Newport Beach-headquartered lessor Aviation Capital Group (ACG) believes aircraft trading will be its primary growth channel for the foreseeable future, with OEM delivery timelines pushed to the right creating uncertainty for both lessor and airline orderbooks.

“Boeing aircraft are 18 to 24 months late from the original-schedule delivery month. Airbus aircraft are 18 to 24 months from the original-schedule delivery month. They're both struggling to manage their production schedules,” ACG’s chief executive officer, Tom Baker, tells Airfinance Global in an interview.

Baker explains that over the past three years, ACG’s orderbook had been more oriented toward Airbus aircraft, driven by placement dynamics as well as the need to restructure its Boeing orderbook following the 2018 and 2019 Max crashes. 

“Now, there's a dip in our Airbus content and Boeing are the primary aircraft we're expected to take this year and into next year, and a lot of those we're still waiting to see,” Baker says. 

“Boeing is still trying to figure it out, but we are seeing signs of improvement.  We've already taken six aircraft from Boeing in the first 10 weeks of this year - five for Air India and one for Neos – so they’re coming. In terms of confidence factor, do we expect some more slippage? Possibly but we really don’t know.”

He notes that the sale and leaseback channel also remains “thin” since airlines, being in the same boat as lessors, are not getting the same amount of capacity as they expected. 

“When airlines do have an opportunity to finance aircraft, the sale and leaseback channel is very competitive and still not as active as we would want, because the OEMs aren't making aircraft fast enough."

Lessor M&A is also starting to pick up, according to Baker. 

“Things take a long time in this industry, but you will see probably increasing M&A in our space, because people need to find that growth.” 

That leaves portfolio trading, the most active of the four channels right now for lessors. “We are seeing tons of portfolio activity. We've been buying and selling a decent number of aircraft. And so that will be our primary channel this year.” 

He notes though, that at some point such trading will start to dry up. “You can only buy and sell the same airplanes so many times from the same people.” 

“Everybody who has an existing portfolio, or everybody who has an orderbook has metal to sell. If you must meet certain growth targets and you don't have a portfolio, then unfortunately, you're a price taker, and that's what we're seeing: very, very strong bids on the sell side.” 

Add to this the fact that a lot of airlines also just want to buy aircraft outright to take control of the metal. “We've been in situations where we put a portfolio to market, and we'll typically go to the airline first and say: 'We're going to put this out for sale. Are you interested?'” 

The economics must make sense, but this approach works well to minimise a lot of the transactional friction that comes with trading, according to Baker. “It's got to be competitive. It's got to make economic sense and match our reservation pricing, but it's good for the relationship. We don't want to be disruptive, and it typically has proved to be a very good solution for ACG and the airline to sell directly to them.” 

Decision-making on lease extensions is dependent on the airline, the aircraft, and the age of the aircraft, however Baker says that airlines these days are very reluctant to return aircraft. 

“Historically, with second leases, you're usually seeing shorter tenors, and a step down on the lease rate. What we've seen consistently now is a transition from a first lease to a solid six years on the second lease at very healthy lease rates.” 

"Through Covid, getting airlines to extend aircraft meant being very competitive on lease rates, but since then the economics have become more compelling," he adds.

Baker points to a structural shift towards aircraft leasing, driven by ongoing OEM delays. “It’s a question of who's got the metal. I think that's what's driving it now, and lessors have the metal, whether it's through an existing portfolio or through an orderbook. Historically, access to capital and cost of capital have been the main factors driving market share for the lessor financing channel. 

“Now it's cost of capital, access to capital and access to metal,” Baker reflects. 

“As long as there's a scarcity value to the metal, as long as people need to go find somebody with airplanes that are available, people who have aircraft – lessors - will have more market power than at other times in history.” 

Predominately a narrowbody lessor, Baker notes there is potential to increase widebody exposure. ACG’s fleet comprised just under 500 owned, managed and committed aircraft entering 2025, according to Airfinance Global Aircraft Intelligence. 

“We're 96% narrowbody at the moment, and some of that was Covid induced and another aspect to that was core business strategy. But I think that's a little bit too far out on that end of the spectrum. 

“I don't think you'll see us be 50/50 narrowbody/widebody anytime during my tenure here. But there is more room for widebody capacity, there has to be. 

“Is it 80-20, 85-15, in terms of percentages? We can’t say for sure, but we don't have the exposure, so we don't have the concentration, so it’s a whiteboard opportunity for us.” 

The lessor is most bullish around the new technology, medium widebody space, encompassing the Boeing 787 and Airbus A350. It recently delivered to Air France one A350-900 as part of a multiple aircraft sale and leaseback (SLB) transaction, which includes sustainability-linked KPIs. 

“Given slot constraints at airports, the focus on densification of certain lines, if there's ubiquity of the aircraft in the market, lots of operators, opportunities to move it and it's core to the fleet, and it's a strong tier one credit, then we think that investment thesis holds up,” Baker concludes.