Aircraft Lease Factors and Return

Let’s say you buy an aircraft, such as an A320, how do you look at calculating the return and making sure that you can meet a certain hurdle rate when you do allocate or sell an aircraft to an airline?

It’s become very aggressive over the last 10 years or so. Lease rate factors have been coming down, which is the percentage of rent versus purchase price. That’s really just based on, many times, the cost of funds and how aggressive you can be. Lessors, depending on their credit standing and how cheaply they can get funds, really dictates how aggressive they can be, for the most part. The Japanese leases and a lot of banks coming into the sector that have much lower costs of funds, made it very aggressive and everybody tries to see the best way to get the new aircraft.

The used aircraft is a different story. Used aircraft tend to be more a factor of market price. If you want to place your aircraft, you’ve got to have a decent market price. You can make up some of that by having a better product, new Wi-Fi system or whatever it is, with all the bells and whistles that some people like; some people don’t like it. Low-cost carriers don’t like it. If your asset is more desirable, for one reason or another, it can get a little bit of a premium. But really, there’s a small band that you can price within, in order to get your aircraft placed.

Some lessors, such as GECAS, were very much of the mindset of placing everything out. When it was due to come off a lease, we would try to place aircraft a year or a year and a half in advance. We had a good strategy for bringing it through to the next customer, but some people like to gamble a little bit and wait until just beforehand and hope the market is higher and they can benefit from the market being tight. Sometimes that works and sometimes it doesn’t work. In reality, it’s all just a matter of what you’ve got, when you’ve got it, and what price you’re willing to give it. If you’re competitive, you get a look. If you’re not competitive, there’s usually more than just a few assets out there to have a choice from.

Clearly, the global interest rate or cost of funds, globally, has inflated aircraft values. Do you think that the Asian, Japanese or Chinese lessors have an advantage over the Western lessors?

It’s a different forum, if you’ve got your own bank, you’re generating your own money, so that is certainly a disadvantage for Western leasing companies. GECAS, being part of GE, had a fairly good rating, most years. We enjoyed a fairly low cost of funds, compared to a lot of the mid-sized lessors. But yes, it definitely plays into your tactics and how you approach the market. You’re not always the cheapest. A lot of times, with new planes, it’s just a matter of when you have the slot available. If you have a slot, when the airline wants it and it’s in the right spec, then you get the deal. That’s why leasing companies are one of those major purchasers of aircraft, so they can control the skyline, to some degree.