Rent Vs Buy: The Rapid Rise Of The Aviation Leasing Market

Amid the hustle and bustle of aircraft deals, like the over $200 billion announced at the Dubai Airshow in 2013, few pay attention to the many moves that go into financing these deals behind the scenes.

But for Safwan Kuzbari, who first started working in the business back in 1973, it’s his bread and butter.

As we sit down for our interview the industry veteran is keen to share his insight into the GCC aviation industry, including some of the facts driving the growing market for aircraft leasing in the GCC forward.

“Operating leases some 10 years ago were only 20 per cent of the portfolio of the aircraft being operated,” he tells me. “Today, we are over 35 per cent”.

Kuzbari’s firm Novus Aviation Capital, which specialises in buying aircraft once they’re leased back from airlines, as opposed to from manufacturers, is what he describes as a ‘niche’ operation.

But with Novus expecting to close the year with $2 billion worth of aircraft transactions, there is clearly big money at stake.

Lease PLease

In view of their relatively strong financial structures, most GCC airlines are able to access all options in financing aircraft, according to Kuzbari, including paying cash on delivery, and refinancing long-term at their leisure.

But leasing is one of the more popular long-term financing routes, given the associated flexibility and reduced value risk. “Leasing has the additional benefit of being off-balance sheet, in accounting terms, which helps airlines to meet their financial targets and keep balance sheets and financial ratios attractive,” he says.

The Novus chief compares the leasing situation to that of the hotel industry, where the chains don’t own the building, but operate it under the ownership of a financial institution or a wealthy individual.

Due to the positive outlook for leasing in the GCC, with three big airlines increasing their market share at the expense of several major Asian and European competitors, a number of leasers have established a presence in the region, including Novus in 2012.

But with a mixture of successful and failing airlines outside this trio, the CEO won’t just lease to anyone.

“We pay a lot of attention in choosing our airline lessees by carefully assessing their track record, business plan, financial and operational performance, safety standards and regulatory aspects. Should a bankruptcy occur despite our rigorous approach in considering a potential lessee, we repossess the aircraft by following certain procedures and begin re-marketing the repossessed plane for sale or rent.”

Financing Partners

Seeking to capitalise on opportunities in the twin aisle segment, in September 2013, Novus teamed up with Airbus and Development Bank of Japan to establish Tamweel Aviation Finance (TAF), a firm dedicated to facilitating the funding of aircraft acquisitions with secured junior and mezzanine loans.

Explaining what prompted the deal, Kuzbari says the company found a niche, filling the gap between pure equity and leveraged senior debt, which aircraft purchasers find most difficult to source, particularly with larger aircraft.

For now the focus is on the wide body segment, particularly A380s, where the company has made a number of transactions with Emirates.

“We have already concluded three A380s with Emirates Airlines in the early part of 2014,” says Kuzbari, adding that several pipeline transactions with Airbus for other airlines are also in the works.

“We closed two A380 deals with a prominent European airline late September and early October. More deals are being considered for A330s in the coming months on the American and Asian continents.”

Adding to Development Bank of Japan’s banking credentials in Asia, German commercial bank Nord/LB was also invited to join TAF in October. The bank has a long-standing business aircraft leasing relationship with Novus, says Kuzbari, financing several of its operating lease aircraft deals, and will bring European expertise to the mix.

“As a strategic partner, Nord/LB will bring about a boost to TAF’s alternative financing platform and will contribute to its development plans,” he adds.

Meanwhile, another cooperation agreement covering aircraft leasing investment between Novus and Hong Kong’s KDB Daewoo Securities is also bearing fruit.

The partnership, geared towards the purchase of aircraft on operating lease with international airlines, announced its first transaction confirming the leasing and financing of one A330- 300HGW to Finnair in May, with more to follow.

“We have a couple of new transactions in the pipeline with KDB,” reveals Kuzbari. “This is a new market for us and we expect to grow quite rapidly in the coming year or two.”

exPansion PLans

To capitalise on new opportunities in the leasing market, Novus plans to expand to a larger office in Dubai in the first half of 2015, and increase its head count.

Areas that Kuzbari is eyeing for growth include Islamic solutions, having already invested in aircraft with a number of partners including Al Salam Bank and BMI.

“Definitely it is growing because aircraft leasing is a very sharia compliant type of asset. We have the necessary sharia gold approval and it’s a very stable and long term investment that pleases the Islamic investors with a steady return,” he says.

Overall, the CEO has a positive outlook for the industry, expecting a higher percentage of aircraft to come under operating leases in the years ahead.

‘”I suspect it [aircraft under operating leases] will grow in the next few years to reach 40 to 45 per cent because there is a lot of potential,” he says.