China is the coming air travel market. In sympathy, the rest of the supply chain is growing – from COMAC to the leasing firms. The top three Chinese aircraft lessors are heading for Hong Kong IPOs. Not to be left out, Hong Kong tycoon Li Ka-sing is also entering the business.
While this is playing out, fast growing Chinese airlines are also seeing the benefits. Why do a lease in US$ when you can even get rid of currency risk? For many airlines, where the majority of their revenues are not in US$, leasing comes with open ended risk. This is especially tough for airlines in developing countries which have seen their currencies drop relative to the US$ – Brazil and South African come to mind. For airlines in these two countries, a declining currency hurts. Not only are leasing costs higher, but their fuel costs in local currency terms have also risen. Yet the value of their revenues have not. This is a very unwelcome squeeze as the global airline industry is making more money than it has for a long time.
This is why China Southern Airlines is turning to domestic Chinese lessors to find financing for 21 aircraft, after previously issuing an RFP seeking Euro and US$ denominated financing. The airline is seeking to finance three A330s, five A320s, three 777-300ERs and 10 A321s. These aircraft are due for delivery from January at a rate of one aircraft per month.
Aircraft leasing is a great business with attractive returns and the ability to move assets if a customer fails, which has happened frequently before as airlines failed. The risks are pretty good given the returns and attachable assets. So China Southern should easily find lessors willing to step forward. Given how quickly China’s aircraft lessors are trying to grow, the airline is likely to be made some very attractive offers.