Aircraft leasing - up, up and away

Wanted: cash-laden buyer interested in moderate long-term returns from a cyclical industry at the mercy of global aviation. Aircraft leasing is just such a so-so pitch. Yet four big deals have been done this year, culminating in AIG's offloading of its unit, International Lease Finance Corp, for up to USD 4.8bn. This spate of interest underlines the aircraft leasing industry's cyclicality.

The sale of ILFC to a Chinese consortium is the third to an Asian buyer, after Sumitomo Mitsui paid USD 7.3bn for RBS Aviation Capital and Mitsubishi UFJ Lease spent USD 1.3bn on Jackson Square. Asian banks are the ideal buyers in that they are cash-rich. For them, the business's average 6.2 percent total return - according to the aircraft investment index compiled by Ascend, a consultancy - looks good.

The buyers of ILFC include banks, insurers and trust companies, so cash looks plentiful. And China should provide leasing opportunities: its airlines' combined aircraft order backlog, relative to the country's economic growth and its total fleet, looks more that of a sluggish western economy than a fast-growing aviation market. That sort of opportunity explains AIG's plan to keep a tenth of ILFC, which is the industry's largest player by number of aircraft. There is potential upside elsewhere too: aircraft demand should continue to grow and cash-strapped carriers are turning to sale-and-leaseback deals.

But anyone wondering why AIG has opted for a sale rather than the float it had hoped for need only look at ILFC's recent performance. Since 2009, the unit has taken USD 3.7bn of writedowns from marked-down sales and the falling value of models as more fuel-efficient ones appear. Even after that, the USD 5.3bn value implied by this sale is USD 2.6bn short of ILFC's reported equity as of September. Those cash-rich buyers will need not only deep pockets but skill to manage this business.

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