Indonesia's Lion Group breaks into aircraft leasing industry

SINGAPORE Wed Aug 6, 2014 6:52am EDT

SINGAPORE Aug 6 (Reuters) - Indonesia's Lion Group, which boasts an order backlog of about 500 Boeing and Airbus aircraft, has clinched the first deal for its leasing subsidiary in a key diversification move for one of the world's fastest-growing airlines.

Two years after setting up shop in Singapore, Transportation Partners (TP) has signed a deal to lease three new Boeing 737-800 planes to 9 Air, the low-cost airline of China's Juneyao Airlines, TP's chief operating officer told Reuters.

Though TP's deal with 9 Air involves just three aircraft, the potential is significant in a market like China where airlines will need nearly 6,000 new jets over the next 20 years. Many of those aircraft, valued at $780 billion at list prices in total, will be leased rather than bought as carriers seek to cap long-term commitments.

The three aircraft will come from Lion's existing order for Boeing 737 aircraft, said John Duffy, a former banker hired by Lion co-founder Rusdi Kirana to head TP.

"If we could do a couple more deals like this this year, then we'd be really pleased. We would hope to announce other deals during the fourth quarter," said Duffy, without disclosing the value of the deal with 9 Air.

The value of leasing transactions are typically not released to the public due to commercial considerations.

The China deal comes after Kirana started TP to help manage some of the aircraft in Lion's portfolio. Lion has placed plane orders worth about $45 billion at list prices and deliveries are spread over the next 10 years.

Lion and Boeing did not immediately respond to requests for comment on this story.

In an interview with industry publication Flightglobal in April, Kirana described the move as a "backup plan" for Indonesia's largest airline by passenger numbers.

Lion hopes a strong leasing business will offer flexibility to cope with any regional oversupply of aircraft at a time when Southeast Asian rivals such as Malaysia's AirAsia Bhd are deferring orders due to deteriorating markets.

Juneyao previously said 9 Air aims to start domestic flights from the southern Chinese city of Guangzhou in the second half of this year. Juneyao could not be reached for comment for this story.

With low-cost carriers accounting for only about 7 percent of China's air travel market, the country is "the last great frontier for LCC traffic," said Duffy.

TP, which currently leases planes mainly to Lion Group airlines, expects to ramp up its third-party leasing business in 2015 and 2016, from about six aircraft this year. TP's focus is on large markets in China, Brazil, Japan and the United States, said Duffy.

"These guys are the needle mover in Asia Pacific. They probably got more capacity delivering over the next three years in seat number terms than anyone else. So there's obviously much more uncertainty around whether there'll be demand for all that extra capacity," said Timothy Ross, Asia transportation analyst at Credit Suisse.

CHALLENGE TO LEASING FIRMS

Airlines have been leasing out surplus aircraft on an ad hoc basis for years, usually in small volumes. However, the scale of the order books of Lion Air and European low-cost carrier Norwegian has attracted attention as a potential source of competition to the mainstream leasing companies, which are an increasingly important part of the global aircraft market.

"Their acquisition cost is probably very low, and in this business, cost of capital and timing of your entry are the two most important elements and particularly when it comes to leasing," said Ross, referring to Lion.

Norwegian Air Shuttle Chief Executive Bjorn Kjos told Swedish newspaper Svenska Dagbladet recently that the airline had set up a leasing company in Ireland and planned to lease out 100-150 jets in a bid to challenge the top lessors.

Still, leasing arms of airlines can face challenges and successful offshoots of ordinary carriers have so far been somewhat rare.

Airlines, engaged in a capital-intensive business with high cyclical risks, tend to have a wide mixture of capital costs. Leasing also requires specialist operations teams and there may be complications over aircraft configuration.

Most importantly, industry analysts say, airlines tend to be guarded about leasing from each other as it means opening the books to a potential future competitor. Lessors typically require a deep dive into an airline's books and carry out credit checks or pore over operations such as maintenance facilities. (Editing by Ryan Woo)

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