“Aircraft leasing is a large-scale worldwide branch of financial services.”
Icelease is a business unit specialising in aircraft trading in the international marketplace. Icelease is an arrangement company which ties together and utilises the vast knowledge, experience and business contacts within Icelandair Group in the business of buying, selling and leasing aircraft. All aircraft related assets for aircraft trading purposes are kept in the holding company IG Invest which is managed by Icelease.
Icelease has been involved in numerous aircraft transactions in the past two years. The transactions can be categorised either as investment or trading. Trading is when an aircraft is bought and sold with back to back agreements, usually kept for a short period of time and does not affect the balance sheet. Investment is when an aircraft is bought and kept for a period of time in a rising market, and will be sold later for a higher price.
Whenever Icelease arranges an aircraft purchase for investment purposes, a new limited-liability company (special purpose company, SPC) is set up in co-operation with outside investors. Icelease manages the holding company, IG-Invest, which in turn holds the shares of the SPCs. The aircraft is then leased to financially trustworthy airlines on a long-term lease agreement that fully covers the aircraft investment company’s operations. The SPCs are eventually sold out of Icelandair Group with the attached leasing contract when market conditions are right, yielding a profit. By negotiating long-term lease agreements, the company increases the likelihood of being able to exit when the market cycle is at a favourable stage.
Additionally, Icelease arranges back-to-back aircraft trading, where aircraft are sold immediately upon purchase, thereby eliminating the need for the SPC-structure.
In 2006 Icelease received 9 new generation Boeing 737-800 aircraft. One aircraft was sold outright but 8 aircraft were sold into SPC’s, in which IG Invest holds 40% of the shares. These aircraft are a part of a 15 aircraft agreement with Boeing in 2005 and were bought as an investment. During 2006, two of the SPC’s were sold, yielding acceptable sale profits.
IG Invest’s current portfolio consists of thirteen passenger aircraft, one cargo freighter and nine future deliveries of passenger aircraft with three additional purchase options. Four of the future deliveries and all three purchase options are B787-8 Dreamliner aircraft, which are expected to be used in Icelandair Group‘s operations as discussed above.
Of the 12 remaining B737-800’s, five are leased to each of Hainan Airlines of China and Air China respectively, and two have been leased to Air Berlin in Germany.
The company’s main focus has so far been on the market in South-East Asia, but also Europe. These two markets are the two strongest growing markets in the current aircraft market.
Aircraft leasing is large-scale worldwide branch of financial services. During the past 25 years the number of aircraft owned by leasing companies has been on the rise, relative to airlines direct ownership, although both the world fleet of aircraft and the proportion of the fleet owned by leasing companies have increased in size. Today around 35% of the world‘s commercial fleet is owned by leasing companies. Aircraft are critical assets for airlines and they pay around US D 115 billion annually in leases. Many companies have seen opportunities to enter the aircraft leasing business. These companies include General Electric, Daimler Chrysler and Royal Bank of Scotland.
Boeing Market Outlook forecasts the average annual passenger and cargo growth over the next 20 years at 4.8% and 6.2% respectively. Such growth will in turn increase the size of the aircraft market, resulting in improved liquidity of assets.
Icelease is fully aware that the success of its operation is highly dependent on the market cycle. The company intends to utilise the market cycle to maximize the return on equity. Ideally, the company seeks long-term leasing contracts on its aircraft, preferably 5-10 year contracts.
At the present Icelease has no new orders due to high market pressure and long delivery lines with aircraft manufacturers along with higher risk. The company is seeking opportunities trading with older aircraft, and offering leasing and financial services to airlines as well as the brokering of equity holders with long-term investment opportunities in the aircraft market.