A Younger, Newer Fleet Gives This Aircraft Lessor The Edge

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More airlines are opting to lease their planes, rather than owning them, so that they can easily shrink their fleets in tough times. Airlines' percentage ownership of the total global aircraft fleet has fallen from 73% in 1990 to 57% in 2012. However, not every single aircraft type is equally popular with airline lessees. As a result, aircraft acquisition strategies and sourcing capabilities play a key role in the varying successes of listed aircraft lessors Air Lease (NYSE: AL  ) , Aircastle (NYSE: AYR  ) and FLY Leasing (NYSE: FLY  ) .

Aircraft acquisition strategies
Fuel costs are now the largest cost component for airlines, currently making up about one-third of operating costs, compared to 13% in 2002. As a result, airline lessees are turning to newer and lighter aircraft to replace their older planes. New aircraft are estimated to be about 20% more fuel-efficient than their predecessors a decade ago.

Air Lease has a huge advantage over its peers in this respect. Air Lease has one of the youngest aircraft fleet in the industry, with an average fleet age of 3.6 years , thanks to its acquisition strategy focusing on new and young aircraft. FLY Leasing and Aircastle have a larger proportion of older aircraft in their fleet, with significantly longer average fleet ages of 8.8 years and 10.0 years, respectively.

Aircastle pursued a different path from Air Lease prior to 2011, targeting aircraft that are five years old and older. But even Aircastle has changed its approach in recent years, and started to move in Air Lease's direction.

Since 2011, Aircastle has invested approximately $2.8 billion in acquiring new aircraft; two-thirds of these new purchases are young aircraft less than five years old. Aircastle also disposed of eight aircraft with an average age of 17 years  in 2012, as part of efforts to optimize its portfolio. Aircastle's shift in emphasis to younger aircraft in the past two years is a validation of Air Lease's existing strategy.

Aircraft origination channels
Besides pursuing different acquisition strategies, the various aircraft lessors also have different origination channels. Air Lease's business model differs significantly from its peers, as it primarily buys new aircraft directly from OEMs such as Boeing and Airbus. More importantly, it is difficult for new entrants or competitors to replicate Air Lease's strong relationships with the OEMs.

Air Lease's CEO Steven Udvar-Házy was the co-founder of International Lease Finance Corporation (ILFC), currently the second-largest aircraft lessor in the world, and he brings to the company four decades of aircraft acquisition experience and a vast network of industry relationships.

In comparison, FLY Leasing has an advantage in sourcing for mid-aged aircraft by virtue of its strategic partnership with BBAM, formerly known as Babcock and Brown Aircraft Management.

BBAM services and manages FLY Leasing's aircraft fleet, and it and its partners own more than 10% of FLY Leasing's shares. BBAM is the third-largest aircraft lease manager globally, and it helps to widen FLY Leasing's network of potential sellers such as airlines, investors and other lessors.

Sales, leasebacks, and secondary-market transactions are the main sources of new aircraft for FLY Leasing. It does not favor buying new jets straight from their manufacturers, due to the time lag between order and delivery and the uncertainty over rental rates. In my opinion, Air Lease is less susceptible to such risks because of management's knowledge and experience in new aircraft procurement.

Aircraft lessors with the youngest and newest aircraft in their fleet have seen the most demand from airlines eager to reduce fuel costs. As a result, it is not surprising that Air Lease has grown rapidly. It was ranked among the top 10 global aircraft lessor in 2012 by fleet value, in a short span of less than four years since its launch in February 2010. Air Lease stands out from its peers with its differentiated aircraft acquisition strategy and sourcing capabilities, making it the best proxy for the secular trend of increased aircraft leasing. 

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Related Tickers

9/27/2016 10:20 AM
AL $27.64 Up +0.28 +1.02%
Air Lease CAPS Rating: *****
AYR $20.09 Up +0.24 +1.21%
Aircastle CAPS Rating: *****
FLY $11.63 Up +0.09 +0.78%
Fly Leasing CAPS Rating: *****