Yomiuri Shimbun Correspondent

DUBLIN -- Major Japanese trading companies are focusing on the global aircraft leasing business. This is driven by expectations of growing demand for air travel. Airlines are also increasing their reliance on leasing over ownership because it provides them with greater financial and operational flexibility.

Ranked 2nd globally

At a maintenance hangar at Dublin Airport in the Irish capital, workers were manually inspecting turbine blades inside the wing-mounted cylindrical engines of an airplane. Inside the cabin was a tunnel-like space, with the ceiling interior and seats all removed.

"The aircraft is undergoing some maintenance and repair. It has come to the end of its lease with one customer (an airline), and it is being prepared for transition and lease to the next customer," said Paul Colleran, head of technical at SMBC Aviation Capital Ltd., a major Ireland-based aircraft leasing company. "We're also meeting requests for new seat configurations and Wi-Fi," he added.

The company leases aircraft to airline companies worldwide and performs maintenance at the facilities of nearly 100 airlines in partnerships around the globe.

In April, Sumitomo Corp. and other entities including SMBC Aviation Capital, in which Sumitomo holds an indirect stake, acquired Air Lease Corp. (now Sumisho Air Lease Corp.), a major U.S. aircraft leasing company, for about 7.4 billion dollars. This summer, SMBC Aviation Capital placed orders for a total of 200 aircraft with two major aircraft manufacturers, Boeing Co. of the United States and Airbus SE of Europe. This accounts for about 10% of the annual orders received by both companies last year.

As a result, the combined fleet owned by SMBC Aviation Capital and Air Lease, both affiliated with Sumitomo, totals about 1,900 aircraft including order backlog, making them the world's second-largest aircraft lessor. The world's largest is Ireland's AerCap Holdings N.V., with about 2,000 aircraft.

Shingo Ueno, president and CEO of Sumitomo, visited Dublin earlier this month to commemorate SMBC Aviation Capital's 25th anniversary. Expressing an aim for the world's top spot, he told The Yomiuri Shimbun, "If we pursue 'sale-and-leaseback' transactions (where we buy aircraft from airlines and lease them back) and place new orders, it will be entirely possible for us to have more than 2,000 aircraft."

Lease ratio rising to 50%

The global aircraft fleet is projected to grow from the current about 35,000 aircraft to over 50,000 in 20 years. This is because air passenger traffic is widely expected to grow, particularly in emerging markets, in line with global economic growth.

The proportion of leased aircraft is also expected to increase. Leasing allows airlines to avoid owning aircraft, thereby reducing financial burden by cutting initial costs, which can reach tens of billions of yen per aircraft, and enabling them to manage business plans, such as route networks and fleet composition, with greater flexibility.

Although leasing used to not be the mainstream approach, its ratio has been rising year by year and currently stands at about 50%. It is expected to expand further in the future.

Production of new aircraft by the two major manufacturers is not keeping pace with orders, and it is said to take about five to eight years from the time an order is placed until delivery. According to Japan Aircraft Development Corp., the two companies' order backlog stood at about 17,000 aircraft as of the end of July.

Airlines are therefore increasingly turning to leasing, including the use of used aircraft. Aircraft can remain in service for about 25 years through regular maintenance and overhauls, which involve extensive disassembly, inspection and repair and are conducted every few years to a decade.

Amid soaring fuel costs, airlines are also increasing their use of "sale-and-leaseback" arrangements -- selling their aircraft to leasing companies to secure funds and then continuing to use them under lease agreements -- to stabilize their finances.

Making series of investments

Other major trading companies are also paying close attention to the aircraft leasing business. According to the U.K. aviation analytics company Cirium, the rate of the leasing of large wide-body aircraft rose by an average of 14% last year.

Itochu Corp. announced in June that it would acquire a 37.5% stake in Sirius Aviation Capital Holdings Ltd., an aircraft leasing company based in the United Arab Emirates. In August, Itochu announced that it would invest about 1.946 billion dollars in Aviation Capital Group LLC, a major U.S.-based aircraft leasing firm, to acquire a 50% stake. Aviation Capital Group is wholly owned by Tokyo Century Corp., a major leasing firm in which Itochu holds a roughly 30% stake, and Itochu will participate in the Aviation Capital Group management as a 50% stakeholder.

Sojitz Corp. announced in May that it would acquire a roughly 20% stake in Japan Investment Adviser Co., which is engaged in aircraft leasing and other businesses, thereby making it an equity-method entity. Mitsubishi Corp. and Mitsui & Co. each have invested in Ireland-based aircraft engine leasing companies.

Ireland grown into global hub

Meanwhile, there are also concerns about the future of aircraft leasing business. The current global rise in long-term interest rates is putting financial pressure on leasing companies that acquire aircraft. Geopolitical risks and trade friction could disrupt supply chains or reduce air passenger demand itself.

The aircraft leasing industry is centered in Ireland. Irish companies own half of the world's leased aircraft.

It all began in 1975 when Tony Ryan, who had worked for a major Irish airline, identified a business opportunity and founded Guinness Peat Aviation (now AerCap), one of the earliest aircraft leasing companies. An ecosystem, comprising related talent and business transactions, was then established.

Ireland is considered business-friendly due to its official language being English, its European Union membership and its low corporate tax rate. The country's economy is also a point of attention.

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This article is from The Yomiuri Shimbun. Neither Dow Jones Newswires, MarketWatch, Barron's nor The Wall Street Journal were involved in the creation of this content.

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