Equipment Leasing Association
by Hope Katz Gibbs
Equipment Leasing Today magazine
Large ticket transportation leasing keeps rolling along, but a recession may be lurking around the corner.
Business is good right now for large ticket equipment lessors. Deregulation, combined with privatization of many of the world’s railroads and airlines, has created a rush to lease high-tech locomotives and noise-compliant airplanes.
Leverage lease finance opportunities, such as lease-in/lease-out (LILO) deals and off-balance sheet financing, also are enabling more national and international transportation organizations to find financing for short- and long-term leases. The result is a boom in business for lessors in nearly every sector of the large ticket leasing industry. Come the millennium, however, the scenario may not be as bright, warn industry experts.
“We’ll probably be moving into a recession in the Year 2000,” says Barbara Beyer, president of Avmark, Inc., a 36-year-old airline industry consulting company in Washington, D.C.
The latest economic indicators show the U.S. economy beginning to slow down, she says, and because the financial situation in Asia is in such a state of flu about 20 to 30 percent of the Asian airlines are returning leased equipment prematurely or aren’t renewing leases.
“These elements suggest to me that we’ll be seeing a downturn in the industry sooner rather than later,” Beyer says.
Richard Carolan, executive vice president of BTM Capital Corporation and chairman of the ELA large ticket business council also predicts the industry will take a hit come 2000.
“As the Asian financial crisis begins to reverberate globally, I expect the leasing industry will experience a downturn, especially in the airline sector,” he says. “I heard a rumor that a brand new Boeing 777 is sitting in the desert because the Asian carrier who ordered it wouldn’t accept delivery. You know things are bad when there are planes sitting in the desert. That’s the way it was in the early 1990s, especially during the Gulf War, when business dropped off dramatically.”
Neither Beyer nor Carolan, however, are too disheartened about the impending slump. Beyer says the recession won’t last long, “and it won’t be nearly as bad as it was in the early 1990s when, in addition to high fuel prices, we had to deal with the threat of international terrorism. Not many people want to travel when they fear they might be killed in transit.”
AIRLINE LEASING SOARS IN ’98
Despite gloomy predictions for the Year 2000, the outlook for the airline leasing industry this year is quite positive. Airline Monitor magazine’s May 1998 issue reports that 5,729 jets-nearly half the world’s fleet of 13,081 airplanes-currently are being leased.
“Big airlines are steadily leasing more aircraft and owning fewer,” says Ray Neidl, managing director of New York consulting firm Furman Selz/ING. “I think that in 10 years we will see a virtual airline. No airlines will own their own planes.”
Part of the reason is low gasoline prices. According to Airline Monitor magazine, airlines are paying an average of about $0.52 cents per gallon of fuel. Compare that to 1990 prices when, during the height of the Gulf War, airlines were paying $0.78 cents per gallon. With dozens of companies clamoring for such aircraft models as 767s, 747s, CFM Powered 737s, MD-1 Is, MD-80s, MD-90s, and A-320s—all worth $12 million to $120 million and up-many lessors are doing just about anything to close deals.
The result is a highly competitive marketplace where too much money is chasing too few airplanes, says Andy LaStella, director of aircraft and portfolio acquisitions at Republic Financial Corporation, Aurora, Colorado.
“The leases I’m currently structuring have to be much less traditional and much more creative than in years past because competition can be cutthroat,” he adds.
For instance, Republic recently bought aircraft subject to a lease agreement. The lessee wanted to convert MD-81s into MD-82s. Republic provided for the conversion and other enhancements in exchange for a longer base lease term and an increase in rental payments. LaStella points out, however, that no amount of fancy dealmaking will stave off the economic downturn that everyone in the industry expects.
“There will surely be a downtown in the economy, probably due to the Asian flu, and it will be reflected in aircraft pricing,” he says. “Right now, though, prices are high and the industry is hot.”