBC Financial Leasing Co., Ltd.
($3.4bn, 41.4% of fleet market value according to Ascend), AerCap Holdings, N.V. ($3.1bn,
10.4%), GE Capital Aviation Services ($3.1bn, 10.6%), CDB Leasing Co., Ltd. ($2.6bn,
48.9%), and Bank of Communications Finance Leasing Co., Ltd. ($2.5bn, 69.0%).
25
2.9. Conclusion
Following the literature review, it is clear little is known about the lessors emanating from the
Far East of late and previous literature does not account for their presence given the pace of
their development. This study shall focus on these lessors and increase the knowledge
available on key aspects of their business offerings, nature, prospects and growth factors
involved.
CHAPTER THREE
METHODOLOGY
25
Chapter Three
RESEARCH METHODOLOGY
3. Introduction
The objective of this chapter is to provide a description of the research methodology adopted
specifically for the completion of this study. Research can be defined as “a systematic and
organised effort to investigate a specific problem that needs a solution” (Sekaran 2003).
3.1. Research Problem Identification
The research problem is the starting point of all research (Brannick, 1997) and is defined, as
an area of which there is some doubt, or is concerned with a difficult question that needs to
be answered (Rummel, 1964). The ultimate aim of a research project is to discern what it is
you need to know in order to solve problems or at least give further knowledge and therefore
a deeper understanding to a particular area of study (Remenyi, Williams, Money and Swartz,
1998). Sekaran (2003) highlight that a research problem is identified and recognised once a
research gap emerges and the researcher adopts a problem solving approach to this process.
In the literature examined, many different ideologies and business perspectives have emerged
in relation to aircraft leasing and the rise of new age lessors. The latter has been identified
this as one specific aspect which has been left idle in recent times and the much of the
research is outdated due to the fluid nature of aircraft leasing development of late.
The views of Ritchie and Lewis (2003) in relation to the necessary criteria which must be met
in the formulation of the research question; namely it must be definite and logical, focused
but not restrictive, viable given available resources and attractive and interesting for the
researcher to undertake, have also been given careful consideration.
3.2. The Research Question
Both Sekaran (2003) and Bryman & Bell (2007) have attempted to define a research question
of the issues that is to be investigated with a view to finding a definitive answer. This author
can report that his research question emerged from the research problem originally identified.
According to Blaxter, Hughes and Tight (2010) the choice of research question is the most
important decision when it comes to undertaking research, as a poorly formulated research
question will lead to poor research (Bryman and Bell, 2007). Saunders, Lewis and Thornton
(2007) agree with this train of thought stating that the initial stage of a research study should
start with the formulating and clarifying of the research question in order to turn a research
26
idea into a feasible research study, with obtainable research objectives. This is a vital
element of the process, as it will aid with the choice of research strategy etc.
Another important requirement is a critical review of the literature. It helps to identify key
academic theories within the research question. The literature review also facilitates the use
of clear and accurate referencing allowing the readers of the study to find the original
publications that are cited in the research (Saunders et al, 2007).
The research question specific to this dissertation can be stated as follows:
“To examine the rise of Chinese aviation lessors and the factors which shall impact their
future success and opportunities in the aircraft leasing sector”
3.3. Research Objectives
Zikmund (2003) adequately outlined what an objective should serve to achieve; namely
provide “the purpose of the research in measurable terms; the definition of what the research
should accomplish. This was central to the selection of the research objectives identified.
Domegan and Fleming (2003, pg. 19) have suggested that “problem definition ends with (a) a
list of objectives or (b) a hypothesis. Objectives are broad statements of intent, while a
hypothesis is a tentative answer to the research question being considered”.
Saunders et al (2007) see the research question acting as a basis to generate more detailed
research questions or research objectives. They define research objectives as “clear, specific
statements that identify what the researcher wishes to accomplish as a result of doing the
research” (Saunders et al, 2007, p. 610).
The following research objectives have emerged from the primary research question:
To examine the nature of the suitability of business models currently employed by
fledging lessors in detail and explore the challenges to their future success
To illustrate the developments which have aided the rise of the new age lessor and
resulting industry impact
To identify the potential impact of Chinese economic issues on the development and
abilities these new age lessors to compete effectively in the future
All of the aforementioned research questions and objectives will be addressed and discussed
in the primary research findings to follow.
27
3.4. Research Method Considerations
There are two types of methods of research which are normally the most used in the
collection of data; namely quantitative and qualitative methods (Ghauri et al., 1995).
Quantitative methodologies consist of systematic empirical studies, which involve
quantifying data through the assistance of statistics (Bryman and Bell, 2007). Data is
collected and transformed into numbers, which can be empirically tested for specific
relationships so that conclusions can be drawn. Therefore, quantitative methods are related to
numerical interpretations (Saunders et al, 2007).
Qualitative research does not rely on statistics or numbers. Qualitative methods often refer to
case studies where the collection of information can be received from the study of a small
number of objects (Bryman and Bell, 2007). Qualitative methodologies emphasize on
understanding, interpretation, observations in natural settings and links to data with an insider
view (Ghauri et al., 1995). According to Bryman and Bell (2007) qualitative research is often
an appropriate approach for research in business and management administration.
The type of research approach to select depends on the study that will be conducted.
However, Gunnarson (2002) argues that the benefit of applying a qualitative methodology is
that the method takes into consideration the overall picture, in a manner a quantified method
cannot. A qualitative approach will be more suitable here as this dissertation is researching
the current opportunities available in the aviation financing industry using stakeholders and
due to the fact that perceptions and opinions are difficult to measure in a quantitative way.
The exploratory character of qualitative market research permits the gathering of new
information on specific areas of research, very often through an intensive dialogue between
the interviewer and the respondent (Broda, 2006; Naderer & Balzer, 2007).
Since fieldwork is done without predetermined categories of analysis, qualitative studies
provide depth and detail. In contrast to quantitative methods, which can statistically measure
the reactions of large groups thanks to a limited set of questions and standardized answer
categories, a qualitative study can never reach the same breadth due to the reduced number of
cases (Patton, 2002). Sayre (2001) provides an overview of the differences between
quantitative and qualitative research, with Hennick (2011) providing a concise table of these;
28
Feature: Qualitative Research Quantitative Research
Table 1: Comparison of Research Approaches (Hennink et al, 2011)
Based on this, a qualitative approach is deemed to offer more and has been selected as the
chosen methodology.
3.5. Research Process
Hair et al (2003) provides this activity grants the researcher a "roadmap with directions" for
completing commerce related research. Sekaran (2003) highlights the importance of the
literature review as the first stage to this process. First developed by Saunders, Lewis and
Thornhill (2007), the process onion has emerged as a guiding light in this regard. A key
lesson is to ensure the data collection method is not a driving force of the research process.
29
The "process onion" preaches the significance of gaining a working knowledge of key
research strategies and philosophies which enable researchers to determine the most suitable
data collection method necessary to meet reach objectives and answer the formulated
research question.
The process onion provides such a framework to utilise and a stage by stage process emerges
as a result.
Figure 13: The Research Onion (Saunders et al 2007, p.102)
However, even though data collection is positioned at the centre of the research onion model,
Saunders et al (2007) believed it is important to decide on your research philosophy first as
“the research philosophy that you adopt contains important assumptions about the way in
which you view the world.
3.6. Research Design
The research design creates the structure and organisation for the implementation of the
research process selected, which consists of data collection and subsequent data analysis in
relation to the predefined research questions using acceptable methods, with the sole aim of
30
achieving the research objectives cited previously (Easterby-Smith, 1997). It is important to
differentiate between these from the outset, to ensure the proper execution of both by the
researcher (Bryman and Bell, 2007).
3.7. Research Philosophies Considered
A research paradigm describes the philosophical aspects researchers follow and are based on
individual perspectives, principles and beliefs (Denzin and Lincoln, 2005). This in turn
shapes the process used to carry out the research itself (Flowers, 2009)
Therefore, a thorough examination of the main philosophical research approaches, namely
Epistemology and Ontology, is required in order to select the most applicable research
methodology to utilise (Saunders et al, 2007)
Both approaches look to place "what constitutes reality" under the spotlight (Flowers, 2009).
Ontology examines the nature of reality. I.e. how something appears, different perspectives
and its objectivity (Saunders et al 2007). On the other hand, Epistemology can be described
as understanding how you can be sure of something, i.e. how is the information produced and
what is in fact possible to know (Hatch and Cunliffe, 2006)
In this approach, two further sub sections or concepts exist, namely Positivism and
Phenomenology, as illustrated below.
