SMBC Aviation warns of tough two years for leasing industry


Aircraft lessors are facing roughly two years of lower rental rates due to the collapse in air travel, according to SMBC Aviation Capital, which on Wednesday deferred delivery of 68 Boeing 737 Max jets for four to five years.

“It will be a tough couple of years for customers and the leasing market,” said Peter Barrett, chief executive of SMBC Aviation, as the top five lessor posted a rise of nearly 6 per cent in annual pre-tax profits to a record $364.5m. “We will have to manage the portfolio, but we see opportunities for businesses like ours to support a recovering industry.”

Mr Barrett said these opportunities included increasing market share by buying aircraft from airlines seeking to raise cash through sale and leasebacks of their jets. 

SMBC Aviation was better placed than rivals to exploit these opportunities given its strong shareholder backing, he said. SMBC Aviation is owned by a consortium of Japan’s Sumitomo Mitsui Banking Corporation, Sumitomo Mitsui Finance and Leasing Company and Sumitomo Corporation. It is one of only a handful of lessors not to have seen the outlook for its credit rating moved to negative by Moody’s and Fitch, who have voiced concerns over the impact on the industry of lower rental income and a fall in the resale prices of used jets.

“We have very few debt maturities in the short term, $6bn in cash and very strong shareholders. All those things become more important through what will be a tough couple of years.”

SMBC Aviation’s decision to defer the unbuilt 737 Max aircraft due to be delivered up to 2022 would cut capital spending by about 40 per cent to $2bn in 2020, bolstering its financial position. In addition to these 68, a futrther 48 737 Max aircraft had been built by Boeing but could not be delivered as long as the jet remained grounded after two fatal accidents. The timing of those deliveries were the subject of discussions with Boeing. 

Mr Barrett said the group did not intend to cancel any of its orders, in what will be seen as good news for Boeing’s ill-starred aircraft. Avolon, the Chinese owned lessor, in April cancelled its order for 75 of the jets, while airlines GOL, Smartwings and Air Canada have all cancelled orders for the single-aisle aircraft.

Meanwhile, Mr Barrett said he expected recovery of the global aviation market to take some time. But there were signs that passengers were keen to get back to flying, he said. In China “there is a sense of pent-up demand”, and airlines were recording growing numbers of passengers on individual flights. 

Mr Barrett’s comments came as Iata, the aviation trade body, signalled that the worst of the decline in passenger flights could be over. The trough had been reached around April 21, when there were virtually no passenger jets in the air, Iata said on its weekly global update. But the number of flights had risen by 30 per cent in May since then. “We are still something like 73 per cent lower than we were on January 1,” said Brian Pearce, chief economist at Iata. “But certainly . . . it looks as though April will mark the low point.”

Mr Barrett said that while the majority of customers had requested rental deferrals of one to three months, he expected that by next spring “many will be generating reasonable levels of cashflow and able to meet their obligations”.

SMBC Aviation’s core lease rentals for the year ended March 31 increased by 5.5 per cent to $55.8m. 

Total aircraft operating lease assets grew by 3.7 per cent to $10.6 bn — a lower-than-anticipated level of asset growth due to the grounding of the 737 Maax and delays last year to the Airbus A320 Neo. 

SMBC Aviation’s operating margin came in at 40.5 per cent, above the long-term target of 40 percent. The average age of the group’s aircraft portfolio was 4.1 years, one of the lowest in the industry, Mr Barrett said

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