Avolon agreed the acquisition of Castlelake Aviation Limited (CAL) with an 118-strong aircraft portfolio in September 2024. Last year, Avolon was the third largest purchaser of aircraft in the world, after Air India and Indigo, and shows no sign of slowing down its growth rate.
The Castlelake portfolio is made up of 68% narrowbody aircraft and 70% new technology aircraft on lease to quality airlines. “We think this is a clean portfolio, and we are really comforted by the mix of counterparties and the length of the average remaining leases,” said Geaney. “When you see an opportunity like this that provides scale, accelerates volume, with a really good mix of counterparties and assets that we think are accretive to our existing business, then you take it.”
Geaney views Avolon’s purchase of CAL as “a natural part of the lessor’s growth story”, which “accelerates earning growth, supporting Avolon’s ambition for a higher investment grade credit rating,” he says.
Scale is of utmost importance to new aircraft lessors especially those in the top rankings like Avolon, looking to use their orderbook – the largest amongst lessors - to compete for business. Scale is required to gain and retain that all-important investment grade rating that can considerably cut the cost of funding by providing access to the unsecured debt capital markets. But having a certain scale also changes the conversations with airline customers as larger lessors can provide total fleet solutions, greater access to different markets, an upper hand when purchasing aircraft, new or in the secondary markets, it also provides access to more sophisticated financing solutions and minimise execution risk.
Reaching significant scale organically is very difficult, which is why large-scale portfolio acquisitions are so popular.
“We have been looking at every scale opportunity that has come to the market to buy portfolios of aircraft and indeed platforms since the industry emerged from Covid,” says Geaney. “This is the first one that has hit that sweet spot of the right asset mix, the right counterparty mix, and the right return for us and the right scale.”
Avolon acquired Castlelake’s portfolio, which has $3.3bn of transferable debt attached for $1.2bn according to a stock exchange filing by Avolon’s 70% shareholder Bohai Holdings. At the end of June 2024, Avolon had $8.2bn in available liquidity, meaning it is well placed to cover the cost of the acquisition. Geaney notes that the lessor has chosen to maintain a conservative balance sheet for precisely this sort of purchase. “We have been under levered because that was what we felt was the right thing to do in order to ensure that we could take advantage of an opportunity like this if it arose; while ensuring that it was helpful to our earnings upgrade trajectory, rather than challenging to it.”
Following the final close of this transaction in the new year, Avolon’s key balance sheet metrics will remain within the target investment grade ranges. Pro forma for the transaction Avolon’s balance sheet metrics remain within its target investment grade ranges: net debt to equity of 2.8x and next 12 months sources to uses of 1.5x.
According to the agreement between the two parties detailed in a stock filing at the Shenzhen Stock Exchange, CAL will divest five operating leasehold aircraft that it had already signed sales agreements for before the transaction is completed. After the divestiture, CAL’s assets will consist of 85 operating lease aircraft, 22 finance leases for aircraft and engines, nine secured loan assets, and 13 aircraft orders. The portfolio has a weighted average aircraft age of 4.7 years and a remaining lease term of 8.4 years. Major customers include AirAsia, Qatar Airways, Avianca, Delta Air Lines, Gulf Air and 18 other airlines.
“The average age of the fleet is 4.7 years, which is really quite young for an existing portfolio,” notes Geaney. “The weighted average life of the leases in the portfolio is 8.4 years, and the credit quality is surprisingly good. We take on a lot of extra Delta, Air France, Scoot and Qatar exposure, and there are some other names where we have strong existing relationships – the Abra group and AirAsia – for example, but we are taking on Gulf Air as a new customer, which we’re excited about.”
A “significant” part of the portfolio is with AirAsia, shares Geaney: “We have known AirAsia for a very long time and we have watched their journey out of Covid really closely. We are big believers that the operating business has recovered really well.”
Within the strong mix of aircraft there are almost 50 A320ceo and neo family aircraft, a smaller selection of NGs and MAXs, and a smattering of wide body aircraft as well as seven CRJ900s.
“The CRJ 900 stands out as a less liquid asset type; there are seven of those but they’re on very long leases with Delta,” says Geaney. “We have existing business with Delta. We understand their business model well and we believe they’ll want to operate those aircraft for a very long time.”
The new portfolio also includes five A220-100s, which Avolon will own for the first time. “One aircraft that we have not had in the portfolio before is the A220 and we have been looking to find ways to get exposure to that aircraft type,” says Geaney. “Over the past year, we have been bidding for the aircraft but we just haven’t been successful. So we are very pleased to be able to take on that asset type on.”
In a recent trading update for the third quarter, Avolon said that it had sold 11 aircraft and ended the quarter with 59 aircraft agreed for sale. In the first nine months of the year, Avolon agreed the purchase of 134 aircraft – including CAL – and agreed the sale of 85 aircraft.
The lessor delivered nine new aircraft during the third quarter and transitioned five aircraft to a total of 11 customers. It also entered into letters of intent for the sale and leaseback of nine aircraft. Avolon ended the quarter with an owned and managed fleet of 577 aircraft, with total orders and commitments for 442 fuel-efficient, new technology aircraft. Pro forma for the transaction, Avolon would have an owned, managed and committed fleet of 1,137 aircraft.
Avolon’s financial performance during the second financial quarter was positive, which Geaney described as having “demonstrated the ongoing recovery of our financial performance”.
Avolon’s net income for the second quarter was $105 million with operating cash flow of $448 million, , continuing the positive trajectory of its financial performance. Total lease revenue rose by 8% and Geaney confirmed that Avolon’s lease rate factor “continues to increase” adding that it was “clear the market is improving”.
The trading market has been strong and Avolon has been one of the most active players.
“Since launching the business, we have been one of the most active aircraft traders globally,” says Geaney. “Since 2012, we have traded 400 aircraft, generating $13bn in proceeds and $900 million in trading gains. This momentum has continued into this year, with 15 aircraft sold and letters of intent signed for 17 more.”
Geaney continued: “With ongoing supply chain challenges slowing new aircraft deliveries and a potential decline in interest rates, existing leases are becoming more attractive. Leases negotiated during periods of higher interest rates offer stronger margins as interest rates fall. This creates a favourable environment for our trading activities, and we remain engaged with trading counterparties to capitalize on these opportunities.”
Looking ahead for Avolon and the industry as a whole, Geaney acknowledged that the environment can change rapidly. “As strong as the market is currently, this is a cyclical industry. We are really aware of that, and we think we’ve built the business to withstand change,” says Geaney. “We believe that the supply and demand imbalance is so profound and will be for the coming years that a lot would need to go wrong on the demand side for that market to find itself back in balance. We don’t expect the market to remain necessarily as strong as it is today through to the end of the decade but we do expect the supply constraints to be significant throughout that period, and even in a declining demand environment.”
Avolon remains confident in its ability to navigate future challenges and remain a key player in the aircraft leasing industry.