Avolon places major purchase order for aircraft to enhance supply capacity

Aircraft leasing giant Avolon has placed one of the largest aircraft orders by a leasing company in the past five years, as persistent supply shortages prompt major lessors to lock in production slots years ahead of delivery.

The Dublin-based lessor, 70 percent owned by Shenzhen-listed Bohai Leasing, has agreed to purchase 250 aircraft from Airbus and Boeing, with options for another 100 jets, according to announcements by its Chinese parent company on Friday.

The agreements mark Avolon's largest combined order with the two manufacturers, comprising 140 Boeing 737 MAX aircraft, 75 Airbus A320neo-family jets and 35 widebody A330neos. Deliveries are scheduled to extend through 2035 for Airbus and 2036 for Boeing.

The potential transaction value totals up to $63.44 billion at catalogue prices, including the options, although actual purchase prices are typically lower following negotiated discounts. The agreements remain subject to approval by Bohai Leasing shareholders.

The orders come despite recent weakness in global passenger traffic, highlighting the contrast between short-term demand uncertainties and the longer-term shortage of new aircraft.

The agreements are seen primarily as Avolon's move to secure scarce future production capacity rather than a direct indicator of current airline confidence in long-term traffic growth, Ben Schmidt, senior director of North America non-bank financial institutions at Fitch Ratings, told China Daily in an exclusive interview.

Worldwide air passenger demand fell 0.8 percent year-on-year in August, according to the International Air Transport Association, reflecting disruptions in the Middle East and slower growth elsewhere. Excluding the Middle East, demand increased just 0.6 percent.

Meanwhile, aircraft production continues to face engine shortages, spare-parts constraints and maintenance challenges, limiting the availability of new aircraft.

Schmidt said demand for new narrowbody aircraft continues to exceed supply, while shorter maintenance cycles for new-generation engines further restrict aircraft availability.

Securing delivery slots well in advance gives lessors greater visibility over future fleet growth and access to fuel-efficient aircraft as airlines replace older jets, he said.

The composition of Avolon's order also broadly aligns with long-term industry forecasts. Narrowbody aircraft account for 215 of the 250 firm orders, or 86 percent, compared with around 81 percent of the 42,060 new commercial aircraft Airbus expects to be needed worldwide between 2026 and 2045.

The European manufacturer expects global passenger traffic to grow by an average of 3.9 percent annually over the period.

For Bohai Leasing, the transaction further expands the order book of its principal international aircraft leasing platform.

At the end of September, Avolon reported a fleet of 1,092 aircraft, including 499 on order, serving 138 airlines across 62 countries. The new agreements would increase its firm order commitments to 749 aircraft.

Schmidt said large, diversified lessors are generally better positioned to secure manufacturer delivery slots, arrange financing and manage aircraft transitions, giving them an advantage when aircraft are in short supply. But the benefits of the latest order will take time to materialize.

"Current bargaining power remains driven mainly by the shortage of aircraft available today, rather than aircraft scheduled for delivery after 2030," Schmidt said.

He said the latest order is therefore unlikely to have an immediate material impact on industry lease rates or competition, although it could strengthen Avolon's position over time.

Avolon has continued to expand its leasing business while managing its existing fleet. In the third quarter, it sold 29 aircraft and arranged leases for 28 new-technology jets, while 89 percent of aircraft scheduled for delivery over the next 24 months had secured placements.

Nevertheless, longer-term orders carry uncertainties.

Schmidt noted that lessors typically secure airline placements two to three years before delivery, leaving future orders exposed to changes in demand, airline profitability and financing conditions.

Funding requirements will increase substantially as aircraft are delivered, while interest rates and capital-market conditions remain difficult to predict over a decade.

Fitch considers Avolon's established capital-market access and diversified operations as factors that help mitigate these risks, Schmidt said, adding that future aircraft placements and financing needs will remain important considerations.

lijing2009@chinadaily.com.cn