With China’s prominence in the global economy, aviation clients expect China to step up its financing of international deliveries. However, Chinese banks and leasing companies remain cautious about expanding too quickly, writes JoAnn DeLuna.
China is on most people’s thoughts in the aviation industry. Over the past three years the country’s strong economic growth, a recent ease in leasing laws and regulations, as well as the financial crisis have given Chinese lessors an opportunity to emerge as dominant international aircraft financiers.
While some of the larger Chinese leasing companies, such as CDB Leasing Co (CLC), Bank of Communications Finance Leasing and ICBC Leasing, are closer to a global expansion, others have a more cautious approach and regional expansion goals. Nonetheless, it is only a matter of time before Chinese lessors become major global players on the leasing stage.
Many Chinese lessors approach leasing aircraft cautiously, whatever their size. When considering leasing internationally, lessors and investors in the industry say reputation plays a role in choosing clients. In other words, they are more likely to do business with well-known airlines rather than small unknown ones when conducting business outside of China. Chinese lessors want more experience, and most admit they have a steep learning curve ahead of them.
“For a Chinese leasing company to be involved in an aircraft leasing deal, special structures and expertise are required. This is the main reason why only the largest Chinese leasing companies are capable of arranging international aircraft leasing deals,” says a lawyer specializing in the aviation industry and who chooses to remain anonymous. “A shortage of experienced leasing personnel in China also hampers development.”
Not having expertise will not stop them; it might just slow their development. Chinese lessors are hungry for knowledge and they do not have a problem acquiring the expertise they need to help them understand the leasing market. They will import talent by acquiring established foreign leasing platforms.
“It is generally expected that the expertise will very soon be mastered by other Chinese leasing companies,” adds the lawyer.
In addition to increasing their knowledge of aircraft leasing and the changing strict regulations, China will need to invest more in its aviation infrastructure. Last January Beijing announced it would spend $88 billion to construct intercity rail lines,$17.6 billion on a passenger rail line through the northwest desserts and $22 billion on freight rail lines in the north-central Shanxi province, according to The New York Times.
Jean-Louis Chevrot, chief executive officer, Dragon Aviation Leasing, says that investing in rail so heavily might stall aviation growth in China. “That will not allow the Chinese aviation [industry] to grow as much as some would have expected when comparing to the historical American example,” says Chevrot.
Similarly, he says that the Civil Aviation Administration of China (CAAC) is closely monitoring the rate of aircraft entry, and ensuring airlines introduce aircraft in an organized and secure manner. As a result, the market for operating leases may not grow as quickly as aircraft deliveries in China.
At Dublin’s 12th Annual European Airfinance Conference in January, Scott Scherer, senior vice president, Boeing Capital, said Chinese lessors had a real appetite for leasing internationally and they would significantly change the global leasing landscape. He expected Chinese lessors to make their emergence into the global market in the next five years.
Others say they expect Chinese leasing companies to expand internationally in the next couple of years. With Chinese airlines becoming increasingly profitable, they will continue to purchase more aircraft, says Chevrot. Bharat Bhise, chief executive officer, Bravia Capital Partners, says Russian aircraft are ready to be replaced, which will also drive a big need for aircraft.
“The expansion may take the form of taking over foreign leasing companies,” says the lawyer. “But some of the Chinese leasing companies may rank among the top five aircraft leasing companies globally.”
CHINESE LEASING COMPANIES
The former Singapore Aircraft Leasing Enterprise (Sale),based in Singapore, was established in 1993 when it did its first transaction with China Southern. In December 2006 Bank of China bought Sale for $3.25 billion and, by July 2007, had changed its name to BOC Aviation.
Since then BOC Aviation has increased business in China by placing its own aircraft and through sale/leasebacks. Robert Martin, BOC Aviation’s managing director and chief executive officer, says the company’s debt portfolio with Chinese airlines is worth more than $7 billion.
Internationally, BOC Aviation signed a sale/lease- back agreement with Air Berlin for three 737-800s to deliver in February, July and August. Air New Zealand signed a long-term leasing agreement for two new A320-200s delivering in the fourth quarter of 2011. BOC Aviation has offices in Europe and US, and a portfolio of 143 aircraft, 53 on firm order and six sale/leasebacks due for delivery through 2013.