The Positivist Approach
This approach lends itself to scientific based reach (Saunders et al, 1997:71). Key to this
approach is a focus on concept of truth, validity and fact in relation to the gathered data and
this is in turn examined under qualitative means (Hatch and Cunnliffe, 2006). Collis and
Hussey (2003) state this approach is based upon human behaviour and natural sciences
studies being carried out in a parallel manner to gain a rationale behind a phenomenon.
The Interpretive Approach
Flowers (2009) contends that research approaches into both the social and natural sciences
display significant digression, due to disparity in the subject matter, thus leading to a
phenomenological approach. Hennink et al (2011) consider this approach to display several
differentiating features whereby the topic under study can be considered subjective and open
to subjectivity of individuals. This approach is associated with the qualitative stable, due to
its emphasis on understanding mind sets and communication methods rather on facts alone.
31
3.8. Research Philosophy Selection and Rationale
A Phenomenological approach has been selected for this study. Given the subject matter and
the objectives cited from the outset, this approach is best suited to this study, as it will enable
the development of key constructs as they surface along the research journey. The use of
"why questions" or the "laddering approach" of Hinkel will enable this to occur, producing
rich and descriptive data for this study to utilise (Mangan, Lalwani & Gardner, 2004)
3.9. Research Method Selection
This refers to the strategy and systems employed in order to gather data for this study. Given
the selection of a phenomenological approach, the necessary research tools to be utilised are
interviews on a group or individual basis and observations (Denscombe, 2002)
Structured interviews are conducted using a pre-prepared list of research questions for
participants to answer. According to Bryan and Bell (2007), this approach lacks flexibility
and serves to encourage very short, often one word answers, due to the narrow span of
control involved. Semi-structured interviews are completed using prepared question lists
based on themes requiring development and generally allow for greater flexibility (Hennink
et al, 2011). The interview can be completed in a less formal manner, thus encouraging
engagement and conversation flow and allows the researcher to ask additional questions
based on participant responses and inquire further where necessary (Bryman and Bell, 2007).
Finally, secondary data refers to literature, documents and articles that is collected by other
researchers (Bryman and Bell, 2007). The secondary data used in this study critically
evaluated and collected from books, scientific articles, and internet sources, in order to obtain
some better insight into this sector and to support the theoretical merits of the study.
3.10. Justification of Semi-Structured Interviews
Based on the information illustrated by the table below, the author has selected semi-
structured interviews in a face-to-face setting as the suitable data collection method.
Using this approach, the researcher can prepare questions and issues to address in advance of
the interview, giving an element of structure to proceedings and yet an element of flexibility
to include other "off the cuff" questions if required (Hair et al, 2003). The use of open ended
questions climates a tendency towards yes or no responses from participants and allows the
researcher to probe using the previously mentioned Henkel approach to foster detailed and
rich data sets in the end (Mangan et al, 2004)
32
3.11. Sample and Selection Criteria
Hennink et al (2011) refers to this as "participant recruitment" representing individuals the
researcher wishes to engage in order to gain study data relevant to the study objectives and
research question cited. Further to this, Marshall (1989) contributes that purposive sampling
is associated with qualitative research, whereby the sample size is small, but can be deemed
adequate to obtain detailed information to allow the analysis process to occur.
The sampling frame employed consists of examining the aviation leasing sector through the
engagement of key industry personnel, with significant experience. Participants were chosen
based on qualifications and length of time spent associated in roles directly related to the
fundamentals of leasing aircraft and all related factors. Nine interviews were conducted with
a variety of management level personnel from different business offerings within the
industry, including accountancy, tax, leasing firm senior management and industry analysts.
Each added to the quality of data gathered and provided a variety of perspectives and
opinions.
3.12. Interview Schedule and Participant data
Due to ethics and confidentially considerations, the names of some interviewees are withheld
due to the small niche sector they operate in and fears of future implications around any
answers provided to this study. These participants is described below and initials shall be
used to refer to their input where necessary and this is listed below. All other participants and
interview details are listed in the table to follow.
33
Date Interviewee Location Method Length of
Interview
Code
July
2016
Gerry Power Aergo Capital,
Dublin, Ireland
Face to face
Interview
45 minutes Power
July
2016
Jack O’
Dwyer
Eirtech, Shannon,
Ireland
Face to Face
Interview
1 hour O’
Dwyer
July
2016
Anonymous Dublin, Ireland Face to Face
Interview
45 minutes AK
July
2016
Ronan
Likely
Waypoint leasing,
Limerick, Ireland
Face to Face
Interview
1 hour Likely
July
2016
Niall
Donovan
Amentum Capital,
Dublin, Ireland
Face to face
Interview
45 minutes
Donovan
July
2016
Niall Woods KPMG, Dublin,
Ireland
Face to face
interview
25 minutes Woods
July
2016
Anonymous Hong Kong Skype
Interview
25 minutes DJB
July
2016
Ger. Halliday BDO, Limerick,
Ireland
Face to Face
Interview
20 minutes Halliday
July
2016
Anonymous Shanghai Skype
Interview
20 minutes SG
Table 2: Interview Schedule
3.13. Interviews
Due to the scale of the given study, there is a need to collect as much significant data as
possible from the various stakeholders in order to be able to accomplish a deeper
understanding of the key aspects of and factors at play in this industry.
It has been decided to use qualitative interviews in order to collect primary data. Qualitative
interviewing is usually seen as being flexible; the interviewer adjusts and responds to the
interviewee, there is a great interest in the respondents point of view, detailed and rich
answers are desired, the interviewer is allowed to depart from any schedule that is being
utilized, new questions may arise due to respondent´s replies and the order of questions may
be revised (Bryman and Bell, 2007).
34
Strengths of Interviews Limitations of Interviews
Enables detailed information collection Time consuming (Transcription and coding)
Valuable insights gained as a result of above More difficult to compare data, due to non-
standardised answers involved
Participants can expand on their views and
identify crucial factors at play themselves
Interviewer Effect – complete process
success rests with researcher skill
Flexibility through question order
adjustment and development of lines of
enquiry
Invasion of privacy and confidentiality
issues
Rewarding experience for the researcher Reliability in question – objectivity difficult
to achieve
Table 3: Advantages and Disadvantages of Interview Method (Adapted from Denscombe, 2007, 202)
There are different approaches to qualitative interviewing; unstructured and semi-structured
interviewing. During an unstructured interview the researcher may start the conversation with
a question and then actively listens to the respondent who talks freely while a semi-structured
interview follow a checklist of issues and questions that researcher wish to cover during the
session (Darmer, 1993; Bryman and Bell, 2007). Thus, semi-structured interviews have been
chosen for this study. The reason for this decision is essentially due to the aim of encouraging
the interviewees to freely discuss their own opinion on the industry. This method with open-
ended questions will allow adjustments to the questions posed depending on the attributes of
the specific expert and their area. According to Darmer (1993) the semi-structured interview
is neither a “free conversation nor a highly structured questionnaire”. Semi-structure
interviews provide the opportunity to regulate the order of questions and the respondents
have the possibility to expand their ideas in great detail about diverse subjects rather than
relying only on concepts and questions defined in advance of the interview.
One general problem when conducting qualitative interviews, with open-ended questions, is
that the interview is “flavoured” by the interest and opinions of the interviewer. Semi-
structured interviews are rather organized in terms of what issue will be discussed during the
interview but the follow-up questions will be depending on the opinions of the interviewer
(Grimsholm, E. and Poblete, L. 2010, Pg17)
Another problem that can occur is misinterpretations of words. This could in particular be a
problem within this research since due to the use of industry phrases and terms which can be
misunderstood. Given that English has emerged as the language of this sector, a language
35
barrier was avoided. However, in order to increase the data reliability, all interviews have
been recorded, subsequently transcribed material have been sent to respondents, statements
have been amended if necessary and finally the material has been approved by the
interviewees.
3.14. Data Analysis Procedures Employed
There is little agreement as to any set criteria that can be regarded as holding a prevailing
consensus amongst those engaged in qualitative data analysis (Maclaran & Catterall, 2003).
Hamersveld & Bont (2007) regard computer software, designed to aid researchers in their
analysis of their data, as tools to assist researcher to manage data sets in terms of organisation
and storage, rather than actual analysis benefits. Additionally, Barber (2010) contends that
the time saving nature of this method is unrivalled and adds great benefits in terms of data
management. Harner (2002) warns of disregarding this method, despite the mixed opinions
surrounding its use.
Following recent tutorials and experience with computer based analysis and manual analysis,
a manual approach has been employed as the approach utilised based on the specifics of this
study and the personal preference of the researcher. It is illustrated in the following table.
