In the skies above you there are between 8,000 and 9,000 commercial jet aircraft flying through the air every day. They carry more than 6 million people daily -- that’s over 2 billion per year -- on 33 million annual flights worldwide.
Less well known is the fact that over half of these planes are not owned outright but leased (see box "How an aircraft lease works?"): the real kings of the sky are not the national airlines whose brands almost every child can recognize, but a group of savvy financial leasing companies, one of whom is ORIX Aviation.
An even better kept secret, unless you work in the industry, is that almost all the significant lessors, including eight of the top 10, are based in a single, small European country: Ireland. The reason for Ireland and mainly Dublin being the home of the sector is down to the entrepreneurial spirit of a couple of insightful innovators back in the 1970s, along with visionary policymaking in the 1970s and 1980s, when Dublin signed double taxation treaties with over 140 countries, enabling companies to lease planes tax efficiently from Ireland, but then to operate them all over the world.
Since aircraft are the world’s most expensive mobile assets, being able to move them around quickly and easily is key to operating them profitably. Modern jets can cost from $50-55 million for a narrowbody like the Airbus A320 Neo, to $150 million for a widebody like the latest version of Boeing’s 787 or an Airbus A350. Those prices vary of course with healthier rates on offer for bulk purchases. It therefore takes a substantial balance sheet to compete in this business.
How an aircraft lease works?
An aircraft lease is a legal agreement between the lessor, who retains ownership of the asset, and the lessee, who makes use of it, in return for regular payments. This is similar to leasing a photocopier for your office or a television for your living room – apart from the size of the ticket.
A typical aircraft lease is for 8-12 years, though during the COVID-19 pandemic terms tended to lengthen as airlines, needing to conserve cash, asked for extensions. Even so, since a modern aircraft has a lifespan of 25 years, it will probably be leased several times, with the rates it fetches declining with age.
As a heavily regulated sector with incredibly high safety standards, aircraft leases invariably include a servicing package, often termed an MRO (Maintenance, Repair & Overhaul) fund. Big lessors like ORIX Aviation offer an end-to-end managed service, handling all the paperwork for its airline customers. Whilst on Lease the airline is responsible for the maintenance work required for the aircraft. And where it manages planes on behalf of asset managers, such as insurers, banks or private equity firms, ORIX Aviation will also take care of repossessing and remarketing the aircraft if this becomes necessary.
The world’s top lessor is AerCap with a fleet of over 2,000 aircraft following its acquisition of General Electric’s leasing business GECAS in 2021. The number two is Avolon, which emerged from Royal Bank of Scotland Aviation Capital, and has more than 800 aircraft in its fleet. Most of the leading operators order directly from the original equipment manufacturers, Boeing and Airbus, while other lessors purchase aircraft in the secondary market from airlines and other lessors. This is true of ORIX Aviation, which sits around 10th in the market with more than 200 aircraft, the majority of which are modern narrowbodies (see chart). Since its foundation in 1991, the group has executed over $42 billion in transactions and currently has over 50 airline customers and more than 80 asset management clients.
“Our robust full-service business model, deep management experience and talented group of over 100 aviation professionals has enabled us to serve the world’s top airlines and become a trusted steward of capital for leading global financial institutions,” says CEO James Meyler. Add to that the stable ownership by its A-rated parent ORIX Group and it becomes clear why ORIX Aviation has been consistently profitable for over 20 years, including during the disruption caused firstly by the pandemic and then Russia’s invasion of Ukraine.
That record is set to continue: lease rates are increasing as travel demand recovers and airlines that were keen to ground planes over the past two years now find themselves short of capacity. At the same time, lessors have to pass on much of the rising cost of their own finance as monetary policy tightens.
Two factors, meanwhile, distinguish ORIX Aviation from most of its peers. Firstly, it is the pre-eminent player in the JOL market (Japanese Operating Lease - aircraft leases for which Japanese investors have the title of aircraft) and has completed over $6 billion of JOL transactions in the past five years. In fact, over half its current fleet is leased on this basis – again, the financial and brand strength in Japan of ORIX itself is a significant plus.
Secondly, ORIX Aviation holds a 30% stake in Avolon, and together the two companies have some $38 billion of assets under management. While partly owning a rival is somewhat unusual, the two companies do not actually compete much directly, since they secure and place their aircraft in different markets.
This amicable cross-shareholding shows aircraft lessors can overcome their traditionally fierce rivalry when it matters – and this is most visible when it comes to decarbonization. Aviation is responsible for more than 2% of global carbon emissions, most released high in the atmosphere, and eliminating these is a huge challenge. “We understand that net zero by 2050 has to happen,” says ORIX Aviation’s CFO Marie-Louise Kelly, “and we believe the leasing sector, which orders more aircraft than airlines, has to lead.”
As chair of Aircraft Leasing Ireland (ALI), the sector’s key trade association, Ms Kelly led the October 2022 launch of a ALI’s Sustainability Charter (see chart), through which over 30 lessors have signed up to 10 ESG principles – including the development of Sustainable Aviation Fuel (SAF) to replace today’s kerosene.
While shorter routes, better traffic management and ever lighter and more efficient aircraft all play a part, the scaling up of SAF production will be critical to hitting those decarbonization targets. Just to meet the European Union’s mandate that 5% of all jet fuel must be sustainable by 2030, will require 750 production plants; right now, there are only four.
Still, as Ms Kelly notes, technology can ramp up far more quickly than expected, as the renewable energy sector has shown.
“The leasing community has a responsibility to lead the drive for net zero carbon by 2050. We’re already on that journey. Sustainability is top of the agenda for our industry. And lessors are at the forefront of the new technologies needed to change the way we fly. That includes research into Sustainable Aviation Fuels, hydrogen powered aircraft as well as electric aircraft. We are working with manufacturers, airlines and the capital providers to aviation. We are actively investing in all of those potential solutions, I am confident technological breakthroughs will provide us with more,” Ms Kelly comments.
ORIX Aviation itself is partnering with Avolon, Boeing, SkyNRG, and Sustainable Flight Solutions to study the development of SAF production in Ireland. And as an industry that lives and dies by its cost of capital, aircraft lessors will react rapidly in response to tightening standards.
Other innovative technologies include hydrogen-powered aircraft and eVTOL (electric planes that can take off and land vertically) for shorter routes, potentially replacing helicopters. Avolon has ordered up to 500 eVTOL planes and ORIX Aviation is partnering with airlines and airports in the Japanese market to support this nascent sector.
Overall, a combination of greater efficiency, technological breakthroughs and – realistically - higher ticket prices will help aviation to reach its sustainability targets while remaining a healthy, profitable business. And leasing companies like ORIX Aviation are leading the charge.
