China Aircraft Leasing Group Is Open To Expansion

At Aero-Engines Asia-Pacific in April, Donald Liu, deputy chief commercial officer for Greater China at Hong Kong-based China Aircraft Leasing Group, also known as CALC, discussed the possibility of the airframe lessor company growing as an engine lessor and how it leans on its MRO joint venture in order to maximize asset values.

What is the state of the leasing environment in the Asia-Pacific region? What are operators looking for and on what terms? 

The Asia-Pacific region is recovering to roughly where we were before COVID. This region cannot be talked about without China, which is at around half the level it was before COVID, but we are seeing the rapid growth of air traffic there. During the COVID period, which stretched across nearly three years, the industry got used to video calls and conducting meetings remotely, and there were doubts about people wishing to travel after. Luckily, this didn’t happen, and traffic picked up quickly afterward. We are in a long-term business, and the leasing environment in the region looks good going forward. As for leasing strategies, we position ourselves as a full-value chain lessor, which doesn’t mean we chase the full value from year zero to 20 of an aircraft’s life cycle but instead meaning we focus on all sides of an asset. We do speculative orders and sell the aircraft with a lease agreement attached to a new portfolio while also doing buyback agreements on aircraft with a lease attached to it. This strategy has worked even better for us post-COVID, because we are in the transition period of fleet upgrades and the aging of aircraft in the Chinese fleet at a time when China also is becoming more open to secondhand aircraft and even the secondhand parts market.

China Aircraft Leasing Group achieved a 14.2% revenue increase for last year compared to 2022. What were some of the dynamics behind the company’s increased revenues? 

Last year continued to be a good year for us. We operate nearly 200 aircraft globally, with more than 70% of the fleet we operate in China. Last year we placed 21 aircraft, with 13 going outside of China and eight staying in the country. The majority of our customers in China are first-time customers, and next year, we have six first-time customers globally. Our target is not just to chase fleet growth but also to look for stable dividends to the shareholders and high liquidity of the assets with 90% of our existing fleet being narrowbody aircraft.

Where do you see some of the Western-made aircraft in your portfolio—such as Boeing and Airbus models—growing over the next few years?

In terms of the Western aircraft types, we are a top five customer for Airbus in existing orders. As of Mar. 31, 2024, CALC had 135 aircraft on backlog, including Airbus A320neos and COMAC ARJ21s. We remain active in the market to seek opportunities for Boeing products, as well. We follow the market, and we remain open to a wide range of aircraft types like we have in our existing fleet, comprised of [Airbus] A320ceo, A320neo and A330 and [Boeing] 737NG, 737 MAX and, most recently, [Boeing] 787 aircraft. We continue to look at Boeing products inclusive of widebodies going forward. However, on widebodies, we are cautious to place speculative orders, unlike with narrowbody aircraft and engine types. For widebodies, we intend to have tentative customers first before we place an order. That’s typically how we work.

What is the strategy for the Chinese-manufactured Comac aircraft, given the Comac ARJ21s already in your portfolio and the orders in place for more along with tentative Comac C919 commitments? 

We have two ARJ21 aircraft out on lease at present. CALC has its affiliated airline in Indonesia, TransNusa, which took delivery of the very first two overseas ARJ21 aircraft last year. This wasn’t an easy process but was ultimately a successful one. CALC is involved more deeply throughout this process than what a typical lessor would do generally. Our aim is to be the leading full-value-chain lessor in China by doing more than a typical lessor or financial institution. This means we’re spending a lot of time looking to continuously improve our asset management expertise. We are collecting further knowledge in order to strengthen this. As a launch customer of the ARJ21 aircraft, there has needed to be a full knowledge of the program’s lifespan from manufacture, exporting, financing, services and even modifications operations.

CALC has a small engine leasing portfolio. What is this comprised of? 

Most of our portfolio is aircraft leasing, but we do have around half a dozen engines out on lease. Given 90% of our portfolio aircraft are narrowbodies, these engines are comprised of [CFM International] CFM56 and [Pratt & Whitney] V2500 engines. Going forward, however, we are open to more opportunities in other engine programs given that the roundoff of fleet upgrades on aircraft such as the A320neo and 737 MAX is centered heavily on new engine options. There will be opportunities during this transition period for both mature and new engine products.

Does this mean CALC could likely grow as an engine lessor? 

We are open to that. For mature product engines, we must do that because we want to keep the fleet flying and provide engine solutions for customers. In that case, we have to own all our own engine pool to have the flexibility to move assets around. For new narrowbody engines such as the CFM International Leap and the Pratt & Whitney geared turbofan, we are still on a learning curve, and this may take longer than everybody expected, although it’s nothing abnormal. During this learning curve, airlines need to buy more spare engines. But eventually, these engines will mature, and when that day comes, those airlines will back away from owning this engine pool. And in that stage, financial institutions with funding and lessors like CALC will take over some of these assets and make a long-term plan to support the operation of airlines. The decision-making process is similar on all programs: We look at the market and follow it. As a lessor, we are operating in the middle of the OEM and the operator. We don’t manufacture aircraft, and we don’t operate them. We have to place speculative orders based on our customer base and our forecasts.

For the past five years, CALC has operated its FL ARI MRO joint venture with FL Technics in Harbin, China. How does CALC lean on this joint venture to support its MRO requirements for its portfolio? 

The MRO facility started as a teardown shop in Harbin, and we have MRO capacity, as well. It’s not our target to do teardown or MRO services specifically; instead, both are combined as part of our full-value-chain strategy to get the maximum out of an existing asset. An example of this was last year in Harbin, where we took five 737-800s at around 20 years old on average. We swapped out a lot of the key elements—from landing gears to engines to auxiliary power units. Ideally, you don’t want to put a lot of investment into such an old asset, but you want to keep it flying for as long as possible in order to optimize asset value. Out of this came three serviceable aircraft that could be kept flying by operators that don’t need a lot of flight cycles but instead wanted the aircraft for cover usage. The rest of the airframes were torn down.