36
Step Action
1. Data Preparation Transcription of text
Catalogue the data
Prepare into orderly manner for ease of analysis
2. Initial Exploration Identify obvious themes’ and issues
Create notes and memos to save ideas
3. Full Analysis Coding of data
Group codes into themes
Compare and contrast themes
Conception creation to represent categories
4. Data Representation Written interpretation of the data
Illustrate points clearly
Use of visual mediums employed
5. Data Validation Data and method link developed
Independent validation
Comparison with alternative explanations
Table 4: Main Stages of Qualitative Data Analysis Employed (Source: Denscombe et al, 2007 p. 252)
3.15. Ethical Considerations
Always a complex issue for researchers, the subject of ethics is discussed by Oliver (2010)
and their creation of the following rules were employed as part of this study.
Interviewees are fully informed as to the identity and background of the researcher
The overriding purpose and aims of the study are disclosed and an explanation as to
the rationale behind participant selection is provided
All benefits or risks reasonably foreseeable to emerge from the research process are
disclosed and acknowledged
Full disclosure of time commitments associated with study participation are disclosed
from the outset
37
Based on this, the purpose of the study is disclosed within the initial interview request letter
sent to participants and an ethical contract was created for all participants to sign prior to the
start of each interview, emphasising the voluntary and confidential nature of the research.
3.16. Study Reliability Issues
These issues related to the level of trust to be placed in the collected data. Reliability here
concerns the substance of the study and the test involved revolves around the following: are
the findings an adequate reflection of reality and are they repeatable? (Hennink et al, 2011).
Key to this is the transcribing of important data during the interview process, to avoid the loss
of important descriptions and to ensure crucial data is not lost in the process (Saunders et al,
1997). The author has taken notes during interviews to avoid this and to enable later
reference.
3.17. Conclusion
This chapter has outlined key features of the research methodology utilised for this study and
the rationale behind it has been outlined. It provides a framework for data collection and
analysis aspects of this study, in order to ensure the findings and discussion chapters of this
study contain relevant and interesting data to present to the reader.
CHAPTER FOUR
STUDY FINDINGS
37
Chapter Four
FINDINGS
4. Introduction
This chapter represents the key findings and data produced from the interview process as part
of this study. The findings are presented under subject headings for the readers benefit.
Firstly, participant details are provided, given that they are the sources of these findings.
Interviewee Position Industry
experience
Company Code
Gerry Power Chief Operating
Officer
35 years
Aergo Capital Power
Jack O’ Dwyer Client Manager 5 Years EirTech Ireland O’ Dwyer
Anonymous Chief Executive
Officer
20+ Years Top Legacy
lessor
AK
Ronan Likely Chief Financial
Controller
8 years Waypoint
Leasing
Likely
Niall Donovan Junior Analyst 3 years Amentum
Capital
Donovan
Niall Woods Head of Aviation
Finance
+10 years KPMG Woods
Anonymous Chief Executive
Officer
20 years New Age lessor
China
DJB
Ger. Halliday Head of Aircraft
Finance
20 years BDO Halliday
Anonymous Senior
Management
7 years New Age lessor
Shanghai
SG
Table 5: Interviewee Details and Key Information
38
4.1. Growth Factors
Great opportunities exist for the future leasing growth from emerging markets such as the Far
East. As their middle class grows, so too does flight demand as they can now afford a flight,
thus driving aircraft demand upwards and increasing business opportunities (AK). Growth in
the Asian market is also being driven by the emergence of the Chinese Renminbi bond
market (Donovan). Investors are drawn to this industry by the fact that investments in
operating lessors are in long-lived assets and that asset value is relatively predictable (O’
Dwyer). It is supported by the solid fundamentals given the attractive supply/demand
dynamic around aircraft capacity (Halliday). There is volatility in aircraft values, driven by
supply/demand and competitive factors (Power). Likely notes little growth from China in
helicopter leasing and that these lessors will not enter it as it is unsuitable for diversification
(large additional expertise requirements) and dislike its lesser returns.
The Chinese have benefitted greatly from the financial crisis and it’s no surprise that the
financial struggles of “the West” have increased Chinese capabilities to expand.
AK contributes that:
“Given the nature of the business and the fact that it’s so capital intensive means that any
financial institutions attempting to invest say $30 million into leasing will struggle to side
step the concerns of their regulator such as ECB, the Bank of England or the “Fed”, all
because such initiations are so heavily regulated now”.
In the past, these regulators would see this as dangerous and therefore prevent it today. These
Chinses institutional backers do not have to answer to these and the backing of the Chinese
Authorities to expand into this area is significant (Halliday).
The bulk of the Chinese lessor growth has occurred in the past six years, due to a recovering
global economy, a boom in the aviation industry with record aircraft orders and airline
profits, and strong economic results in China (Woods). By contrast, established foreign
lessors have had to weather the effects of 9/11 and the global financial crisis (O’Dwyer).
“There has a lot of Chinese money available to invest in leasing and it's promoted by
government policy” (SG). “Beijing looks at the status of Japan as a major industry player
and is looking to match if not exceed their global status. The idea of competing with your
neighbours is paramount”, according to O’ Dwyer. “The Chinese Government looks at
39
leasing as a pillar of its global influence aspirations through becoming a major voice in all
things aviation”, according to Power "I don't see that slowing down. All the big banks have
leasing arms or subsidiaries, which do leasing. They are buying more and more airplanes"
(Woods). Another important consideration here is that several of the largest lease customers
include large airlines supported by the Chinese government. The following are examples:
Air China Limited China Eastern
Airlines Corporation
Limited
China Southern
Airlines Company
Limited
Hainan Airlines
Company Limited.
Table 6: Chinese State Backed Airlines
These four airlines represented 48% of the top five lessors' Chinese fleets, and provide more
reliable cash flow streams to lessors compared with non-government supported airlines
(Woods).
The matter of addressing a more disruptive forces, which were previously rather rare, such as
airline collapses, and a lessor being required to quickly repossess its asset and then re-market
them at short notice. All participants contend that ordering and placing new assets is the
simple part, but repossession and re-marketing is where expertise is needed.
Chinese lessors will address this, with some learning curves along the way, according to this
sample of professionals. Overall, a broad welcome party exists for these lessors. However,
each speaker was keen to preach caution and highlighted certain concerns in relation to these
new age lessors emanating from Asia.
4.2. Prospects
According to all parties, the prospects for these lessors and China as a global leasing hub are
both positive and hold great potential. Woods and Halliday appear certain that the Chinese
influence on leasing is set to stay, although at present these companies are “young and
bedding into the market”. This sentiment was echoed by Halliday stating that it is simply as
case of “writing these new age lessors off at your peril”.
Echoing this, Woods states, “Some industry professionals have written off their chances
already, and while some criticisms are valid, the determination and strong financial backing
behind these firms will make them formidable powers in this market in the very near future”.
Halliday argues “that provided the Chinese government backing remains, in addition to
reasonable economic growth in the region, it is hard to see any major retraction of these
40
lessors in the near future”. However, if the Chinese economy in particular was to enter a
period of decline, “it would be interesting to note what effect this would have on these
relatively new companies entering the market” (AK).
According to Woods,
“In this hypothetical scenario, I would presume opportunities may arise for more
western based lessors to act as vultures towards these Chinese asset portfolios and
opportunities may arise to pick up cheap assets. In addition, increased mergers and
acquisitions both domestically in China and globally would create larger portfolio
companies and lower the numbers of new entrants to the market”.
Both finance experts highlight that Ireland remains the premier location for leasing
enterprises and that the industry stakeholders here, including the Irish Government, must
acknowledge increased competition from the Far East and ensure our role of world leaders
remains intact” (Woods and Halliday).
Halliday submits:
“Many of these lessors based in the Far East would benefit from an Irish address in
terms of F/X risk, taxation and regulation, if the Chinese economy began to decline”. The
tax rate of 12.5% in addition to experienced professionals and global tax treaties would
currently provide better options to these companies, while Beijing prepares its own free
trade areas and tax regulation to compete with the Irish offering”.
4.3. Leasing Attitudes and Outlooks
SG described the attitude of some new lessors as “one whereby they tend to treat the leasing
offering like a “white label credit card”. Aircraft design standardisation, due to the impact of
leasing, has enabled ease of aircraft migration from one operator to another and flexibility,
but also has allowed a lower level of technical understanding behind aircrafts to be required
for new entrants (Power). All parties echoed this idea and cite it as an explanation for this
treatment to become more widespread. According to AK:
“The differentiating factors between legacy lessors and new age entities include their
geography of origin, who their investors are e.g. private equity firms or high net
worth individuals with experience with airlines in our case. They have not grown up
beside well established lessors and treat the sector as offering a financial services
product”.
