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Good times back for the aviation leasing industry

Aviation leasing is a highly cyclical business. "There are peaks and troughs and the skill of the business is that you have to smooth that out," said Dixon. It is where the cutthroat world of multi-million dollar deal making combines with the skill of the market trader, to ride you through the bad times and maximise returns in the good. It's also the glamorous end of the leasing industry, the end that grabs the imagination of the media. And this isn't necessarily a good thing," said Dixon.

"Part of the problem with the aviation industry, and for the companies and banks that lend into it, is the media because the media loves drama and airlines are perfect for drama," he said. But it's not Armageddon. "Many of the same aircraft that were abandoned in the [Arizona] desert because demand had dried up are now impossible to obtain. "If you're lucky enough to have them you can lease them out and pretty much name your price," said Dixon. "It's fantastic. The good times are back."

Strong demand for aircraft has also meant a return to higher residual values. "Residuals have probably doubled compared with two years ago," said Dixon. "There are certain aircraft types that no one wants, that will go the desert and will stay in the desert. But for aircraft of 12 years and less that are still in production, there are very strong residuals. It's a sellers' market again." Since Oasis Leasing was established in 1997 and listed on the Abu Dhabi stock market (ADSM) — the main big-ticket lessor in the Gulf region — it has ridden the cycle well. "Although we have never behaved like a bank, we did try and be opportunistic during this [difficult] period where there were limited cash resources open to us," said Dixon.

Between 2002 and 2003 Oasis also tried to keep the leases short — to 2006 or the latest 2007— "which was our feeling of when the market would come back," said Dixon. As a result there are nine aircraft on which leases are about to expire.

"Four will be sold and we have Letters of Intent for all the others at significantly higher interest rates than what we were getting previously," he said. Interest rates are between 40 to 100 per cent higher, depending on the type and age of aircraft.

Oasis Leasing has about 27,000 shareholders and is one of the most widely traded companies on the ADSM. The share price is currently trading at Dh10 per share.

Mubadalla, a government-backed investment company, Abu Dhabi Investments Company and BAE Systems are the largest shareholders, although, over recent months, BAE has been reducing its stake. "They have already sold shares to Mubadalla and I think over time they will download their position. We are not a core business and nor are we strategic," said Dixon.

A recovery in the market contributed towards the company's greatly improved operating performance in the year to December 2005. Revenue increased by 5.8 per cent compared to 2004 to $50.9million and net profit increased from $2.1 million in 2004 to $7.6 million, an increase of 255 per cent over the previous year. "We also picked up money from a lessee who had earlier defaulted," said Dixon, resulting in a $2.4 million contribution. The realisation of two investments in operating leasing and the contribution from Project Blue from arrangement and structuring fees were also significant.

Project Blue refers to the acquisition of 25 financed Airbus aircraft worth nearly $1 billion that are operated by 10 of the world's best-known airlines. The Second Rights Issue that took place in August 2005, doubling the companies share capital from Dh 700 million ($190 million) to Dh1.5 billion ($400 million), helped to make this acquisition possible.

In that period Oasis, along with joint venture partners, also increased its investment in aviation assets. It acquired a 1995 B-737-500 on lease to Continental Airlines and a 50 per cent interest in two A340-300 aircraft on lease to Emirates Airlines.

In 2005, Oasis also entered into its first transaction in non-movable assets, through a joint venture with ADIC and Tabreed in two cooling plants. This represents a step in fulfilling the company's original mandate to concentrate on infrastructure related assets as well as ships and aircraft, although aviation will remain its core focus.

Just when the company was thinking of diversifying, there was 9/11. "All of a sudden rather than growth the focus was care and maintenance of the portfolio," said Dixon. By this time the company had bought only one ship, which it later sold. The shipping market became "pretty frothy, so we started to stay clear of that," explained Dixon.

"Now shipping is a blank sheet for us and infrastructure is increasingly important."

In the first quarter of this year, business continued to improve. Oasis recorded a net after tax profit of Dh13 million ($3.5 million) compared with a loss of Dhs4.5 million during the same quarter in 2005. The company also announced revenues of Dh60.3 million over the quarter, an increase of 35.5 per cent over the 2005 figures, while the operational assets reached a value of Dh 2.2 billion, a 16 per cent rise since the end of 2005.

Recent deals include a finance lease with Etihad Airways for six Airbus A330-200 aircraft worth $948 million and an operating lease with Sama, Saudi Arabia‚s first low cost airline for a Boeing 737-300 that is part of Oasis Leasing's existing portfolio. Sama has also said it will lease up to seven 737s in 2006 as the airline readies itself for domestic service soon.

Demand for lease finance was once largely driven by the tax and accounting benefits it offered, but these have been removed. The decision to use lease finance now comes down to two issues, explained Dixon. "First, can a leasing company provide a lower cost of capital than the operator himself? Second, does it provide operating flexibility?"

The business of an airline for example is not necessarily to own assets. "It is to make money from putting people on seats. If by not owning an aircraft you can lower costs and increase operating flexibility then you have done your shareholders a favour," he said.

The trend by airlines to use lease finance is gathering pace. "Many airlines in most parts of the world are increasingly using leasing as a preferred choice of obtaining assets. And that trend tells a story," said Dixon.

He also said there is "a definite higher dependence on leasing among low cost carriers", but added, "what works for one carrier does not necessarily work for another but the trend overall is increasing usage."

That's good news for Oasis Leasing. Revenue projections for the company are expected to top Dh324 million in 2006, from Dh187 million in 2005. And deals are in the pipeline.

"By half year there is probably a lot more we can talk about, because there is a lot of re-leasing going on. There may well be some additional trading of assets and there may be some new acquisitions of A330s," said Dixon.

Part of the company's growth will also be achieved from the diversification it is aiming for, particularly in infrastructure projects. While the UAE has been slow to use lease finance, this is likely to change. Said Dixon: "I think over time leasing will find its place in the region and as commercialisation continues there will be opportunities for lessors and for leasing."

"As the place evolves and develops all this development must be paid for somehow. Governments are going to become very creative about the ways in which they pay for the development. It is not all going to be centrally funded. And what of specific deals? Said Dixon: "We are in a lot of discussions with a lot of people but nothing is imminent."