SE Asia’s airlines have problems, so do the leasing companies

Garuda is loosing fistfuls of money by the minute

As I mentioned in yesterday’s article, Malaysia Airlines is about to force a restructuring on its engine and aircraft leasing companies they don’t like. The company is actually using UK law to make the restructure happen because of an arcane practice used widely in international business, that contracts United Kingdom Law and UK Courts as the arbiters of contractural disputes. Recently for example, an argument between the government of Djibouti in the Horn of Africa and China over who owned the port in the country after a dispute, was supposedly settled in the UK Court, but neither side particularly liked the ruling and ignored it.

Malaysia isn’t the only SE Asian airline in dire straights. Garuda in Indonesia is loosing fistfuls of money every day posting a US$700m in losses for the last quarter and needs bailouts just to get through the next few months.

In Bangkok, Thai Airways is in effective bankruptcy protection with no clearly defined exit route. Its hard to work out how you can exit bankruptcy when there is no market to serve.

International agreements to create maintenance and support services around the region have basically been dropped, as markets fail and there is no vaibility to them even in the medium term.

The huge Air Asia brands are in dire straights, returning quite literally hundreds of aircraft to the leasing companies. The vast order which always seemed a bit bloated even the good old days, of 400 Airbus aircraft is basically being reduced down to the point it will effectively cease to exist in real terms. On paper it will look like deferments into the late 2020’s. Air Asia X has in essence cancelled orders for ten A350’s and 30 A321neo’s.

Back in Indonesia the huge LionAir is basically demanding massive reductions on its rentals from its leasing companies, as well as a whole ream of other contract term concessions – if it doesn’t get them it will simply hand the 200 aircraft back.

Leasing companies are in shock at the amount of aircraft they’re faced with. In many ways they have themselves to blame. They went from a mere 10% of the market in 2000 to close on 55% of the market in 2019.

Airlines were encouraged to hand over aircraft they bought for a cash injection to either keep themselves flying or use for some other purpose – including paying dividends to shareholders, as the sale and leaseback was seen as a profitable business transaction.

Leasing is basically a rental, and while you might agree a 10 or 12 year lease on a large aircraft like an A380 or 777, it might only be 5 to 8 years on something like an A320neo, especially if you’re in the high turnover, cheaper-to-have-new-than-maintain-old LCC or ULCC market.

That approach from the LCC market has been adopted more widely by the main line and legacy carriers. Airlines might have to pay a penalty for cutting a lease short – maybe as much as 25% of the total payable, but if they don’t have the money, well they don’t have the money! That means all the leasing company can do is agree to the return of the aircraft voluntarily so they at least have the asset.

At least with a lease when airlines fold you can get the aircraft back

The problem for the leasing company is that right now, the asset itself is now used, has little chance of being re-leased any time soon, and they have borrowed the money to buy the aircraft they in turn rent out to the airlines. They now don’t have an asset that covers the money they borrowed, no income to pay the banks for the capital loans they raised because the rentals aren’t being paid. Worse still they have to pay to store and maintain the returned aircraft.

What just a few months ago was a profitable cash cow for the leasing companies had now turned into them paying the banks back and having to pay to keep the aircraft viable. Sooner or later one or more of them is going down.

However some of the very wealthy leasing companies, who are also the largest, have seized the opportunity and are looking longer term. Some of them have been able to acquire nearly new aircraft from airlines that bought their own, on sale and leaseback, for a bargain basement price. The recent deals with Finnair and Air Canada for instance may have given them much needed short term cash, but they still have to pay the rental and the amount they got wasn’t anything like the real value of the aircraft.