41
This has influenced and affected their business offering to the industry, according to all
parties, due to the prevailing market needs experienced to date in China. Several parties note
the well documented order backlog of Chinese carriers has served to encourage Chinese
lessors to enter sale and lease back transactions to stem this tide (AK and Donovan).
Table 7: Expected Chinese Aircraft Demand 2012-2028 ((DJB, SG and Woods, citing PWC 2012 Figures)
Chinese lessors hold an obvious advantage navigating the domestic market compared to
foreign lessors, in terms of language and business customs (SG). If Chinese airlines continue
to demand yuan financing, then Chinese lessors would be best placed to provide it, given
their financiers and government support (DJB). However, their lessor fleet lacks geographic
diversity, many lack effective hedging programs in relation to the Yuan and are therefore
vulnerable to the economic volatility of one country (Halliday).
The Chinese lessors have grown quickly to become formidable players on the global stage.
However, as lease returns become due and economic conditions change, they will have to
face the challenges of operating as a lessor based in China, conducting business during a
downturn, re-marketing aircraft and achieving portfolio diversity.
DJB highlights his own concerns, stating:
“My fear for a lot of the new age lessors is that they have entered a commodities
sector, almost like a white label credit card sector and think life is going to be very
easy. A lot will have a big wakeup call in 5 to 7 years hence when their first leases
need to be renewed and they must do the hard thing which is to move an aircraft from
airline a to b or they have their first repossession, which occurs regularly”.
Airlines are a high risk customer base after all, as each participant points out. Power and AK
both highlight that many of these lessors will never have dealt with a repossession, due to the
lack of failed airlines in China given their strong government backing to prevent it.
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4.4. Leasing Industry Experience
First identified by AK and echoed by Power, O’ Dwyer, SG and DJB, the experience void
displayed by many of the management teams is worrying but fixable. AK disclosed that this
is a “significant hurdle to jump in relation to the future success of these lessors”. Many of
these teams “have little to no experience in relation to trading aircraft outside of the Chinese
Mainland and less in relation to the remarketing of aircraft” (O’ Dwyer).
Power echoed such sentiment and stated “the senior management team here in Aergo
(Capital) would have anywhere from 5 to 25 years’ experience of leasing as their bread and
butter, making them experts. The vast majority of these new lessors cannot boast this yet”.
Woods states that in leasing “it’s not just what you know, but who you know. A big contact
book is required constantly, in order to succeed”. Within leasing, “experience guides
decisions and prudent investment in aviation assets” according to Power and therefore, a
significant “flaw these lessors display is the lack of such personnel”. O’ Dwyer contends that
“such inexperience stems from these lessors dealing almost exclusively with Chinses carriers,
backed by the local government rather than global, independent airlines”.
On the same topic, DJB predicted “significant talent movement” towards new age lessors as
the industry expands in China and that given the expertise of many Irish professionals in the
area, “many Irish may join the ranks of the new comers to fill management gaps in the near
future”.
4.5. Aircraft Remarketing
According to each interviewee, the easiest part of aircraft leasing is the initial purchase of
“new metal”. “The most difficult aspect is to move an aircraft from lease 1 to lease 2”,
according to Power and this time of the assets lifespan is “the most highly pressurised time in
the entire timeline, due to the financial dangers involved with unsuccessfully finding a new
client for a now mid-life aircraft” (AK). The importance of foresight and contact books are
highlighted by Power and others here, and the overall goal is “to ensure that no asset, which
is airworthy, sits on the tarmac for an extended period once it comes off lease”. DJB
highlights that “a parked aircraft costs money daily and makes none for the firm, hence the
importance of beginning the remarketing process at least one year prior to lease expiry”. AK
notes that where client financial difficulties are on the horizon “tentative steps will be taken
to prepare a POA in the event of default and repossession occurring”.
43
Each of the legacy lessors highlight the global nature of the business provides a wide
customer base and remarketing opportunities exist globally, from start-up airlines in Latin
America to established names in Europe. “Based on existing business models, their
remarketing prospects are poor”, according to DJB. Lessors use their global networks to
remarket to airlines around the world, but a lessor that has few leases outside of China will be
hard-pressed to find a buyer for aircraft that come off lease. According to Power, Chinese
carriers have “a very strong preference for new metal and so they avoid leasing a mid-life
aircraft” (8 years old approx.). Remarketing these within China does not seem like a viable
option therefore and hence, the need to look abroad (SG).
With economic volatility, airline bankruptcies occur and lessors are compelled to repossess
assets. Since 2000, there has been over 1,100 instances of leased aircraft with a bankrupt
lessee (Woods). The handling of a repossession and re-marketing event is crucial to a lessor’s
bottom line and each represents a valuable learning experience (Halliday). Chinese lessors
have had virtually no experience with lessee bankruptcy to date (DJB).
Figure 14: Aircraft with Ceased Operators - Operating Lessor Managed 2000-2015 (Woods, citing Flightglobal)
4.6. Transition Costs and the Price of Remarketing
Aircraft transition is a sensitive time in this industry, as “when an asset is sitting on the
tarmac somewhere in the world, it’s costing somebody somewhere money” (O’ Dwyer). The
costs of this event varies. This cost “is roughly $15,000 a day minimum loss for an NBA and
possibly double for a WBA”, hence the pressures surrounding aircraft remarketing and finding
a new customer once lease A expires (Power). Issues with insurance, debt interest etc. begin
44
to become major problems the longer the asset remains grounded (AK). If this was to become
a frequent occurrence, with several assets grounded, “bottom line pressures become
significant” (Power).
A failure to remarket efficiently is down to poor planning and portfolio management (Power
and AK). The costs of this process begin with the asset itself in terms of ensuring its
cleanliness, airworthiness, associated legal bills, cabin lay-out reconfigurations and also the
colour scheme of the aircraft (AK). According to O’ Dwyer, the respray process for an asset,
which is between leases, consists of a white top and grey underbelly, removing previous
logos from the aircraft is costly -“an NBA would begin at a basic €80, 000 and WBA begin
around the €120,000 mark”. For a full respray with a designated airline colour scheme, costs
begin at €110, 000 for an NBA, and €150, 000 plus for a WBA, with prices rising with
complexity (O’ Dwyer).
It was interesting to note that none of the Chinese based lessors engaged placed any emphasis
on these costs or any mention of their necessity. In comparison, our legacy participants went
to great lengths to highlight the consequences of such an event occurring between leases for
an aircraft itself, margins, asset returns and portfolio managers.
Figure 15: The Leasing Cycle (Source: Author generated based on participant data)
4.7. Chinese Lessor Portfolio Risk
The leased fleet of Ireland-based lessors is spread all over the world, with the highest
concentration in Asia-Pacific at 35% (Woods). In contrast, Chinese lessors have 80% of their
fleet within Asia-Pacific, 84% of which is leased in China (Halliday). Risk management in
this game revolves around avoiding too much exposure to one economy or market (Power).
45
Likely echoed this by stating that global helicopter lessors will avoid certain deals at when
their over exposure to one economy becomes too great and represents “a dangerous game”.
Figure 16: Operating Lessor Fleet Share - By Region (Halliday, citing Flightglobal)
Chinese lessors display young fleets (sub. three years - SG) and avoid mid-life aircraft
entirely at present. In contrast, each legacy player stated a percentage (15-30% approx. –
Woods) of their portfolio would always be classified as this, as “demand for such “cheaper”
options always exist”, according to AK. Power pointed out his entire business offering
revolves around a specialization in the area, and that a diverse portfolio range is less subject
“to fluctuations in oil prices, residual asset value and over exposure to any one area of the
world economy”. Both AK and Power noted increased demand in older aircraft of late, due to
the lower price of oil, “allowing these aircraft to outperform their newer counterparts in
terms of economic viability” (AK).
A key risk facing Chinese lessor’s volatility the residual value of current-generation assets,
with the EIS of the new-engine Airbus A320neo. DJB cited UBS figures stating that “the
CMVs of A320ceos and 737 NG aircraft have been declining at almost one-third of the 737
Classics aircraft’s rate at the same lifecycle, at 6% against 15%”. Explanations include high
fuel prices for almost a decade and growing asset air demand growth in emerging economies
which stabilise aircraft values (DJB), echoing the sentiment of Power. These aircraft have
been acquired via sale and lease back transactions from Chinese carriers, “at higher rates
than would be advisable” (Power).
