Hong Kong-based lessor CALC is accelerating its strategy to capture a bigger market of overseas, non-Chinese customers and benefit from the strong recovery. The company has also entered the emerging passenger-to-freighter market, with work on the first aircraft underway since July. China Aircraft Leasing Group Holdings reported its HY1 2022 results on August 24. Lessor CALC wants to be less dependent on China. Of the 138 owned aircraft in CALC’s portfolio at the end of June, 76.8 percent is leased to airlines in China, Macau, Hong Kong, and Taiwan. Although the lessor is seeing a gradual recovery of the Chinese aviation industry since June, the prolonged lockdowns have hurt its business model, resulting in delayed deliveries. CALC might have realized that it is over-dependent on China, at the same time witnessing a full rebound of international markets. Hence a change of strategy was implemented earlier this year. Although it expects the growth momentum in China to pick up in HY2, CALC says of its revised strategy in the financial statements: “Since the beginning of this year, riding on the strong recovery in overseas markets, CALC has been accelerating its global market expansion, especially in regions with rapid economic growth and strong demand for air travel. All aircraft to be delivered in the next sixteen months after 30 June 2022 have been mandated for lease, of which more than half will be leased to overseas airline customers. As of 30 June 2022, CALC’s owned and managed aircraft were on lease to 38 airlines in seventeen countries and regions.” By comparison: a year ago, this was 37 airlines in sixteen countries, so the diversification of its customer base is progressing at a slow pace until now. Overly-dependent on Airbus Another problem for CALC is in its fleet portfolio. It is overly dependent on Airbus. The owned fleet includes eight A320ceo family, 21 A320neo family, and 21 A330ceo’s, compared to 23 Boeing 737NGs and a single 787. Together 138 aircraft, eleven more compared to December. It disposed of two aircraft, took delivery of three new ones from its own backlog, and added ten through purchase and leaseback arrangements with airlines. CALC has a backlog of 66 undelivered A320neo’s, 69 A321neo’s, 66 Boeing MAX, and thirty COMAC ARJ21s. Excluded are an intended order for another thirty ARJ21s and the MoU for twenty C919s. As such, the current mix of older and newer generation aircraft is strongly favoring the ceo’s and NGs, with just 21 neo’s and still no MAX available. With China still to give final approval for airlines to resume MAX services and deliveries and supply chain problems delaying new aircraft deliveries anyway, CALC has to rely on its existing portfolio. Ironically, the delays have resulted in stronger demand for existing aircraft and that is something the lessor wants to build on. “Aircraft OEMs are further reducing production capacities due to supply chain issues. A shortage of next-generation models, especially narrowbody models, is expected to boost the market value of such asset class further. In the second half of the year, CALC will continue to strengthen its aircraft full value-chain management capabilities, riding on its unique model of “new aircraft leasing + mid-to-old aircraft management” to proactively explore business opportunities emerging from airlines’ accelerated needs for fleet optimization and capacity expansion,” says CEO Mike Poon in a media statement. CALC's first Boeing 737-800 before it is converted into a full-freighter. (CALC) Another opportunity that CALC doesn’t want to waste is that of the emerging market for narrowbody freighters, driven by e-commerce. CALC entered this market in July by commissioning its first passenger-to-freighter conversion of a Boeing 737-800SF to Aeronautical Engineers (AEI). The conversion will be done at AEI’s conversion center in Shandong in China and should be completed in October. “We shall develop this freighter business further as it enables us to exploit in full the utility of our aircraft assets to serve the escalating demand for cargo capacities globally and meet operators’ needs via a prevalent freighter aircraft model while contributing to a greener and sustainable aviation industry”, Poon said in July. A HK$439 million write-down on Russia CALC ended HY1 with an HK$-130.2 million net loss attributable to shareholders compared to HK$302.6 million net profit for the same period of last year. This is mainly due to a one-off write-down of HK$439 million on two aircraft that are still in Russia. CALC terminated the contracts for the aircraft in March after sanctions were imposed on Russia, following the invasion of Ukraine. Although it is in contact with Russian lessees to repossess the aircraft, this is most uncertain. CALC has filed insurance claims, but so far without success. The aircraft are still included in the 138 mentioned earlier. In May, AerCap took a $2.4 billion charge on aircraft in Russia. Total revenues in HY1 were HK$1.891 billion, up from HK$1.585 billion. CALC ended June with HK$4.8 billion in cash and bank balances and HK$6.2 billion in undrawn bank facilities.
