Aerospace leasing, an alternative asset class that focuses on purchasing and leasing aviation assets, can provide investors with diversified and uncorrelated returns relative to other asset classes. While aircraft are durable and capital-intensive like other physical assets, they are uniquely flexible in deployment and limited in supply. Historically, aerospace leasing has been a stable, income-generating investment class with strong downside protection due to the underlying security of the lessee's credit and the asset.
The aerospace sector, which plays a crucial role in global transportation, is influenced by several complex factors, including global economic trends, ongoing supply chain challenges and technology lifecycle management. Despite these dynamics, it also represents an intriguing, risk-adjusted investment opportunity. Below, I outline what investors need to know about the current aircraft leasing landscape, address some of the principal industry tailwinds, and explain why it is an interesting option in the alternative investing space.
The Growing Aircraft Leasing Sector
Aircraft leasing involves renting aircraft to airlines and other operators, allowing airlines to expand their fleets without the substantial capital expenditures required to purchase aircraft. There are two primary types of leases: operating leases and finance leases. Operating leases are typically short—to medium-term and do not transfer ownership. In contrast, finance leases are often long-term, used for new(er) aircraft and result in the transfer of ownership at the end of the lease term.
Both types of leases have accelerated growth over the last several decades. According to Cirium, operators have shown an increasing preference for leased aircraft since 2000, as the share of leased aircraft within the global fleet has increased from roughly a quarter to over half today.
Industry Tailwinds and Opportunity
Over the past five years, the aerospace industry has seen widespread change across several dimensions. The following factors have been especially influential in driving the growth of aircraft leasing:
- Post-Pandemic Recovery: Even several years after the height of the pandemic, the aviation industry is still rebounding from COVID-19, with passenger traffic and cargo demand increasing. This recovery has driven the production of new aircraft and the need to expand the useful life of the incumbent fleet, creating a stable demand for leasing.
- Fleet Modernization & Supply Chain Issues: Airlines are increasingly focused on modernizing their fleets to improve fuel efficiency and reduce carbon emissions. This has led to a focus on acquiring more efficient planes, often through leasing. Moreover, well-publicized supply chain issues have impacted the production rate of new aircraft and engines, resulting in an interesting opportunity for used aircraft. Leases are increasingly being extended while more creative approaches are being taken to manage and maximize the maintenance lifecycle of used aircraft.
- Economic Growth: Global economic growth, particularly in emerging markets, is increasing air travel demand. As airlines expand to meet this demand, they often turn to leasing as a flexible and cost-effective solution. Importantly, aircraft, unlike real estate, is a mobile asset class.
- Demand for Both New (and Older) Aircraft: Innovations in technology, such as the development of more fuel-efficient engines and the use of sustainable aviation fuels, have led airlines and larger leasing companies to focus on newer aircraft. For investors, the production of new aircraft requires large capital allocations, with exposure to strong credits with long-term and relatively low returns. By contrast, investing in mid-life to end-of-life aircraft offers an opportunity for investors to exploit higher returns that are based more on opportunity than scale.
- Growth in Non-Commercial Aircraft: In addition to commercial aircraft leasing, there are also a growing number of compelling, well-structured investment opportunities in leasing aircraft modified for specific missions, including medical rescue, homeland security, surveying, defense and infrastructure. These leasing contracts often have the benefit of sovereign backing and tend to be longer-term in nature.
Investment Considerations
For investors looking to enter the aircraft leasing market, several factors should be considered:
- Not All Leases Are the same: It is crucial to understand the underlying leasing contract, its technical nuances, and how the leases interact with the aircraft’s maintenance cycle.
- Portfolio Diversification: Diversifying investments across different types of aircraft, including different sectors, allows investors to build a strong, diversified portfolio without overreliance on one type or unnecessary exposure to geopolitical risks.
- Risk Management: Effective risk management strategies are crucial. These include assessing lessees' creditworthiness, monitoring geopolitical developments, and staying informed about the aircraft's maintenance condition.
- Long-Term Perspective: Aircraft leasing is a long-term stable yield investment. Investors should be prepared for market fluctuations and focus on the industry's growth potential. The nature of leasing creates a bond-type income-generating investment. Typically, leases are correlated with interest rates, and any financing is usually hedged to mitigate fluctuations during the lease term.
Conclusion
Aircraft leasing continues to offer a compelling risk-adjusted opportunity for alternative investors as we head into 2025. The longer-term income-generating nature of leasing and the fact that a high-value physical asset underpins it offers a natural hedge with historically low volatility.
The industry's issues are also relatively well-known and predictable. The current supply chain challenges and new production delays are growing pains that will eventually be resolved. At the same time, while the market presents opportunities, it also comes with risks that must be carefully navigated. By aligning themselves with the right manager, investors can capitalize on the potential of this dynamic sector.
Nathan Dickstein is Managing Director and Head of Aerospace Leasing at AE Industrial Partners.