46
Figure 17: Historical 737 Classic, 737NG and A320 Market Values (Participant Provided Estimates)
The need to sell or lease out surplus aircraft, most likely the A320ceo and 737 NG, is further
necessitated by the economic slowdown in several emerging markets, which prompted the
IATA to slash its 20-year passenger forecast to 7.0 billion at a CAGR of 3.8% instead of the
original 7.4 billion and 4.1% projections, respectively (Donovan).
While the long-term outlook remains robust, with 3 of the 5 largest additions of new
passengers being in Asia, namely China whose passenger total would grow 173.1% to 1.196
billion in 2034 from 438 million at present and a 267.0% growth in India from 103 million
passengers to 378 million. The transitory period plaguing the world’s second-largest
economy will exacerbate the downward pressure on CMVs of the A320ceo (Power).
4.8. Industry Impacts
As well as the increase in competition from the capital markets, traditional lenders in the
commercial aircraft space are facing increased competition from Asian banks, such as China
Construction Bank, and leasing companies, such as Cheung Kong Holdings, which is
squeezing margins and creating the most competitive conditions in aviation finance since
before 2008. Government aims to ensure more of its new lessors enter the top ten and
challenge “the Top Two” by 2030 (Woods). AK remarked that in the last twenty five years
no such lessor has emerged with a scale and size to match the “Top Two” and that is would
be unlikely to be matched by this date.
Many Asian banks are being drawn to the market and, in a lot of cases, traditional lenders are
simply unable to compete with the low margins being offered. Woods commented at the
47
Airline Economics conference in Dublin one bank noted that it had seen margins drop by 35
percent in the previous year.
Halliday notes that the aviation industry is shifting towards the model adopted by the hotel
business; with one side specialising in asset ownership, while the other side operates it, and
that new lessors offering of a financial services product are accelerating this process.
Going forward, the emergency of new entrants will place downward pressure on the NIM
legacy lessors earn, generated between the aircraft yield where aircraft yield equals lease rate
divided by CMV, and the newer lessor’s lower cost of funds (Woods).
Most significant impact of all appears to be the growth Chinese Renminbi denominated
bonds on a broader scale. In February 2014, BOC Aviation priced a 10-year ¥300m offshore
RMB-denominated bond, the first to be issued by an aircraft operating lessor. It then followed
this up with another ¥1.5bn private placement later in the year. British Airways also recently
completed a RMB financing of two A380 aircraft with Bank of China.
The Chinese aircraft market is expected to be worth in excess of $600bn over the next 20
years and it’s anticipated that an increasing proportion of those transactions will be RMB-
denominated, especially if it finally achieves full convertibility (Donovan). There is also
speculation that it could eventually replace the US dollar as the base currency for
commodities (much as the US dollar replaced sterling) (Woods). It is therefore inevitable that
the Asian markets will continue to grow and play a major role in the future of the industry.
4.9. Chinese Lessors and Economic Factors
The expected economic growth deceleration in China through 2017 should not significantly
hurt aircraft lessors' credit profiles (Donovan and Woods). While the Asia-Pacific region is a
meaningful area of current exposure for most aircraft lessors, we expect that resilient
consumer spending in China over the next few years and the Chinese government's support
for top airlines that are among the lessors' top customers should suppress the fallout from a
broader China slowdown (Donovan).
Predicted GDP growth in China is 6.2% in 2016 and 6.0% in 2017, and consumer spending
increases of 7.7% in 2016 and 8.1% in 2017 (Donovan). Such growth is a key indicator in
this sector (Halliday). “GDP and our industry are heavily linked and so growth or regression
of an economy is directly linked. Basically, GDP growth drives leasing industry growth
hence its importance” (AK).
48
The aviation industry is cyclical, tied to passenger travel, and therefore driven in part by
consumer spending. Moderate RPK growth could play out over the next few years as the
secular drivers of Chinese air travel - namely a growing middle class, low jet fuel prices and
airlines' increased leasing use – persist (Donovan). Another factor driving air travel is that
China's population is more than three times that of the USA, but Chinese aircraft values only
represent two-thirds of U.S. aircraft values (Donovan, citing Ascend 2015 figures).
Should consumer spending prove less resilient, airlines could be pressured and lease
terminations could accelerate, spurring weaker profitability and capital erosion for the lessors
exposed to China (Power). In such a scenario, we must consider the impact of a China
slowdown on global economic growth, along with lessors' ability to re-lease planes to airlines
in other regions and their ability to offer the current low lease rates (Donovan). The timing of
any slowdown would be an important consideration, due to the large order books that will be
delivered to certain lessors over the next 5-10 years, as an extended slowdown could pressure
lessors' ability to place these planes with such favourable terms (Woods). The link between
GDP and aviation business is illustrated in the following figures.
Recent Chinese GDP Performance:
Figure 18: Chinese GDP vs. the World (Source: Donovan, citing World Bank)
Recent Aviation Growth Figures in China versus the World:
49
Figure 19: Aviation Growth in China vs. the World (Source: Woods, citing CAAC)
4.10. Conclusion
Many of the key findings of this study have been outlined in this chapter and the following
chapters shall serve to develop this data further, with reference to prior collected secondary
data. The findings of this study add greatly to the existing knowledge of aviation leasing
presented in previous academic literature.
CHAPTER FIVE
DISCUSSION OF THE
STUDY FINDINGS
50
Chapter Five
DISCUSSION
5. Introduction
This chapter consists of a detailed discussion of the findings and a comparison of notable data
with previous literature. Key findings previously unmentioned by literature shall be
developed. The overall aim is to meet the report objectives and answer the research question.
The research question is:
“To examine the rise of Chinese aviation lessors and the factors which shall impact their
future success and opportunities in this niche industry”
The objectives of this report are:
1. To examine the nature of the suitability of business models currently employed by
fledging lessors in detail and explore the challenges to their future success
2. To illustrate the developments which have aided the rise of the new age lessor and
resulting industry impact
3. To identify the potential impact of Chinese economic issues on the development
and abilities these new age lessors to compete effectively in the future
5.1. Objective 1
Based on participant submissions, the model adopted by new age lessors appears to be
adequate at present, but was universally deemed unsustainable over the medium term. All
participants cited that dependence and involvement in Chinese marketplace alone is poor
practise, in agreement with literature from Fitch. The governments influence in addition to
booming airline carriers in the region allow this approach to bring success at present it seems.
Previously, PWC (2011) only reference to concern over Russian state involvement in the
leasing sector.
Firstly, the leasing approaches employed double up as a challenge to address. The preference
towards sale and lease back agreements with Chinese carriers reflects the previous literature
of Gritta & Lippman (2010) in relation to the airline benefits of leasing remains applicable
and in this case, reflects an element of Government will in action according to several
participants. Concern has been voiced over the high prices paid to these carriers, in addition
to the lease rate offered and lease factors required, and participants noted that these
51
transactions reflect the reflect that these lessors are overpaying for the asset. This would
account for the recent sharp rise in sale – lease backs witnessed in China by PWC Reports of
late.
The small, domestic customer base and a domestically biased portfolio displayed by many of
these lessors is also in opposition to the work of Habib & Johnson (1999), who contended
that the global client base was the mark of all aircraft lessors, assets leased in many markets.
These lessors display little inclination towards a wide, diverse and global customer base at
present, with focus on domestic carriers considered almost universal according to
participants, who highlight the dangers of one market dependency in this sector.
In addition, the desire to only operate new/young aircraft and to disregard the potential
midlife aircraft appears foolish according to legacy lessor contributions. It is interesting to
note no top ten lessor follows such a model. The work of Schofield et al. (2011) cited many
lessors as providers of niche aircraft offerings, yet DJB noted such an identity or approach is
yet to be seen within these new players. No inclination towards any aircraft specification,
body type or manufacturer was identified by the new age lessor participants, with only a
preference for “new metal” cited. This is again in contrast to the work of Eisfeldt et al. (2005)
who contends most lessors are experts with a specific area of leasing or aircraft model. This
lack of asset preference and a financial services view of their offering is contrary to the work
of Gavazza (2010) in terms of traditional lessor attitudes and approach towards their field.
Furthermore, it would appear that further challenges exist in relation to the work of Gavazza
(2011) and Anselmo & Johnson (2012) in terms of lessor expertise and the monitoring costs
displayed by most traditional lessors. A lack of remarketing teams, insufficient asset
monitoring systems and lackadaisical risk identification and control appear commonplace in
many new age lessors based on the contributions of the participants. Financing and capital
flow appears strong for new age lessors, with many varied options available and no shortage
of investors, which is again contrary to the work of Trubbach (2013) in relation to funding
gaps in the industry at large.