Martin says he expects its exposure to Chinese airlines to grow to about 25% in the long term and continue to have global goals.
ICBC Leasing has lease financed 40 aircraft since starting in 2007,with 20 aircraft delivering in 2009.It is owned by ICBC, the largest bank in the world based on capital of $48.95 billion, according to Bankers Almanac as of November 2009.Its fleet consists of a mixture of Boeing, Airbus and Embraer aircraft, both passenger and cargo models.
The lessor has not only kept busy domestically by leasing to carriers such as China Southern, Spring Airlines, Tianjin Airlines and Shenzhen Airlines, but also it is helping to support the development of China’s aviation infrastructure. Last year it signed a cooperation agreement with Shanghai-based manufacturer Commercial Aircraft Corporation of China, which is producing ARJ21 regional jets.
ICBC Leasing has also signed a $3 billion memorandum of understanding with Airbus for the assembly line of the A320 in a Tianjin joint venture.
“Now we’re growing quickly. We’re happy to finance as much as possible and we will change to more international leasing in the coming years,” says Johnny Lau, global head aviation finance, ICBC Leasing.
CDB LEASING CO
CDB Leasing Co (CLC) has been rapidly expanding since China Development Bank acquired Shenzen Financial Leasing in 2008.
In December 2009 it purchased 12 aircraft with leases attached from Gecas in a deal worth about $700 million. The aircraft, which consists of a mix of A320s and Boeing narrowbodies and widebodies, delivered in December. All aircraft will be leased to foreign lessors. CLC previously purchased three aircraft with leases attached worth $100 million from Gecas.
At the end of last year CLC delivered 45 aircraft, and had a registered capital of Rmb8 billion ($1.2 billion).It also established a leasing platform in Ireland.
DRAGON AVIATION LEASING
Dragon Aviation Leasing, established in 2006 and based in Beijing, has been instrumental in developing China’s aviation industry by supporting start-up carriers such as Juneyao Airlines. The lessor also purchased and leased, to Sichuan Airlines, the first A320 assembled in Tianjin.
Dragon Aviation Leasing has aircraft on lease in South-East Asia and Europe, and will soon be closing a delivery in the Middle East. Jean-Louis Chevrot, chief executive officer, Dragon Aviation Leasing, says it wants more non-Chinese exposure, but is focused on risk management.
“Even if based in Beijing, our strategy is to develop the company according to international standards, including in terms of risk assessment,” says Chevrot. “We will develop our portfolio both in China and outside of China in order to get a balanced range of economic risk.”
BANK OF COMMUNICATIONS FINANCE LEASING
Bank of Communications Finance Leasing, wholly owned by the Bank of Communications and established in 2007, was one of the first banking leasing companies approved by the Chinese Bank Regulation Committee. Its fleet consists of three aircraft, two A340-300s and one 767-300ER.
In August 2008 it closed a finance lease for one 767-300ER with Hainan Airlines and, in April 2009, for two A340-300s with China Eastern. The lessor says it plans to expand rapidly by purchasing aircraft portfolios and increasing the products offered to customers, such as finance leases and operating leases by way of onshore or offshore special purpose vehicles.
Bank of Communications Finance Leasing says it also hopes to branch out internationally within the next two years.
CHINA AIRCRAFT LEASING COMPANY
China Aircraft Leasing Company (Calc), based in Hong Kong, began in 2006 and has five A320s,all on lease to Chinese airlines.
Mike Poon, chartered financial analyst, Calc founder and chief executive officer, says the company is looking to expand, but will expand to Asia while retaining a 70% to 80% focus on China. He adds that Calc has a competitive advantage with emerging countries and will be expanding in these regions also.
The company’s offshore base means it is not bound by China’s tax regulations and allows it to offer competitive pricing. Rather than relying on an airline’s credit background, Poon says Calc’s business model puts more emphasis on whether an airline has access to government support in the event of a default.