We believe mixing an aircraft leasing strategy into a diversified portfolio has the potential to mitigate downside risk when times get tough.
Financing Opportunities Throughout the Cycle
There are fewer than 30,000 commercial jets in operation today, and about half are leased. Most have a 30-year life, though frequent upgrades to newer, more fuel-efficient planes keep turnover high and average lease life shorter than the plane’s life. This provides opportunities for aircraft leasing throughout the market cycle.
Leasing helps airlines stay flexible and responsive to changing supply and demand, which also means aircraft leasing stays active throughout the market cycle. When demand is low, as it was during the pandemic, lessors can enter sale-leaseback arrangements, acquiring planes from airlines in need of liquidity and then leasing them back for regular use.
When conditions improve and travel demand rebounds, large public lessors often sell midlife and older planes to modernize their fleets—a requirement for maintaining their investment-grade ratings.
These planes—typically narrow body aircraft that fly shorter routes—are the workhorses of most fleets and can offer attractive value for investors. Focusing on midlife aircraft that still have a long useful life ahead can help create opportunities and reduce risk.
Unlike the newest generation of aircraft, midlife aircraft are a proven technology. And they can be monetized in multiple ways when the time comes to sell, including via trade, sale and conversion to freighter. Finally, midlife aircraft typically produce ample cash flow relative to cost. Together these factors can make for a favorable risk-return scenario.
Reaping the Benefits Requires Managing the Risks
Of course, executing these strategies successfully requires robust sourcing and strong management capabilities; owning and leasing aircraft isn’t easy. Doing these things well typically comes down to capabilities and experience.
Experience can also help when it comes to managing risk. For example, certain factors could reduce travel demand and dampen the outlook for aviation leasing. Escalation of regional conflicts in Ukraine and the Middle East would raise fuel prices and reduce travel demand, so it’s important for aircraft lessors to actively manage regional exposure. And certainly, another global pandemic and similar quarantine measures could halt or greatly curtail travel.
From a big-picture perspective, though, we think aircraft are a compelling and long-run avenue for capturing economic growth. As the middle class grows, so will travel demand. In our view, contractual aviation leases, with their strong cash flow and income potential, may help investors make the most of it.