52
In terms of further challenges facing these lessors, participants cite several which have not
been identified as specific to new age lessors and contend that these will shape the future of
these companies. Each challenge is interlinked and is presented below.
Remarketing from lease one to two is a staple of all lessors according to the work of Habib &
Johnson (1999) and Morell (2001), yet contributors to this study cite little experience with
this area of the business for these new entrants from China. Literature from Gavazza (2010)
suggests planning and global client lists as paramount to this. Contributors have universally
agreed with this, but highlighted that new lessors lack this, due to a variety of reasons.
Participants of this study highlight that remarketing domestically in China appears unlikely
due to preferences towards the newest assets available, yet an insular approach remains
amongst many lessors based there despite many of their first leases expiring within the next
2-4 years. Furthermore, participants submit that any economic volatility in their region
(where state aid is not forthcoming), could lead to airline bankruptcies and would expedite
the need to remarket an aircraft, echoing the views of Woods and literature from Flight
Global and Ascend.
The prevalence of a financial services attitude in turn places little emphasis on this process,
and literature from Anselmo &Jackman (2012) is in agreement with participants, in stating
this is the hardest part of modern leasing, not the initial investment requirements. All
participants, minus the new age lessors themselves, were sceptical about their abilities to this
successfully. Literature from Clarke (2007), PWC (2011) and Morell (2001), is in agreement
with Power in relation to strong global remarketing opportunities for such aircraft, with good
ROI’s per annum under dollar financing, rather than Yuan denominated transactions.
The consequences of a failure to remarket effectively are covered broadly by Eisfeldt &
Rampini (2009), but lack detail and modern figures. Participants of this study outline the
significant costs involved in the process in the findings chapter. None of the newer lessor’s
Leasing
Approaches
Leasing Experience
Aircraft Remarketing
Aircraft Portfolio Risk
53
engaged this point, but other participants such as O’ Dwyer, AK and Power note the
emphasis legacy players place on avoiding this event and the significant associated losses
involved. The legacy – new age player divide is clear here in terms of attitudes towards and
feelings on the issue and the legacy players reflect the traditional literature of Habib &
Johnson (1999) and Anselmo & Johnson (2012) in this regard, and may represent a cultural
divide, which literature has not previously developed or cited.
Participants cite that senior management within these firms have little experience with leasing
on an overall level, again contrary to most legacy players and the contributions of Morell
(2001) and Cameron et al (2011) previously, who have identified experienced staff as the
enablers of successful aircraft trading. This is a point echoed by several participants of this
study. Questions have been consistently raised by several contributors to this study in relation
to abilities of management teams to trade effectively and successfully without such expertise
and predictions of steep learning curves, due not fitting traditional lessor profiles, seem to
have merit. Literature from Habib & Johnson (1999), Clarke (2007) and Gritta et al (2010)
echoes the words of DJB, in relation to the possibility of talent movement in order to gain the
attributes they lack as management teams and such talent can be sourced from other
locations. Traditional attitudes to leasing voiced in previous literature versus those of Chinese
lessors today, appear to suggest a theory – reality gap and the seemingly lesser importance
placed upon experience requirements by modern Chinese lessors.
Portfolio Risk affects all lessors and these new entrants are no different, with participants
agreeing with literature from Eisfedlt & Rampini (2005) throughout. However, the current
portfolio management of these Chinese lessors face rather large issues. Literature from
Gavazza (2010) and Trubbach (2013), along with submissions from AK, Woods and Power
all agree that good leasing portfolio management involves a diverse client list and varied
asset types to avoid any economic shocks in one area or fluctuating oil prices. Yet, many
Chinese based portfolios display significant portfolio bias to the region, in contrast to legacy
player practises and also challenge the findings of Gavazza (2011) in relation to leased fleet
average age of 1.5 years younger than owned fleets. Participants argue this could in fact be
two years younger in China. Participants of this study explain the issue facing Chinese lessors
in great detail, in terms of location bias, quicker than expected depreciation of asset values
(and resulting lowered portfolio values and returns achievable), potential asset surpluses, over
exposure to several asset models, the potential requirement to expedite the remarketing
process for these assets in the near future (and the potential to lack the expertise to do so) and
54
an inability to provide older aircraft, which can become more cost efficient depending on oil
prices, if such demand grew further. This represents a development of the issues cited briefly
by Fitch and a broad agreement with its findings here, in terms of long term portfolio value.
5.2. Objective 2
Based on the available academic literature on this topic, we must note a lack of a clear
submissions as to the factors behind the growth of leasing in China. Following the interview
process, participants have disclosed the factors at play in detail. The misfortune of “the West”
in terms of the full impact of recent economic recession has provided the necessary
opportunity for these lessors to emerge given the funding issues affecting traditional finance
houses and the funding void they have left. Tighter financial regulation cited by AK
highlights difficulties for Western firms to gain scale today, while Chinese regulation in the
area has become relaxed and no such issue are present. This is complemented by the 2007
Chinese state directive to its banks to establish leasing arms. This is a previously
unrecognised connection made and is absent in the related reports of Frost & Sullivan, PWC
and Deutsch Bank. It must be stated that is a previously uncited consequence of the recent
economic downturn, in terms of the business opportunities, which commerce in China has
taken full advantage of, while western economies faltered and subsequently began to recover.
It seems probable that this can be witnessed across many industries besides aviation financing
and warrants further debate and study.
It also appears the reports produced by PWC (2013) and Investec(2012) relating to this topic
have underestimated both the impact the Government in China has played to date and its
daily influence in the industry experienced by practitioners. The link between Chinese lessors
appears to be stronger than originally cited by Anselmo & Jackman (2012) and such
dependency on this state involvement is not seen elsewhere. The government policy,
highlighted by Ascend, aimed at developing their leasing units is beginning to take shape, and
has been enacted by state authorised funding streams at very competitive rates. This state
determination is present across the aviation sector, as seen in the number of state backed
airlines, who also serve to fuel lessor business in China, and its efforts towards global
influence in all aspects of aviation are linked, based on participant sentiment.
Literature cited from the Deutsch Bank Leverage Finance Conference has made reference to
a GDP – aircraft leasing link previously, but the extent of its influence appears understated.
All experts engaged, especially the legacy lessors, place large emphasis on this aspect of new
55
lessor growth in China and its growing middle class percentage of population. This is also
affects the airline industry in China in tandem and highlights the close correlation of these
sectors domestically in China at present. It is clear also of the influence GDP figures hold
over leasing operations globally in their economic and opportunity analysis, building on the
work of Gavazza (2010).
In terms of industry impact, previous literature falls silent, presumably as it is still ongoing,
but participants have cited the increased usage of the Yuan as a financing currency,
threatening the dominance of the US Dollar as the sectors preferred currency, in contrast to
the work of Habib previously. The expected increasing of Chinese in this regard could
potentially replace this traditionally preferred currency. The use of RMB-denominated bonds
to finance aircrafts is also a new aspect linked directly to the rise of these lessors and
provides a new finance for other lessors to exploit. Severely increased competition for key
personnel and clients, aircraft orders, lesser aircraft demand from those outside China and
lower ROI’s in the region for legacy players, due to new lessor rate undercutting previously
offered rates, are the key impacts, in addition to increased Chinese influence in the industry
overall and the economic impact it may have on the sector in the future. This is previously
unlisted within literature on aircraft leasing, in addition to strong Chinese government in
leasing from now on.
All participants cite that Chinese lessors hold a strong advantage in their domestic market,
providing major competition to the legacy players as a result. Such advantage is previously
uncited in studies by Trubbach (2013) and Gritta & Lippman (2010), with previous market
advantages have Power noted that this makes it less attractive than before and has drawn his
firms focus elsewhere, such as India. This sentiment certainly represents a portion of legacy
players, but was far from universal. Overall, the high levels of new capital appears well
received and will meet industry requirements.
5.3. Objective 3
Given the well documented speculation regarding the Chinese economy, gauging its impact
on its leasing sector appeared logical. Based on the industry figures of the FAA and IAA,
strong growth is expected in the demand for aircraft and Chinese lessors are cited as
beneficiaries of this growth. Strong predicted consumer spending is cited by this literature as
a presumption behind this. Participants engaged in this study develop the scenario whereby
56
this does not occur. Financial services firms nor do academics develop this point in recent
times, with only Gavazza (2011) and Anselmo & Jackman (2012) making any reference.
