Bubble and trouble

Add them all up and these three carriers alone have signed up for 1,316 aircraft worth some $135 billion at list prices, although with these levels of orders they’ll be getting major discounts.

It doesn’t end there. Airbus and Boeing have been making hay while the sun shines with orders from a host of other low-cost operators across the region, including the new wave of budgeteers emerging in China.

When it comes to the question of whether this is all going to lead to an over-capacity disaster somewhere down the track they all sing from the same song sheet. Not an issue, they suggest. The growth prospects for air traffic in the region are so strong there will be no problem filling seats and launching endless numbers of new routes to keep the traffic flowing and growing.

Nevertheless, it is now emerging that some of the big LCCs are hedging their bets by taking out a unique form of insurance they hope will protect them if things go awry. Both Lion and AirAsia have recently set up their own leasing subsidiaries, apparently to provide them with a back door to offload surplus capacity if markets hit a road bump.

Lion Air has set up a Singapore-based lessor, Transportation Partners, which aims to ramp up third-party leasing in 2015 and in 2016, focusing on China, Brazil, Japan and the United States. The carrier’s chief operating officer John Duffy says it will act as a strategic hedge, or pressure valve.

“If planes coming into the group are identified as being surplus to requirements, then we have the right to lease them anywhere. ” AirAsia quickly followed suit, establishing its own aircraft leasing subsidiary, Asia Aviation Capital (AAC), based in Labuan, Malaysia’s offshore financial hub. While it will manage all the aircraft owned and operated by AirAsia and its regional brands in Thailand, India, the Philippines and Indonesia (with Japan to come) it will also look to find customers elsewhere.

AirAsia group chief Tony Fernandes says ACC is expected to generate as much as US$50 million over the next few years with long-term projections seeing it earn US$100 million in later years. It is expected to place aircraft in target markets such as China and Africa. While providing a hedge against ending up with too many aircraft, the idea is clearly also aimed at providing yet

It is now emerging that some of the big LCCs are hedging their bets.

another revenue stream for LCCs that are currently showing signs of tightening yields and diminishing profits in an increasingly competitive market.

Of course none of this impresses incumbent lessors. The emergence of these “part-time” lessors could eat into their own lucrative business, which brings in net profit margins of around 20 per cent, far better than airlines themselves enjoy. They also suggest that lessors set up by airlines themselves don’t have the expertise or backup to allow them to compete with the big players. Besides, at least one lessor, Dutch-based AerCap, thinks the big jet manufacturers are making too many planes and not all of them will end up getting delivered.

“Clearly there is a vast amount of over-ordering,” said AerCap chief executive Aengus Kelly recently. It is the world’s third biggest lessor after GECAS and ILFC.

While they won’t comment on moves by individual customers to enter the leasing business, Boeing and Airbus also appear to be underwhelmed by developments. Commenting on the sidelines of a recent conference Airbus’s top salesman John Leahy said: “I do not encourage our customers to set up leasing companies… the leasing model is a different model. . . I don’t think airlines running part-time leasing companies is a good alternative. ” Boeing marketing vice president Randy Tinseth was similarly unimpressed. “The better question is whether this practice is practical. Leasing companies have infrastructure to support the placement, contracting, configuration and technical management of the assets – airlines do not. ” The reaction is hardly surprising. Neither of the manufacturers is keen to see anyone upsetting some of their major customers, the big lessors, who now buy 40 per cent of their aircraft.

On the other hand, Lion and AirAsia can hardly be blamed for recognising an opportunity to making some money from a business that is proving extremely profitably. As AirAsia’s Fernandes puts it, there is big interest in investing in commercial aircraft.

“People are looking for good rates of return with low risk. The asset class of airplanes is becoming a good asset class. ”