The market for commercial aircraft is driven by the underlying demand for passenger travel and cargo transport and it is seeing huge growth worldwide.
Commercial aviation has weathered many downturns in the past. Yet recovery has followed quickly as the industry reliably returned to its long-term growth rate of approximately 5 percent per year.
In any other industry a growth rate of 5% would seem anaemic and hardly worthy of an investor’s time, but the sheer scale of the airline industry makes this growth enormous. In 2013 over 3 billion passengers took to the skies and this will double by 2030. To cope with this demand, according to Boeing and Airbus, over $4.5 Trillion of new aircraft will be delivered and they will need paying for.
Airlines are increasingly looking to lease aircraft rather than buy them outright. New deliveries of aircraft which are to be leased to airlines are over 50% of the deliveries being made and this number continues to grow.
A typical aircraft, of the type that Ablrate lessors would post on the platform, would cost a lessor between $2 million and $10 million. Before the financial crisis an aircraft lessor would hope to have 80% of the aircraft financed by a bank, of which there were many involved in the space. Now, with banks under pressure to preserve capital, these loan to values (‘LTV’) are more like 60%-70%.
This means that aircraft lessors, instead of having to invest 20% of their own capital in transactions, are now having to invest 30%-40% of the transaction capital. This constrains the amount of deals a lessor is able to do and so many are seeking third party investors to fill the gap.
This is where Ablrate lenders can benefit from joining the transaction to provide the mezzanine loans needed to complete a transaction.
A typical lease rate for an aircraft is 1%-2% of the value of the aircraft per month, with the effect of bank leverage taken into account, and depreciation of the asset, a Lessor would be able to offer between 6% – 14% interest on a loan.
If the Lessor offers a bonus based on the value of the aircraft at the end of a lease the total return could be higher, in the 9%-16% return level. Of course the credit worthiness of the Lessor and Lessee are determining factors, with excellent credit being in the lower band with no bonus, and good credit being in the higher band with a bonus offered.
Lenders will be able to view all the information pertaining to each transaction in order to make an informed decision on a loan.
Aircraft are a very interesting asset in which to invest. They are very well protected by international law, have very predictable value curves, low volatility compared to other markets (such as the stock market and commodities), they are insured, maintained to strict schedules and they are moveable from low demand to high demand areas very quickly.
The international nature of investing in aircraft carries its own risks of course and the airline sector itself is cyclical, but a well-managed portfolio of aircraft investments is proven to provide excellent risk adjusted returns against many other assets with less volatility.
As with any investment or loan there are risks involved in each transaction on Ablrate and will have those risks stated, potential lenders will be able to ask questions of the borrower and will be provided with full and completely transparent information in order to make their decision to invest in a loan.
Who will manage the aircraft leases?
Borrowers on the site will either be respected leasing companies or lessees themselves. In the case of lessees coming to the system the aircraft assets will be managed by Phoenix Aircraft Leasing Pte Limited.
Phoenix has been profitable from inception and we are very pleased to have such a highly respected business managing our aircraft transactions.
Ablrate paper on aircraft investing: Looking for Value in Aviation
European Regional Airline Association: The Case for Investing in Regional Aircraft
Aircraft Investing (video): Ablrate Welcome