In a move that surprised many, a consortium led by Sumitomo revealed in September that it was acquiring Air Lease Corporation (Air Lease). Japanese companies’ interest in aircraft leasing investment has rekindled as lease rates and profitability continue to rise in response to sustained demand for aircraft. Air Lease’s large orderbook is attractive in a constrained delivery environment, as is its client portfolio.
The concept originated at the 2024 Farnborough Airshow, where the leading players – Peter Barrett (CEO of SMBC Aviation Capital), Steven Udvar-Hazy, and John Plueger (Executive Chairman and CEO of Air Lease) – first convened to explore the possibility of a merger
or sale.
Although the announcement a year after that fateful meeting shocked the market (with many previously refusing to believe that neither Steve Hazy nor John Plueger would ever really retire), on reflection industry observers have come to recognise the many rationales for the deal. Foremost is scale. Size really does matter in aircraft leasing. In every interview with leasing company chief executives over the years the importance of scale has been highlighted, and this year’s Aviation Leaders interview series has been no exception.
DAE’s chief executive Firoz Tarapore noted that compared to 20 years ago, the leased fleet owned by the top 10 lessors has more than doubled, adding that he believes scale will become more concentrated “because every year we’ve got to find a way to get bigger and stronger”. He tempers that comment with the question of whether bigger necessarily equals more profitability, which is a question all lessors chasing scale need to consider. “We don’t want to be so big on one particular airline that when trouble hits, we can’t get out of the way, or have so many aircraft on order that to secure placements we discount lease rates because anything is better than zero,” says Tarapore, speaking to Joe O’Mara, head of FS Tax at KPMG Ireland in Singapore in early November. “Both those things are systemic destroyers of capital returns. We don’t want any of that. We want to find that sweet spot where we continue to be relevant, but we continue to be proportionally relevant to our clients.”
AviLease has been gaining scale quickly and has made no secret of its desire to become a significant leasing player. Speaking to James Kelly, head of aviation finance at KPMG Ireland, in New York in October, Ted O’Byrne, AviLease chief executive made it clear that M&A was a defined investment channel for the company but noted that this requires opportunity and experience to be able to properly value the company, execute a trade and integrate the company. “There is value in scale,” says O’Byrne. “We think that the minimum threshold is a balance sheet of around $20 billion. The question is first how we get there, and beyond that is knowing what incremental value there is for driving above that threshold. That may be at the $75 billion topline level or it could be less than that, and then what you need to do to get to that scale? Considering the input costs of our industry, could I improve my input costs by getting to that $75 billion mark; or I am I good enough at $20 billion? That is a key question for the top 10 lessors. So what you can see in the next year is consolidation within the top 10. The winners will be who borrows the cheapest and who buys the cheapest, and then what balance sheet level do you need to be to achieve that efficiency. That’s the question that we all need
to answer.”
Steven Townend, chief executive of BOC Aviation, recognises the need for scale but highlights that it needs to be accompanied with relevance. “We have always said that we don’t have to be the biggest, but we want to always make sure we’re one of the top five,” he told Joe O’Mara in Singapore in early November. “It’s not about having scale for the sake of scale. It’s about relevance. It’s about making sure that we are relevant to Airbus and Boeing, to be able to get the right aircraft at the right price, at the right time; that we have relevance to the funding markets, to maintain that investment grade credit rating; and relevance to airlines to be able to close the larger transactions with the top tier airlines. You need the scale to be able to do that.”
Townend does note that relative scale is changing. Where previously, at the end of the last decade, a lessor may need to have been above $20 billion in assets, he now believes that “relevant” number is much higher. “You probably need to be at least $35-40 billion, by the end of this decade, to be certain of being in that bigger group,” he says. “That’s really just a process of the industry maturing. If the airline industry and the broader aviation industry is going to continue to grow as we all expect, and lessors are going to maintain their 50% market share, then there’s an inevitability to that level. Once companies achieve this scale, they can only be funded efficiently if they are investment grade. However, while there will be a small group of large investment grade lessors starting to move away from the pack, there will still be scope for people at a smaller level to have niches and defensible positions.”
Despite the many questions facing top ten lessors, it is clear that scale is the aim, just not at any cost. “To get a competitive edge in the leasing sector, you need scale, and that scale is coming only through consolidation because order book deliveries are still slow and unlikely to change in the very near future given the size of the OEM backlog,” says Kalash Pandey, managing director at Goldman Sachs.
