| HONG KONG
HONG KONG Dec 13 The sale of one of the world's
top aircraft leasing companies to a Chinese consortium is the
boldest signal yet that China's aviation industry will
increasingly look to the cash-rich home market for specialist
finance to support its expanding fleet.
International Lease Finance Corp (ILFC), the aviation arm of
U.S. insurer AIG which confirmed the $4.8 billion sale
on Monday, joins a growing number of homegrown Chinese leasing
firms looking to exploit the world's fastest growing air market.
For China, the rise of a powerful air finance industry is a
third pillar in its aviation development, alongside parts
manufacturing and assembly for foreign planemakers like Airbus
and Beijing's own Comac C919 commercial jetliner project.
"It's a huge investment and (ILFC) are the second biggest
leasing company in the world," said Paul Sheridan, chief Asia
consultant for specialist aviation think-tank Ascend.
China is seen as one of the most promising markets for
aircraft leasing, in which airlines rent aircraft to keep the
cost of ownership off their balance sheets.
The world's second-largest economy will need 5,260 new
aircraft worth $670 billion through 2031, according to Boeing
Co. About half of these new planes would be owned by leasing
firms, adding about $100 billion to the market size which is
expected to rise to $268 billion in the next two decades.
PLANE PURCHASES NOT KEEPING UP WITH DEMAND
China is a major purchaser from both Airbus and
Boeing, often in batches of 100 or more aircraft to
coincide with state visits in the spirit of balancing U.S. and
But government-coordinated purchases have failed to keep
pace with demand, leaving a gap in the market for lessors armed
with speculative orders.
"We believe that there are not enough aircraft in order in
China at the moment. (Buying ILFC) will help Chinese airlines to
get more aircraft," Ascend's Sheridan said.
Until now, that has been an advantage for ILFC and its main
rival GECAS, the air leasing arm of General Electric, as
they compete with China's own domestic lessors.
"They are growing but not at the expense of ILFC," said
Henri Courpron, the chief executive of ILFC, which is expected
to remain U.S.-based with the same management after the sale.
"We have something that they don't have - an order book," he
said before the deal was announced.
Chinese lessors have so far been growing by doing sale and
leasebacks with cash-constrained airlines and by purchasing from
other leasing companies.
ILFC owns or manages around 1,000 jets and has some 230
aircraft on order. China is already a major outlet for its
planes - it has around a 35 percent market share there.
Meanwhile, China's domestic leasing industry is growing.
ICBC Leasing and CDB Leasing Co Ltd are both owned by
well-capitalised banks -- Industrial and Commercial Bank of
China and China Development Bank
China Everbright Ltd's China Aircraft Leasing Co
Ltd made its name on the international stage in July at an
airshow in Farnborough by committing to buy 36 Airbus' A320s
worth $3.1 billion.
And China has also been spreading its wings abroad.
Bank of China bought Singapore
Aircraft Leasing Enterprise (SALE) in 2006 and renamed it BOC
Aviation. Hong Kong Aviation Capital (HKAC) acquired Allco
Aviation in 2009 as a route into the international market, which
is estimated to need $4 trillion of new aircraft over the next
20 years, with about half owned by lessors.
PILES OF CASH
For now the gap between the international market leaders and
Chinese rivals is large - the fleet value of the biggest, BOC
Aviation, is less than a fifth of GECAS and a quarter of ILFC's.
But Chinese financiers in the aircraft industry have been
growing rapidly for a decade, with additional impetus provided
in 2007 when Beijing lifted a 10-year ban on banks conducting
leasing, which had been imposed in response to reckless
investment and poor management in the 1980s and 1990s.
China's big banks are sitting on piles of cash thanks to
strong economic growth and state bailouts over the past decade
which have together amounted to more than $500 billion.
The ILFC deal, involving a consortium headed by asset
manager New China Trust, which is one-fifth owned by Britain's
Barclays, will also help bring more Chinese capital
from banks into a global business.
BOC Aviation Chief Executive Robert Martin says he expects
to clock growth of about $1 billion each year over the next five
years, raising China's share in its portfolio to 25 percent from
the current 18 percent.
"We are a capital-dedicated lease operating company and will
grow roughly from $8 billion today and to $12-13 billion in five
years time," he said.
Funding for this pace of growth appears to be available in
abundance - CDB Leasing just concluded a $1.5 billion bond
offering after receiving $16.5 billion in orders.
Aircraft makers are aware of the financial muscle these
institutions are beginning to flex.
Chinese and other Asian banks are offering funds into the
aircraft market as some European banks retreat due to the
region's financial crisis and tougher capital rules.
"There is a lot of Chinese money and there has been a huge
growth in Chinese leasing companies over the last five, six
years, in particular it's promoted by government policy," said
Andy Solem, vice president, sales, China & North Asia Bombardier
Commercial Aircraft at a recent air show.
"I don't see that slowing down. All the big banks have
leasing arms or subsidiaries, which do leasing. They are buying
more and more airplanes."