Airplane financing may be flying too high; investment bubble feared

By Laurence Fletcher and Robert Wall | The Wall Street Journal

Private-equity investors, known for their jet-setting ways of landing deals, have become hooked on the air transport business. Some fear an airplane investment bubble is forming.

Attracted by a global rise in passenger numbers, an explosion of budget airlines and healthy profits, private-equity funds have poured $207 billion into financing commercial airliner deliveries since 2009, according to Boeing data, during which time almost $900 billion was spent on new jetliners. But with returns dampening, some investors worry the historically cyclical sector is overinflating.

"The big question is, are we in a bubble and is it going to explode in the face of investors? My view is that there is a significant risk of a big bursting of the bubble," said Michel Dembinski, head of aviation at Japanese financial group MUFG.

Average return on investment data is hard to track because most deals are private. However, Mr. Dembinski thinks returns have fallen to the mid-single digit range from 10% to 15% a decade ago. Though other factors are at play, lower returns feed through to lower average monthly leasing rates for the most sought after new planes, Boeing 737s and Airbus A320s, which have fallen sharply in recent years, according to aviation data provider IBA.iQ.

Interest in aviation is a reflection of rampant demand from global investors for more niche, private markets. Low bond yields, high equity markets and often-disappointing returns from investors such as hedge funds have helped drive private-equity fundraising activity to its highest level this century in 2017, according to data group Preqin. Privateequity funds now sit on a record $1 trillion of uninvested cash, according to Preqin.

In June, private investment firm Castlelake, L.P., a longtime investor in aviation, completed a $911.3-illion securitization to finance a portfolio of 36 aircraft. Late in 2017, Apollo Global Management LLC, the private-equity firm co-founded by billionaire investor Leon Black, agreed to acquire privately held Sun Country Airlines for an undisclosed amount.

That came shortly after Indigo Partners LLC, a US private-equity group with stakes in fast-growing discount airlines, organized a joint plane purchase between four airlines and European plane maker Airbus to acquire 430 planes valued at almost $50 billion before typical discounts.

Aengus Kelly, chief executive of AerCap Holdings NV, one of the world's largest plane rental companies, said while there are credible private-equity investors in aviation, some recent actors aren't long-term players. This raises the possibility that they could bolt for the door if short-term yields dry up.

"A bunch of these guys are tourists," he said. "They are investors looking for any place to park money to get returns. What they are looking for is somewhere to park their money to get some yield," he said, without naming names. "That money will leave the sector at the first sign of trouble."

Airlines have been quick to tap that money. Carriers buying new planes have been increasingly turning to capital markets – including private equity and small investors – to finance their new jets.

However, plane investments, which typically are long-term bets, can be risky. The airline sector tends to be highly cyclical, exposed to the whims of the broader economy. It is a lesson some may have forgotten given the sustained boom in air traffic.

Furthermore, plane preferences can change or not materialize. One example is the Airbus A380. When the program began with big promise of conquering the market, private investors flocked to help airlines finance their deals. But the market for the superjumbo that can seat more than 600 passengers has softened with airlines preferring other models. German asset manager Dr. Peters Group said in July it would recommend to investors they sell two used Airbus A380 superjumbos for parts. The company failed to find a new home for the planes used for a decade by Singapore Airlines Ltd. before that lease contract expired.

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