The success of AerCap since it became a “super scale” lessor has not passed unnoticed by its chief rivals. With the acquisition of Air Lease’s orderbook and control over the management of Sumisho Lease’s fleet, SMBC Aviation Capital will become a significant super scale lessor challenging AerCap at the top of the lessor rankings.
SMBC Aviation Capital and Air Lease are currently the third and fourth largest aircraft lessors by portfolio size. The proposed orderbook acquisition and subsequent management of Sumisho Air Lease’s fleet would see SMBC Aviation Capital overtake Avolon as the second largest aircraft lessor, with a post-merger portfolio of 1,685 owned, managed, and committed aircraft. CMVs compiled by Airline Economics and KPMG in the 2025 Aviation Leaders Report, indicate that the merged SMBC Aviation Capital and Air Lease portfolio would be valued higher than AerCap, at roughly $54.6bn.
The combined fleet would result in SMBC Aviation Capital reducing its share of current-generation aircraft by approximately six percentage points, bringing it down to 31.4%. Air Lease holds a higher percentage of new technology aircraft, including the Airbus A220 and A330neo, which are not currently on order by SMBC Aviation Capital. The composition of new technology aircraft within the combined portfolio is expected to increase post-acquisition, with ALC reporting $1.4 bn in its aircraft sales pipeline during
Q2 2025.
The proposed acquisition also introduces new partners into the leasing sector with a new structured equity arrangement. The acquiring consortium is Gladiatora Designated Activity Company (DAC), a new holding company based in Dublin, Ireland, whose shares are held by Sumitomo Corporation, SMBC Aviation Capital, and investment vehicles affiliated with Apollo managed funds and Brookfield. Air Lease will be renamed Sumisho Air Lease and its orderbook will transfer to SMBC Aviation Capital as part of the transaction. SMBC Aviation Capital said it will act as a servicer to the substantial majority of Sumisho Air Lease’s portfolio.
SMBC, Citi, and Goldman Sachs USA have provided $12.1bn of committed financing in connection with the transaction. An SEC filing detailed that the financing will be used to fund “all amounts required to pay the merger consideration and all related fees, costs and expenses” incurred by the
holding company.
The equity portion of the transaction has gained attention for its novel structure. Under the deal, once SMBC Aviation Capital has paid cash for the orderbook portion, the remaining equity is being funded by four equity providers: Sumitomo will fund and hold 37.5% of the common equity of the new entity, Brookfield and Apollo affiliates will hold a further 37.5% of the common equity, with SMBC Aviation Capital holding the remaining 25%.
The use of this structure is due to certain banking regulations impacting the SMBC Group. The structured piece also enables significant equity to be raised to allow for such a large purchase.
Under the structured equity arrangement, Brookfield and Apollo would be entitled to a reallocation of equity from Sumitomo should dividends from the investment not meet certain prearranged parameters, which are not public. The expectation is that Brookfield and Apollo will be paid back in full over seven years, which as equity is not guaranteed, but in this structure there are covenants that should the level of returns to Brookfield and Apollo be lower than expected then that reallocation caveat would trigger. This formula makes it very likely that the structured equity would be paid off. One industry expert described this structure as very similar to preferred equity, which offers investors priority over common equity in receiving distributions and liquidation proceeds, often with a fixed return, but without the full upside potential of common equity. This makes it a more secure investment than common stock but less secure than debt, providing downside protection while allowing for some equity risk. This structured equity arrangement appears to go one step beyond that to allow for even more security of a full payout. “This is a balancing act between equity and preferred equity, which is positive for corporate credit ratings and accounting purposes,” explained one expert. “It is also relatively inexpensive equity. Typically this type of structured equity would pay an interest rate of around seven or eight percent, opposed to true equity where investors would expect a double digit return of around
15-20 percent.”
“The SMBC AC-Air Lease transaction is an excellent example of these new pockets of new equity – insurance capital, infrastructure capital, private equity capital – are coming into our space,” observed Tom Baker, chief executive of Aviation Capital Group, in a discussion with KPMG’s Joe O’Mara in Singapore in early November.
“The structure that was used on that transaction with Brookfield and Apollo providing the structured equity is interesting,” comments Vinodh Srinivasan, managing director, co-head structured credit group at Mizuho Americas during an interview with James Kelly, head of aviation finance at KPMG Ireland, speaking as part of the Aviation Leaders interview series in New York in October. “It’s something that other funds have been trying to deploy in the sector. I think you’ll see that used as a distinct financing tool in certain large ticket opportunities.”
