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Bank of China's aircraft leasing unit sees growth opportunities amid downturn

➤ BOC Aviation Ltd., the Hong Kong-listed aircraft leasing unit of Bank of China Ltd., plans to spend US$5 billion on buying planes from airlines.

➤ The Bank of China unit plans to grow its portfolio and support its cash-strapped airline customers during the industry downturn.

➤ Half of BOC Aviation's customers may be allowed to defer part of their monthly lease payments; company may take back a handful of aircraft from airlines that may fail.

SNL Image

BOC Aviation CEO Robert Martin.
Source: BOC Aviation Ltd.

Bank of China, like several other global lenders that have expanded into aircraft leasing and financing in recent years, is caught in the sudden downturn in the aviation industry as COVID-19 becomes a global pandemic and countries enforce travel restrictions.

The International Air Transport Association, a global body of the airline industry, said April 14 that it expects airline passenger revenues to drop by 55% this year. As of early April, global passenger flights were down 80%. There was a day in April when Hong Kong's Cathay Pacific Airways Ltd. flew 582 passengers, down from its pre-pandemic daily average of about 100,000 passengers.

Even after the outbreak is brought under control and global air travel resumes, most analysts believe demand will take several months to return to pre-outbreak levels.

Bank of China's Hong Kong-listed aircraft leasing unit, BOC Aviation, has activated its "downturn" plan and aims to spend US$5 billion on buying planes from cash-strapped airlines. The strategy is to support its long-term customers and grow its portfolio, CEO Robert Martin tells S&P Global Market Intelligence in an interview. The company currently owns 323 jets and has another 204 on order.

This is an edited transcript of the interview.

S&P Global Market Intelligence: How is the pandemic affecting you and your customers and what are you doing to protect your business?

Robert Martin: You've got to be there both in the good times and the bad times. We've been proactively going to them and offering to purchase and lease back planes. We've already announced Cathay Pacific for six Boeing Co. 777s, American Airlines for 22 Boeing 787s ... by the end of this month, we would have announced around US$5 billion of fresh [capital expenditure] since Feb. 1.

If you're in any asset-based business, the best time to buy assets is during a downturn. And even better if you could get a 12-year lease with a top-tier credit with it as well.

About half of our customers need a deferral and we have reasonable confidence that they can pay us back. What we're generally doing is a three-month deferral of around about half of the monthly rental that we want them to repay us over the summer high season, which for the northern hemisphere is July-August-September.

A handful of our planes are with a very small group of airlines that may not survive. There, we enter into negotiations with the carrier to get a consensual return of the aircraft and we commence our re-marketing activities. That group for us is just about eight aircraft.

Where are you going to get the funds to buy new aircraft? It would also increase your liabilities; how would you manage that?

We amortize our debt repayment profile over a 10-year period. During this year, we only had one large bond repayment; that was US$750 million, payable on March 27. And we've already repaid that. At the end of March, we had US$3.6 billion of cash and available credit lines. Even during first quarter this year, we've raised new money. We did a US$400 million bond issue and we did additional new debt issues of another US$700 million and US$100 million of revolving credit facilities were rolled over with the banks.

Another source is the private placement market, where even in today's markets we get inquiries from investors who've dealt with us before.

At the moment, we haven't drawn anything under our US$2 billion backstop facilities from Bank of China. But we will start drawing from those as we bring new transactions in.

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Do you expect to be left with aircraft that you can't place with airlines in the coming quarters, and are you in touch with your customers and airplane manufacturers to defer some deliveries?

We are fully placed for all new aircraft for 2020. But we are receiving some requests from airlines asking us to defer some aircraft. And so, we are working with the manufacturers to defer those aircraft. Airbus SE announced last week that they've decided to cut the A320neo production rate from 60 a month to 40 a month ... we are working with them to move some of those deliveries back. We're doing the same thing with Boeing.

How do you expect the recovery in air passenger traffic to play out? How much time might it take?

We think it's going to come back in four phases. The first phase is freight. We have already seen freight rates here in Asia jump by 200% to 300%. So freight is definitely in demand, because of all the factories that have reopened on the eastern seaboard of China. The second is because passenger planes aren't flying, the bellies [cargo space in passenger planes] obviously are not flying, and so there's more demand for dedicated freighters.

Second, we believe, will be domestic operations. We're beginning to see this in China, where domestic fights have picked up and we see 50% of the domestic flights are flying in China. The next step that we would expect to see is regional flying. We're not at that point yet, but that is coming, where you'll see flights in and out of China, basically some countries in the region. The fourth part, then, is intercontinental.

The base case we're working on is that we begin to see traffic begin to pick up in the rest of the world in the month of June as we move into the northern hemisphere summer season. If there were to be a second round of this, that would mean you could see this getting pushed into the middle of the summer season before we basically see flights picking up again.

What kind of permanent impact can coronavirus have on the global airline industry?

There will be a fundamental restructuring of parts of the airline industry here in Asia. In North America, that's already happened, we've had consolidation there. In Europe, consolidation started last year, but I think there is some more for it to run this year. But in Asia, we've really haven't seen any consolidation at all. I think that is going to come. In particular, a lot of the new carriers that have emerged over the last 10 years. We will find out now how solid the financial backing is and whether their backers are prepared to double down and put in more equity.