Oct 16, 2018--Kroll Bond Rating Agency (KBRA) releases its 2018/1019 overview of the aircraft leasing industry. Key takeaways discussed in the full are as follows:

KBRA expects the highly competitive landscape in the aircraft leasing industry to remain a theme for the near-term driving further consolidation. However, rising interest rates—while not good for funding—could help slow the inflow of capital into the industry and help moderate some of the negative effects of high competition stemming from abundant liquidity.

Last year marked another eventful year for the global aircraft leasing industry with further consolidation among lessors (and even OEMs), active lessor ownership exchanges, and an increasingly difficult operating environment for airlines around the globe. Investor interest in buying out whole leasing platforms continued to be strong too, with a few newcomers taking ownership of established lessors, and others trading numerous large portfolios of aircraft.

Most tie-ups focused on creating the scale necessary to compete better globally while helping to mitigate rising interest rates through better access to funding. Responding to lease rate pressure which has been a continuous challenge for many lessors, though it has recently somewhat abated. Scale and diversification can also help protect against pockets of airline weakness while potentially achieving better pricing from OEMs.

Most lessors have tried to reduce the average age of their portfolios through actively trading and selling older aircraft and purchasing new, technologically advanced aircraft—all the while extending average remaining lease terms. With a diverse array of funding options available, lessors continue to grow and represent a key role in aircraft financing markets with several merging and selling portfolios to maintain their competitive edge. Earnings margins are robust despite lease rate pressure and lessors continue to manage down leverage metrics and de-risk balance sheets.

Risks include pressure on airline profitability because of the notable rise in fuel cost and regional currency depreciation with potential negative impact on lessors. Aircraft delivery delays have been another source of concern for some lessors as well; while higher interest rates can constrain access to capital markets and pose a short-term funding mismatch since lease rates lag movements in rates by a few quarters.

Other challenges remain for those lessors exposed to geographic and/or asset concentrations. Other than regional macroeconomic volatility impacting some lessors more than others, risks include weaknesses in wide-body or other less liquid aircraft which could lead to impairments—particularly for lessors facing end of lease term while lease rates are under pressure and reconfiguration for new lessees costly.

Despite these pressure points on an otherwise healthy sector, KBRA notes that lessors with solid credit fundamentals, diversification and scale as well as established niche players should still perform well given a combination of strong demand for aircraft and leasing, diverse sources of funding, relatively strong net income, and still solid airline fundamentals overall.