ORIX Aviation’s James Meyler expects the use of structured equity to play a useful and meaningful part in future M&A deals. “Once the cost of the structured equity is lower than the businesses’ planned ROE over the post M&A period, then the use of such structured equity will always be accretive to a transaction. It will also provide the flexibility and short term liquidity required when the value of the assets held by the top ten leasing companies will all exceed US$15 billion in the
near future.”
Not everyone is a fan of structured equity. An industry veteran noted: “Rating agencies should not give any equity credit for the kind of structured equity used in the ALC acquisition,” they said. “Since the return on the structured equity is fixed and guaranteed, it is nothing more than expensive debt that the buyer is using to hide the excessive leverage in the transaction. For example, if the structured equity component was 50% of the total equity, the implied transaction leverage is actually 7x (non-IG) instead of 3x (IG). This enables buyers to be reckless with the price they can pay for fixed assets and is sowing the seeds today for asset valuation problems in the future.”
Structured financing aside, the rest of the leasing industry are keen to see what trading opportunities will arise following the closure of the Air Lease deal in the first half of next year. Mike Inglese, chief executive of Aircastle, which has grown significantly over the past year as it acquires aircraft, noted in an interview with KPMG’s James Kelly in New York in October that he expects trading opportunities as the two companies combine. “As you’ve seen with other transactions – SMBC AC buying Goshawk, Carlyle buying AMCK, AviLease buying Standard Chartered – when people buy a company or a big portfolio, they typically find things they really want to keep, and other things they may want to sell. That can be driven by customer concentration issues, lease expiries, or other factors that make certain assets better suited for the market. Most people believe the Air Lease portfolio will be in selling mode – probably at a greater level than it was under Air Lease itself. We’ve always seen opportunities emerge out of large portfolio trades or M&A deals, and this one is likely to be
no different.”
Although the market consensus appears to be that the top three or four companies leading the lessor table will continue to pull away from their rivals in terms of aircraft portfolio size and assets under management. Maintaining that level will not be an easy task, however. Greg Conlon, chief executive of High Ridge Aviation, who formerly head GECAS, knows all too well the struggle to maintain a balance sheet of depreciating assets. “The past 18 to 24 months have been dominated by M&A activity because aircraft are not being delivered or lessors cannot source enough new aircraft and they need to grow,” he says. “We at High Ridge have a little bit of history running a $45-50 billion balance sheet company. You have got to work hard just to stay flat at $50 billion; you probably need to add $8-10 billion a year. But you’re amortising half that, and you’re selling half that, so you have got to run faster to feed that growth. Once you get bigger than that, growth is hard to come by, which makes large scale M&A the only logical option.”
Tom Baker agrees: “Many assume that big chunks of the Air Lease portfolio will come into the market through the trade sale channel, providing billions of dollars of growth that some will be able to tap into. There is intense competition to acquire assets from a diverse set of well capitalised buyers. There are not enough of the largest platforms for sale. Once you get to a certain size, it’s difficult to continue to scale significantly, given depreciation and the importance of trading strategies to manage risk and generate earnings. It’s also not prudent to grow simply for the purpose of growth. Certainly, the industry will continue to consolidate, and some platforms will be larger than others. But I don’t see a very small number lording over all others.”
Consolidation is going to continue into 2026 and beyond as lessors feed that need for growth. The theories about mega-lessors dominating the industry have been proffered since the days of GPA and ILFC, and are unlikely to stop now in an supply constrained environment. James Meyler, chief executive of ORIX Aviation, opines that those top level lessors will continue to grow but the share of the market has not substantially moved. “ In 2005 both ILFC and GECAS together accounted for close to 43% of the leased market. In 2010 it was around 37%. So you’ve always had the mega-lessors. At the moment, the new SMBC AC–ALC combination and AerCap only account for about 22% of the market, so we’re actually nowhere near the concentration levels we had in the past,” Meyler told Joe O’Mara in Singapore. “Avolon – number three lessor in which ORIX Aviation in Ireland holds a 30% shareholding – has over 600 aircraft on lease but also an orderbook of over 520 aircraft. DAE and BOC Aviation are both growing rapidly, so you’ll see the top seven to ten lessors becoming much bigger – at a thousand-plus aircraft each. But even with that growth, the percentage of total market control will probably end up similar to what it was 15 years ago, simply because the global fleet has grown so much. Lessors essentially have to grow just to maintain
their share.”
All of these interviews form part of the Aviation Leaders interviews series by Airline Economics and KPMG, which are being published over the coming weeks on our website, Apple podcast and
YouTube channels.