At crossroads of aviation
China’s aircraft leasing sector to go from ‘quantity’ to ‘quality’ in future: expert
China’s aircraft leasing industry, after a decade of explosive growth, is now reaching a turning point, as the nation is on its way toward deleveraging and as financing channels are gradually reducing, which has ramped up massive pressure on domestically owned aircraft leasing companies, industry observers said.
In 2007, the market shares of Chinese companies in the global leasing market were negligible, but by the end of 2017, Chinese firms owned one in every 10 leased airplanes worldwide, Zhao Guijun, chairman of Industrial and Commercial Bank of China Leasing, said at the China Air Finance Development Summit held over the weekend in North China’s Tianjin.
At the end of 2017, there were a total of 1,369 leased planes in China, and Chinese companies owned more than 50 percent of them, which compares with just 5 percent in 2007, Zhao added.
Meanwhile, the number of major leasing companies in China also surged from just four in 2007 to more than 20 at the end of 2017.
Currently, leased airplanes represent more than 50 percent of planes in the market, and market demand for leasing aircraft will also continue to boom in the near future, Wang Jiangmin, an industry expert with Hefei-based aviation industry portal the Civil Aviation Resource Net of China, told the Global Times on Wednesday.
In the coming 20 years, Boeing predicts that China will need 7,240 new airplanes, which translates to a demand of 300 planes on an annual basis, financial news website caixin. com reported. And it is estimated that almost 50 percent of aircraft need to be leased every year.
Lack of professional know-how
The rapid expansion, dating back to a decade ago, was thanks to a guideline issued by the China Securities Regulatory Commission in March 2007, which for the first time allowed banks to establish financial leasing entities, Zhao noted.
Since then, major Chinese financial institutions, including the China Development Bank, China Construction Bank and Industrial and Commercial Bank of China, have set up financial leasing firms for large-scale equipment such as planes and ships, giving life to the aircraft leasing industry.
Currently, among the 11 leasing operators whose total assets have exceeded 100 billion yuan ($14.5 billion), eight of them are owned by banks, and the remaining three are supported by non-banking sectors.
And China’s leasing market, as a result of dominating banking players, usually adopt a business model under which carriers pay rental fees during leasing terms and eventually acquire the fleet’s ownership on the expiration date of the lease.
Such a model, according to industry observers, is similar to banks’ credit businesses and is making profits out of domestic financial institutions’ traditional advantages in acquiring capital while disregarding necessary professional know-how on the aviation market.
It is also in contrast to another business model that is prevalent among Western leasing peers who manage their own aircraft and take responsibility for associated risks of assets such as equipment maintenance and depositions, Wang noted.
However, such a financing-driven business model may no longer be sustainable after Chinese authorities tightened scrutiny over the financial market this year, said Ding Wenyu, chairman of leasing at Germany’s Norddeutsche Landesbank.
Furthermore, a number of contracts for airplanes under bonded leasing are going to expire next year, and domestic leasing firms will then face a variety of options such as renewing the lease term or selling the aircraft to somebody else, which is “very challenging” for companies that lack asset management skills, said Li Jun, deputy manager of CATIC International Leasing Co.
“Leasing firms need to know the trends and changes in aircraft prices, and update their portfolios so as to grasp opportunities. This could be a catastrophe for non-professional leasing companies,” Li also noted at the summit. Shadows
Li also stressed that the aircraft leasing market is set to go from “quantity” to “quality” in the next stage of development. And the industry is expected to experience an industry restructuring in the near future.
“The homogenous competition has been intensifying, leading to a price war that swallows the average profit,” Li said. For example, the monthly rent-to-price ratio was 1 percent a decade ago, but now it has plunged to just 0.6 percent or even lower. Also, because of the swarm of competitors, the bargaining chips are in the hands of renters and aircraft leasing companies sometimes have to concede over certain terms to clinch a deal.
The ongoing trade tensions between China and the US have also brought uncertainty to the industry, Wang said.
In August, China announced tariffs on $60 billion worth of US imports. The retaliatory tariffs, which include a 5 percent tax on small and medium-sized aircraft and aircraft components, would take effect if US President Donald Trump moves forward with tariffs on $200 billion worth of Chinese imports.
“If the trade tensions further escalate, domestic leasing companies would face difficulties in choosing aircraft types. They probably will adjust their strategies and purchase fewer planes from Boeing and more from Airbus,” Wang explained.
Future trends
Experts agree that the leasing industry’s future is destined to be about narrowing the gaps with Western peers and moving to a more professional and internationally competitive level.
Zhao suggested that Chinese aircraft leasing operators should strengthen their asset management abilities, including procurement, sales and risk management.
“If those companies are just carrying out the financing-driven business model, they are competing tit-for-tat with the banking sector,” Wang said, suggesting domestic players should focus on professional management.
As China’s aircraft leasing companies “grow bigger and stronger,” they will have more bargaining chips to negotiate deals with manufacturers in the future and could even ask to use the yuan as the payment currency to prevent risks associated with fluctuations in exchange rates, Zhao noted.