Buy or rent? The steady rise of airlines with no passengers

The article was taken from The Economist at http://www.economist.com/node/21543195

THERE is a saying in the transport business that if it flies or floats, you should rent it (there are also much ruder versions of this epigram). Nevertheless, airlines have traditionally bought their planes, even if many purchases were arranged as “finance leases”, with the instalments dressed up as rent payments so as to make them tax-deductible.

However, airlines are turning increasingly to “operating” leases, in which they really are renting the planes, for a few years at a time, with a leasing company bearing the risk of any slump in their second-hand values. Over a third of the world's airline fleet is now rented (see chart) and the proportion is likely to keep growing. Paul Sheridan of Ascend, an aviation consultancy, reckons that of the world's top four owners of airliners, two are lessors: GECAS, with 1,732 planes, and ILFC, with 1,031, soar miles above Delta (800) and American Airlines (775). A chunk of the aircraftmakers' bulging order books is from leasing firms betting that demand for rented planes will keep rising. Alafco, a Kuwaiti lessor, splashed out $4.6 billion (at list prices) on 50 Airbus A320neos in November.

One of these big “airlines with no passengers”, RBS Aviation, was sold this week by Royal Bank of Scotland, a state-rescued British bank. A consortium led by Sumitomo Mitsui of Japan paid a handsome $7.3 billion, a sign of Asian banks' eagerness to move into aircraft finance as struggling Western institutions retreat. China Development Bank bid unsuccessfully for RBS Aviation and may now seek another leasing firm to buy. Bank of China bought a Singaporean lessor just before the financial crisis and it is now in the world's top ten. ILFC is part of AIG, a bailed-out American insurer, which is seeking to sell it.

Prospects for the leasing business are strong, says Philip Baggaley of Standard & Poor's, a credit-rating agency. Airlines lack cash to finance their big plans for fleet renewal, and they cannot borrow cheaply to buy new planes. Deals in which airlines sell part of their existing fleet to a lessor and rent it back are becoming more common: Air France-KLM wants to do this with planes worth a total of