News Column

Aircraft Leasing Investment Soars As Market Grows

August 15, 2014

Chika Goodluck-Ogazi

INVESTMENT on aircraft leasing has now become one of the most profitable segments in the aviation industry, with an annual Return On Investment (ROI) of 12-15 per cent, according to experts.

The reason, being that the first and second lease cycles of commercial passenger aircraft are commonly preferred by investors and lenders due to more stable risk/reward ration.

"It is not enough to simply choose an aircraft (or a portfolio of aircraft), sit down and wait for the lease payments. One mustn't miss the point when an aircraft residual value depreciates below the asset's economic efficiency. This means that aircraft re-leasing, conversion or part-out - as an alternative asset utilization after the first lease cycle are becoming even more sensitive to the age issue", said the Chief Executive Officer, AviaAM Leasing, Tadas Goberis.

AviaAM Leasing is a global aviation holding company engaged in commercial aircraft acquisition, leasing and sales. It is the only company in the Baltic States engaged in long-term aircraft lease business. The head office of the company is situated in Vilnius, Lithuania.

However, he noted that freight aircraft normally come as the second most popular option with an ROI of around 12 per cent. However, ensuring such substantial returns called for an accurate assessment of the air market trends and has subjected to a thorough understanding of the direction that the industry has been heading towards.

Also, the exact ROI differs depending on an individual aircraft, its size and type. As the price of certain aircraft types varies from $48 million (Boeing 737-800) to $210 million (Airbus A380), so does the ROI, typically ranging from 3 per cent to 15 per cent, accordingly.

"Apart for the carrier's financial performance, the investor should clearly understand the geography of the carrier's operations. While there are many promising emerging markets, China, India, Brazil and others of these countries are still improving their airport infrastructure, technical supervision standards, aviation safety and so on. All of these factors may lead to the depreciation of one's asset. In other words, aircraft finance is certainly a promising market to invest in. However, its big potential comes with the necessity to profoundly understand its visible and hidden processes thus requiring to start from a truly well done homework", added Goberis.

In addition, the usual level of gearing for a new aircraft ranges from 70 per cent to 85 per cent, meaning that an investor provides up to $40 million in a Boeing 737-800 case, while the remainder of the price has covered from the buyer's own funds. At the same time, used aircraft gearing level drops to 50 per cent-65 percent, as investors are willing to lower their engagement due to either increasing aircraft age or financially weaker buyers.

Meanwhile, it has the residual value, which played the most vital role when choosing an asset to invest in. Based on the previously recorded changes in aircraft prices, it has been estimated on average of an aircraft base value declined by approx. 4-9 per cent per year. According to him, while the United Nation's International Civil Aviation Organization's (ICAO) supports and promotes the development of universal modern civil aviation standards, national and regional legislation continues to play a crucial role in regulating the industry.

With regard to commercial aircraft and their operation, many countries maintain distinct age and import restrictions as well as specific requirements. For instance, China, India, Indonesia and Turkey impose restrictions on the imports of commercial passenger and cargo aircraft between 10 and 15 years' old whilst many other emerging air travel markets do not allow the imports of aircraft, which are older than 15-20 years.

The Senior Project Manager, AviaAm Leasing, Tomas Sidlauskas stated: "When we talk about regulation, one should consider not only the existing legislation, but also the geopolitical situation in various world regions. As we observe today, there is a lot of developing which unfortunately affects the aviation industry also. However, thorough understanding of both the international and national regulations, as well as continuous communication with local aviation authorities allow to minimize the direct impact of the risks and ensure efficient and prompt reaction in any developing, which involves one's assets".

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: AllAfrica

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