An Attractive Market for Private Equity Investment

The aircraft finance market is a hot topic and likely to remain a well-positioned for over the coming years as there is a significant increase in orders of aircraft for both new aircraft types, and substantial demand in the emerging markets. According to the Boeing Current Market Outlook the annual airplane demand could grow up to 40 per cent over the next decade.

In fact we believe potential opportunities will emerge in the aviation financing sector for investors looking to deploy large amounts of capital efficiently. In 2016, the industry forecasts funding for approximately $127 billion in new commercial aircraft deliveries, in which the capital markets and commercial banks make up for around two-thirds of the total amount.

We have witnessed continued growth in the number of aircraft on operating leases which is fundamentally the result of following principal drivers. Firstly, the airlines could face financing at competitive interest rates but which are potentially too expensive to access the capital market to buy aircraft, especially in a volatile economic environment. Secondly, leasing provides airlines with a degree of fleet flexibility that would not be possible with owned or debt-financed aircraft. Moreover, aircraft assets have generally not been subject to as wide valuation fluctuations as other asset types subject to business cycle and entire risks. Lastly, it is an important factor of diversified fleet financing strategies, even for airlines that are able to increase finance in the commercial markets. Hence, commercial aircraft leasing is considered a global business with attractive growth dynamics.

Leasing companies also play a key role in financing aircraft deliveries as they are better placed to tap into new investment resources. As a result, leased aircraft will grow at a higher rate than owned aircraft.

With increased demand for leased aircraft, Private equity (PE) investors have long been attracted to the investment rationales of the operating lessor. One of the key attractions to PE for aircraft leasing is that the industry serves a growing airline market as the air traffic demand has been expanded greatly due to the urban population, globalisation and cross-border economic trends.

In addition, aircraft have consistently created stable risk-adjusted returns for PE investors throughout the economic cycles, outperforming many other asset classes in terms of returns and volatility. The aircraft leasing business will tend to remain strong given the solid fundamentals around asset values, the favourable and predictable supply and demand characteristics of aircraft assets and the long-term steady returns that lessors have provided throughout various industry cycles.

PE investors have taken into account what are significant hurdles for entry into the aircraft leasing space, given that the businesses are very capital intensive with acceptable returns only provided on a levered basis. PE investors are familiar with different leverage perspectives. They often apply a diversified debt funding mix to the lessor with funding ranging from bank financing to export credit supported loans. Therefore, PE certainly has contributed a significant role to capitalise the aircraft lessors that are playing the economic cycles and investments in diverse aircraft assets in various ways.

At Brookfield Aviation, as a main part of our business activities, we provide a range of financial solutions to our clients worldwide. We are proud to announce strategic partnerships with private equity investment groups with substantial financial resources and committed industry expertise to support the aviation and aerospace industries in realising their growth ambitions.