Thanks to a rise in the number of Chinese consumers able to spend more on travel, Chinese aircraft lessors are expanding rapidly and bringing added competition to the global marketplace that may further pressure the yields and margins of established companies.
China’s growth in air traffic has been a key driver of strong global demand for commercial aircraft, and in a recent report by Fitch Ratings analysts expect the rapid pace of this growth to continue, with revenue per passenger kilometer likely to increase to 10% per year over the next decade or so. So far this year, 42% of Chinese aircraft deliveries have been lessor-owned, up from 33% in 2012.
China’s Belt and Road initiative and Go Global strategies are also helping drive Chinese lessors pursuing international expansion, Fitch said. This expansion is also aided by airspace bottlenecks and a lack of airport capacity for domestic routes.
“Chinese-backed aircraft lessors are competing aggressively in the global market across the spectrum of future aircraft orders, new delivery transactions and the leasing of older aircraft,” Fitch said. “Chinese entrants may price risk differently from established players, given their growth priorities and generally shorter track record in aircraft leasing. Leasing subsidiaries of leading Chinese banks [are] also benefiting from their parents' funding and capital support, which may lower their funding costs and provide an advantage over standalone global competitors.”
Increasing competition in the worldwide market could pinch profitability and weaken underwriting standards for established international lessors, thus raising the risk of market shocks putting pressure on lessors’ ratings. “Several airlines have already been forced into bankruptcy this year, including Monarch of the U.K., Air Berlin and Alitalia. This illustrates the weak credit quality of some airlines even in a benign market environment, as well as the dangers for lessors of significant airline customer concentration,” analysts said.
– Nicholas Stern, managing editor