Contributions from largely Donovan, Woods and Power, highlight that the dependency on
such spending could be very harmful to the leasing sector based domestically in China and
that only continued and increased state aide could enable these firms to ride such a storm.
Again, the link between all aspects of the Chinese aviation scene becomes significant, largely
due to the strong bias of Chinese lessors towards their domestic clients and home currency
financing. During a recession and without strong state involvement, participants have
predicted large levels of mergers and acquisitions between lessors, who are currently rivals,
the sectors strong growth would falter and the opportunity for foreign lessors to acquire
Chinese lessors and their portfolios rather cheaply would emerge, according to Woods.
Decreased ability to offer low leases rates, due to increased finance costs or limited funding
lines, would also limit their competitive edge. Legacy lessor action in relation to hedging
currency, varied funding streams utilised and portfolio diversification in terms of assets and
clients, limit their exposure to such events. Hedging to limit this Yuan exposure was
emphasised by all accounting and legacy participants, echoing the risk management processes
outlined briefly by Clarke (2007).
The interaction between backed state initiatives, the degree of economic turmoil and a strong
domestic client base can be considered as the key factors which would decide the fate of
these lessors in this scenario. Therefore, continued economic stability is essential for lessor
growth in China, and in its absence, many of these players are at risk, due to market
overexposure, a factor cited by PWC (2011) as “integral to avoid” for all lessors. However,
decisive actions by these lessors in terms of business model can help them avoid its full
impact should such an implosion occur. Fleet diversification, openness to foreign investment,
wider client bases and hedging schemes, as highlighted by Woods and Power, could offset
such risk.
5.4. Conclusions
There appears to several divergences between previous literature and new age lessors
operating today. Commonalities do exist however and so these lessors have not departed
completely from traditional definitions. Several serious issues have emerged in relation to
business models and concern voiced as to their implications. Overall, the findings have been
57
developed and key points discussed in terms of the research objectives and the available data
on new age lessors has been expanded considerably by industry experts.
CHAPTER SIX
CONCLUSION
57
Chapter Six
CONCLUSION
6. Introduction
The objective of this chapter is to conclude this study, including reference to the main
research findings and the original research question and objectives. In addition, the
limitations of this study are acknowledged and the author provides recommendations for
future research. Finally, recommendations are made for practitioner benefit emanating from
the findings of this study.
6.1. Research Question and Objectives of the Study
The research question specific to this dissertation can be stated as follows:
““To examine the rise of Chinese aviation lessors and the factors which shall impact their
future success and opportunities in this niche industry”
The objectives of this report are:
To examine the nature of the suitability of business models currently employed by 1.
fledging lessors and explore the challenges to their future success
To illustrate the developments which have aided the rise of the new age lessor and 2.
resulting industry impact
To identify the potential impact of Chinese economic issues on the development and 3.
abilities these new age lessors to compete effectively in the future
6.2. Summary of Key Findings
New Chinese lessors, commonly referred to under the heading of “new age lessors”, arguably
represent the biggest development in the aircraft leasing sector since its inception. Literature
and studies have not kept pace with the rapid expansion witnessed in the area, and this study
aims to bridge this gap in the available literature around this interesting field.
This study provides an insight into the factors behind their rise; namely a combination of the
fall of traditional financiers and weakened economies in the West, strong Chinese state
encouragement, strong economic growth in the region, powered by a booming airline sector
and a growing middle class and finally an influx of large amounts of investor capital from the
region. These lessors challenge the traditional literature produced on lessor’s characteristics
and this study finds frequent departure from literature produced less than a decade ago.
58
This study identifies several key challenges which may prevent the success of these entities,
namely worrying attitudes towards aircraft leasing services, large aircraft portfolio risk,
potential economic issues in China, unclear business offerings, domestic client bias,
inexperienced management and a lack of expertise in relation to aircraft remarketing.
Finally, this study outlines that, due to the strongly state backed nature of these lessors and
the interlinking of all aspects of the aviation sector in China, the fates of their economy and
fledging leasing scene are intertwined. Any potential recession would have a detrimental
effect on these lessors, compounded further if state backing receded to any material extent.
However, such risk can be limited through immediate and decisive action by such lessors.
6.3. Study Limitations
This author discloses that this study displays several limitations, namely:
Due to the small sample size, this qualitative data cannot be generalised to the wider
leasing industry. It represents the views of a small number of professionals with
strong industry experience only, rather than a systemic analysis of leasing practises. In
addition, attempting to demonstrate rigour in such analysis can prove challenging.
Despite a concerted effort, the author was unable to attain any more than two
interviews with a newly formed lessor based in China. Language and time zone
barriers hampered this effort from the outset.
Several interviewees hold a vested interest in the subject area as competitors of these
fledgling operations and so this could potentially impacted on the responses received
and the stances adopted. The author has looked to balance these views via the
inclusion of more independent professionals to the data collection process.
A lack of adequate previous academic literature in the area has impacted on
comparison opportunities between current and past findings.
In addition, industry confidentiality issues regarding official strategy employed leaves
this aspect potentially flavoured with participant and author subjectivity.
59
6.4. Author Recommendations
Based on the findings of this study, a number of recommendations have been outlined for
leasing entities consideration and the benefit of interested academics:
New age lessors must acknowledge and address their key challenges immediately in
order to expand as required. An altered attitude towards leasing, one which is not
solely based on a simple financial services product offered to domestic airlines in the
region, is essential to their long term viability.
Dependency on state funding lines and state backed client bases is a dangerous over
exposure. Diversification of funding streams, portfolio composition and client bases
will help create a sustainable business model for new age lessors. The commentary in
this study around potential economic risk exposure should only encourage this further.
One note of caution is that there are concerns about a possible bond market bubble if
too many investors seek to sell-off their positions at the same time, which could
potentially lead to volatility in the region.
The creation of niche offerings amongst lessors and aircraft specialisation, which is
not solely focused on new metal, is crucial to continue their expansion and enable a
more global outlook to emerge. Many Chinese lessors compete fiercely with domestic
rivals in a crowded market place. Such focus on their home market alone is unsuitable
in this sector and ignoring potential clients globally for their assets is poor business.
Aircraft specialisation allow for expertise to develop and increased ability to compete.
Flexibility to trade aircraft and enter leases in US dollars, as well as Yuan, would
enable many more lessors to enter the global market and compete with legacy players
in areas besides Asia. Yuan Renminbi may well emerge to replace the US dollar as
the preferred form of financing, but this has not occurred yet and so lessor must
finance in the form selected by the majority.
Talent acquisition of professionals with considerable reputation and industry expertise
from abroad would greatly enhance Chinese lessors and help them reach their
potential. Such professionals would educate and complement existing management
and improve weak areas, such as repossession, remarketing and global contacts.
These lessors must consider other locations globally as a leasing base to facilitate
improved talent education, talent attraction and overall expansion, at least until China
60
can establish an improved leasing system. Two independent professionals in this
study identify Ireland as a suitable home, given its world leader status.
6.5. Recommendations for Future Research
The author notes the following recommendations for future further research:
The opportunity to undertake a wider study of business strategies employed by lessors
exists in order to develop theories relating to maximised returns structures from a
wide variety of portfolio combinations lessor may hold. Several participants held
diverse views in relation to the optimisation of an aircraft portfolio and the nature
these assets display in terms of manufacturer, body type, age, aircraft purpose and
engine type.
A more in depth analysis of the Chinese leasing sector with increased numbers of
participants would add to the data set already in existence and add develop the limited
existing research in relation to these enterprises. However, a caveat exists in relation
to holding a strong level of Mandarin, as this would aid the prospective author greatly.
The author proposes a comparative case study in relation to the benefits and negatives
displayed by both Ireland and China as bases for leasing practises, so that a definitive
argument towards business optimisation for young lessors is produced
It is recommended that any future study in this area achieves a wider scope of
industry personnel as participants, in addition to increased participant numbers in
order to achieve a greater more diverse data set and increased data triangulation. An
element of international travel and expense may also emerge as a consequence of an
increased study scope. Such expense may be justified given the more insightful
information which is likely to become available and thus an improved study may be
produced.
6.6. Concluding Remarks
This chapter has discussed the research question and objectives outlined as part of this
research study. Key findings have been highlighted and several recommendations as to
implementing these findings have been discussed. Finally, recommendations as to future
studies have been issued and outlined where necessary.
61
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APPENDICES
xii
Appendix A
Personal Reflection
The dissertation has provided me with a new learning experience, as my undergraduate
degree did not include such a research opportunity. Given my decision to undertake this
master’s programme was motivated by a desire to move away from "the law", my career
aspirations are also an influencing factor in relation to my choice of topic for my dissertation.
