A question we are often asked. Well before answering the question, it’s worth looking at who invests in Aircraft. The universe of investors is quite large, and covers Banks, Private Equity funds, Insurers, Pension Funds, Tax Investors, (Jol’s/Jolco’s etc.), The Public – buying publicly traded lessor stocks, The Bond Markets, EETC’s, Airlines, Lessors, and Metal Traders. I’m sure there are one or two more, but that list captures the main players.
Of these, some are more active than others, e.g. some hold Assets directly, or with other co-investors through SPV’s, and/or Leasing Platforms. Others hold notes or paper.
But back to the Why? Why do investors choose to invest in Aircraft? What are the main drivers of their investment decisions? And will that all change in a post-Covid environment?
In terms of understanding why people invest in Aircraft, perhaps firstly it’s worth noting that Aircraft Assets share some common characteristics with other well understood alternative assets, like infrastructure and property.
These are all “Hard Assets” with long economic lives, and they all require considerable upfront capital expenditure to acquire them. Also like infrastructure and property, Aircraft Assets generate relatively predictable contracted cashflows. However two of the key differences and/or advantages that Aircraft have, are their mobility and liquidity.
Aircraft are very mobile assets, typically with a 25+ year economic life, and they enjoy global recognition. As such, they are relatively easy to relocate across different geographies, and re-lease across different clients. Whereas property and infrastructure are fixed, and therefore more influenced by local factors.
In terms of liquidity, there is a globally active market for Aircraft Assets. Assets are bought and sold regularly, sometimes with leases attached, and sometimes naked – i.e. just the metal. Airlines also regularly enter into Sale & Leaseback transactions on new Aircraft at the point of delivery from the OEM’s, and also on older unencumbered Assets in their fleet to boost their cashflow.
The long term value of Aircraft is relatively predictable throughout the economic cycles, however short term fluctuations certainly do occur, as we have seen throughout recent history, at times like the Gulf War, 9/11, SARS, the Global Financial Crisis, and now during the Covid-19 pandemic, which grounded most of the worlds fleet.
The important point to remember however is that Aircraft are long-term secured investments that generate high yields, and each lease payment is a mixture of principal and interest, so the capital at risk diminishes over time.
In terms of extracting maximum value at the end of a given investment period, there are many options available for investors to consider, including onward sale, reduce to spares, conversion to freighter, entering a new lease, selling the SPV, etc. etc., so in contrast to having a piece of property without a tenant, there are many viable exit strategies when it comes to Aircraft investments.
Recognising where we are in the economic cycle however, is key to making wise investment decisions, as is not over-paying for an Asset, and selecting the correct Asset type. Typically after a cycle trough, the industry enjoys 8-10 years of recovery, which is where we are likely heading from early 2022 onwards.
In conclusion, investing in Aircraft can provide investors with attractive risk adjusted returns, and can help to diversify a balanced portfolio of hard alternative assets, in a defensive investment strategy.
To extract attractive returns however, requires a skilled Asset Management team, who are well connected and experienced in the market, and who will work hard through active Asset Management to continually find opportunities to create value for investors.