Aircraft Leasing: Purchase & Leasebacks

What about the opportunity for lessors, in this market, in purchasing leasebacks?

It’s been quite large. BOC just announced 20 aircraft, the other day. It’s a time when the airlines need cash and if they have assets that are unencumbered, then it’s a good way to release that cash. So purchase leasebacks are a huge tool and it is a buyer’s market, so you’re probably getting a pretty good deal on the aircraft and the airline is getting the cash to pay their salaries and everything else that they need to do.

Do you get a much higher return in those times? What happened in 9/11?

Again, you get back to your lease rate sector or whatever and however you are going to compare the value of a deal. It might be possible to get a steal from an airline that’s gone bankrupt and then put that to somebody else, eventually, and make a good deal on it. But a straight purchase leaseback, where it’s the same customer, you don’t really want to take advantage of the situation and gouge them on the price and then gouge them on the rent. Normally, the rent is in line with whatever the purchase price is. If it’s a low purchase price, it’s a lower rent; if it’s a higher purchase price, it’s a higher rent. That’s fairly transparent when you’re doing purchase leasebacks, within a degree. But, as I said, if they’re buying from outside, if you’re buying from a failing airline, which might need cash but doesn’t want the asset, you’ve got to place it somewhere else and you’ve got to find a home so you might be sitting on it for a while. Therefore, the lower price you paid for it, might be justified, because you’re going to take a risk of it sitting on the ground.

So the actual cash return for the lessor is not materially higher during this time, in purchasing leasebacks?

Not necessarily. It might be better after the first lease expires, because then you’ve got a lower-priced asset and that’s going to go on in the future, hopefully in good times, where you can make better returns on that. Leasing is a long game, so you’re not necessarily looking at the first transaction, to make it pay for itself.

Effectively, you’re buying a relatively distressed asset, putting it on your balance sheet and then maybe having a lower lease rate in the short term, but then you have a longer lifetime to earn more cash, from that lower-priced asset?

Exactly.