Aviation leasing is the area I wish to enter following the completion of my studies and given
my strong interest in this area, it seemed like a logical choice to embark on a research journey
to increase my knowledge of global leasing issues.
Due to the diverse nature of the topic, the hardest aspect of the process was to narrow
down my topic. Consultation with my supervisor, Mary Cooke, my course coordinator Sheila
O’ Donohoe and Sean Byrne of my research methods modules were integral to this and each
provided a new angle and advice which aided my final decision. From the outset, it was clear
that this initial decision is key, given the time and dedication needed to produce a dissertation
of substance. Throughout, I have enjoyed researching and each day has allowed me to
increase my knowledge, which hopefully I can put to professional use in the near future.
I feel it is important to acknowledge that I did find the process challenging and at
times highly stressful. I found myself constantly edited and rewriting passages of the project,
especially the literature review, right up the submission date. Finding articles in this area of
finance which were applicable or provided an up to date insight into the industry in 2016 was
a struggle throughout and it quickly became apparent that much of the research and data
gathered in recent years was of poor quality or at times, non-existent.
The most enjoyable aspect of the process was undoubtedly completing the interviews
with the variety of industry experts, who provided invaluable insights into this topic. The
opportunity to discuss your topic with experts of global prominence and to learn from them,
was simply excellent and amongst the highlights of the year for me. I feel that, as the
interview process progressed, my interview skills also improved, which in turn helped my
data collection abilities. Meeting people whom I admire greatly, such as Gerry Power
(Guinness Peat Aviation fame and former colleague of Dr. Tony Ryan) amongst others,
provided me with the opportunity to learn from them and to have frank discussions on a
broad range of leasing issues. Wide reading was key to this and a level of self-determination
xiii
to display a strong competency to these experts was essential to success of the interviews and
the quality of data gathered. It is an opportunity to display my talents to these experts and all
students should view it as such.
In addition, my initial difficulties in gaining participants was difficult and frustrating
at times. However, I have learned the value of persistence and determination to achieve your
goals and that any setback should only encourage increased resilience. Issues in relation to
confidentiality, anonymity and privacy concerns made the process more complicated at times.
Bringing an element of problem solving to proceedings became unexpectedly crucial and my
skills improved in this regard.
Key to this is bringing an element of thinking outside the box and innovation to your
approach towards encouraging the key interview targets you identify to participate and
utilising any contacts that can aide you in this regard. I personally resorted to a wide range of
schemes to gain the required data I needed. In the end, my (at times) unorthodox approach
not only granted me time with these experts, but also a job offer after college on more than
one occasion. Therefore, I would not alter my approach were I to repeat the journey and I
would encourage all prospective students to go above and beyond to speak to these people.
Not only will your final research improve, but you will also learn a great deal from simply
speaking to leaders in their field, both personally and professionally. I would never have
gained such opportunities without completing this master’s programme and this dissertation.
In truth, my overall management of the process was poor at times. Procrastination and
simply avoiding getting words down on paper often became an issue. Putting things off until
tomorrow is a dangerous game and if I could make one change to my approach, it would be
to ensure that I set weekly progress targets rather than aiming to meet deadlines which
seemed so far into the future. Rushing to meet deadlines at times has prevented me from
enjoying the process to its fullest capacity, which is a shame. Key to this is to place your
thoughts on paper and begin your research with an initial journey around the internet and
utilise all available resources to gain a wide understanding of the area, before refining your
study. Based on the experience, my overall project management skills have improved greatly
and the experience has left an indelible mark on my approach to large scale projects. Other
aspects such as the approach I take to academic writing has been improved through reading
more widely and correction by skilled academics. My mind has been expanded both
academically and professionally and this will undoubtedly benefit me going forward.
xiv
A level of empathy towards the next year’s students has developed already. Their
experience would be greatly improved through displaying a great attention to detail and
effective project management. Sheila told us as a group on many occasions that August was
only around the corner and she was right. To get the most from the process, level of
discipline and dedication is necessary. I am just glad I realised this in time so that I could
learn from the opportunity, rather than regretting it later. I would advise any future student
that by choosing an area which you enjoy, you will ensure the task is never tedious and
becomes a labour of love. This makes it an easier road and the task is less arduous.
The process has allowed me to gain a lot more than merely marks and grades towards
my final degree. I am grateful for this and my future career path will undoubtedly be shaped
by the journey I have taken while producing my final dissertation.
xv
Appendix B
Sample interview questions
Example: Gerry Power – Aergo Capital, July 2016
Lease Calculation process Aircraft maintenance and control
What’s your company's portfolio
specialization and why?
Issues faced with portfolio
management
Asset purchase criteria Client identification
Funding and finance sources Customer analysis processes
Returns per annum and calculations Impact of oil prices on leasing
Target market over next 5-10 years Are order back log issues realistic?
Growth areas for leasing business
globally
Fleet strategy guiding principles
Investor attractions to leasing aircraft Wet leasing still offered?
New age lessors – thoughts?
(Business model, growth drivers,
challenges, fears, strengths and
weaknesses, potential)
Diversification possibilities in aircraft
leasing
Repossessions – process and
significance
Remarketing process – stages and
costs?
Currency of choice and why? Brexit – any impact?
Future industry direction Why Ireland as a location
xvi
Appendix C
Indicative timetable
Stages
Nov 1
5
Dec
15
Jan
16
Feb
16
Mar
16
Ap
r 16
May16
Ju
n16
Ju
l 16
Au
gu
st 1
6
Supervisor
Meeting O O O O O O O O O O
Research
Proposal O
Literature
Review O O O
Interview
Organisation O O O
Interview
Completion O O O O
Information
Examination O O O
Literature
Modification O O O
Amendment O O O
Submission O
xvii
Appendix D
Sample Interview Request letter
RE: Masters of Business Studies Dissertation – Interview Request
Dear Sir/Madam,
My name is Darragh McEniry and I am currently a Masters of Business Studies student in
Waterford Institute of Technology. I am due to submit my dissertation on the 22nd
of August
2016. The title of my research project is “Aviation Finance: the Rise of the New Age Lessor;
A flight towards success or failure?” This dissertation shall cover recent industry
developments and associated topics relating to aircraft leasing in 2016.
Having conducted research into your background and areas of expertise, I very grateful if you
would consider becoming a participant in my study. Your help and knowledge would be very
beneficial to the process and would add tremendously to the standard of data collected. Your
experience and reputation within the leasing sector makes you a prime candidate to speak to.
A short interview would be the form this participation takes, with all questions relating to the
above research topic.
Any participant of the study will hold the right to remain anonymous if they so choose and
will also have access to the final dissertation itself should they desire it. All interactions
would be treated in the strictest of confidence and all data gathered shall be used for research
purposes only. No third party will have any access to the participants expressed views and no
reference to these shall be made to other participants of the study.
Thank you for your time and consideration of my request.
My contact details are as follows:
or
0873155xxxxx
Thanks for your time and help with this query. Please do not hesitate to contact me if you
require any more information or wish to speak further.
Kind regards,
Darragh McEniry
xviii
Appendix E
Ethical Documents
Ethics is the discipline of dealing with what is right and wrong within a moral framework
that is built on obligation and duty (Nation, 1997, p. 92).
The ethical protocol below was provided and explained to all interviewees. A copy of this
protocol was offered to each participant and the investigator also filed a signed copy of the
protocol as proof the activity. A failure of any party to agree with the terms of the protocol
would leave the participant to be no longer considered a suitable candidate for this study.
“My name is Darragh McEniry. I am the investigator that is undertaking a qualitative data
analysis as part of the dissertation requirements of my Masters in Business Studies
programme in Waterford Institute of Technology, with the central aspect of the study relating
to recent developments in the leasing sector and the new entrants from Asia making a strong
impression at present. I would like to point out that all data collected from this interview will
only be available to me personally in order to complete my research and also my supervisor
if necessary. The disclosures of this interview shall be treated with the strictest confidence. In
conclusion, I would like seek your permission in order to record this interview process to
maximise the data collected and aid by research. The option also exits for you to remain part
of the process as an anonymous participant and for only note taking to be used as a
recording technique.
“In conclusion, with your permission would you please sign and date this document for proof
this interaction took place, along with your consent preferences to continue in this process?”
Participant’s Name: ______________________
Date of Interview: ______________________
Interviewers Name: ______________________
Please initial beside the following options if consent is granted:
Consent to audio recording:
Consent to disclose name and background details: