BUSINESS

Changes are coming to aircraft leasing as risks cloud the recovery.

Paris (Reuters) -This week, SMBC Aviation Capital’s deal to buy smaller rival Goshawk Aviation for $6.7 billion is shaking up the global aircraft leasing market.

The move comes as businesses report that the U.S.-led recovery is stronger than expected. However, inflation, rising borrowing costs, and the effects of the conflict in Ukraine are putting a cloud over the recovery.

With this deal, SMBC moves ahead of Dublin-based competitor Avolon to become the No. 2 company in its field worldwide, behind AerCap.

Analysts say that the long-awaited agreement to take over Goshawk, which was confirmed by the company on Monday after a Reuters report last week, could put more pressure on smaller competitors to do the same as interest rates rise and funding costs go up.

“It means that only the biggest and strongest lessors can compete at the levels you need to compete at to win,” said Ishka consultant Paul O’Driscoll.

More than half of the world’s fleet of planes is now owned by leasing companies, and bankers say that at least one lessor is being eyed by a private equity firm as the industry grows.

CEO of SMBC Peter Barrett is one of the leaders who took over the Dublin-based aircraft leasing industry from Irish tycoon Tony Ryan’s up-and-down business empire. He says he thinks the industry will continue to grow.

Barrett told the people at the Airfinance Journal conference in Dublin two weeks ago that a series of industrial and economic crises would change things.

At the event, which was one of two back-to-back conferences in the world’s air leasing capital, he didn’t talk about the long-running rumors of a partnership with Goshawk.

“You need sellers to be willing to sell, but that is going to change, partly because it will cost more to get money. This will play a role in whether the owners keep these assets or sell them “Barrett said at the meeting.

After Monday’s announcement, SMBC refused to say anything else about the Goshawk deal.

AerCap CEO Aengus Kelly, who shook up the industry by buying ILFC in 2013 and then GECAS last year to get the number one spot, says that size gives you more power in important talks with repair shops and jet manufacturers.

Kelly told last week’s Airline Economics conference, “You’re just on a different level than the rest of the industry.”

“No one wants to merge just to get bigger, but I think it will happen over time.”

Steven Udvar-Hazy, who was a pioneer in the leasing business, warned against making deals just to make deals.

“It won’t change the total need for planes around the world. It’s just a change in who supplies the airlines with those planes “The executive chairman of Air Lease (NYSE:AL) Corp in the United States said.

“We’d rather get more planes than hire more people and make more rules

So we’ll keep looking at it, and if a good chance comes along, we’ll take it “he said.

FARES, HIGHER LEASE RATES

After not meeting for two years because of the coronavirus pandemic, the delegates at the Dublin conferences announced that demand was on the rise.

The speed of the U.S. airline industry’s recovery has surprised people, despite red flags like higher interest rates, inflation, high oil prices, and geopolitical risk.

After the two-year safety grounding of Boeing’s (NYSE:BA) 737 MAX, COVID-19, and Russia’s recent seizure of hundreds of planes, there aren’t enough of some key planes right now.

Kelly told analysts on Tuesday that after years of too much supply, even the market for wide-body jets is getting tighter.

Lessors warned airlines that they might raise ticket prices if they had to pay more to get money.

Marjan Riggi, senior managing director for corporate aviation at Kroll Bond Rating Agency, said, “After many years, the lessors have power over lease rates.”

But it’s not clear if and how quickly inflation and less money people have to spend could hurt the industry again.

David Power, a special adviser to Aergo Capital and the former chairman of Orix (NYSE:IX) Aviation, sees inflation as a side effect of years of central bank stimulus that is still manageable.

The cause is growth, and the effect is inflation. And the other reason for inflation is that a lot of money is put into the system when interest rates are very low At the Airline Economics event, he said.

Others worry that it could cause an economic downturn and lessen traffic.

Norman Liu, who built GECAS out of the ruins of Ryan’s leasing empire in the 1990s, warned financiers about a return to growth-free inflation and asked how long the travel snapback would last.

Liu said at the Airfinance Journal conference, “Everyone is talking about how great the summer was for travel, but when you talk to people about the fall, do we get to the point where travel is no longer a novelty?”

“What does it mean for the industry when there is stagflation?” Liu added.

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