Listen in as Aviation Week Network's Karen Walker speaks with BOC Aviation's retiring CEO Robert Martin and his successor, incoming chief executive Steven Townend, about managing supply chain disruptions and how people make things happen at their leasing company.
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Rush Transcript
Karen Walker:
Hello everyone, and welcome to Window Seat, the Aviation Week Network Air Transport Podcast. I'm ATW & Group Editor-in-Chief Karen Walker, and it's a great pleasure to have you on board. This week I've got not one but two very special guests. I'm absolutely delighted to be joined by two of the top executives at BOC Aviation, which is a leading aircraft leasing company. BOC is actually headquartered in Singapore where we're talking now, but it has offices all around the world and it owns an aircraft portfolio of more than 680, yes, that's right, 680 narrow bodies and wide bodies, Airbus and Boeings, operating with more than 90 airline customers in more than 40 countries and regions.
So these are huge numbers and I'm absolutely delighted to be talking with longtime MD and CEO Robert Martin. Always great to see you and you've had just an incredible career here of some 25 years. Yes? Yeah. And Robert will be retiring at the end of this year, so I'm also delighted to be joined by Steven Townend, who is currently Deputy MD and CFO at BOC, has also got a long experience here and he will become Managing Director and CEO on January 1. Is that right, Steven?
Steven Townend:
That's correct.
Karen Walker:
Steven, congratulations.
Steven Townend:
Thank you.
Karen Walker:
And delighted to be joined with you today. So I guess I just wanted to start this conversation by we've seen, well, one horrific crisis, of course, the COVID crisis for the airlines where everything came to a stop and we saw how important leasing companies and BOC certainly was in helping support airlines through that producing and leasebacks, et cetera, all the work you were doing there. And now currently we're seeing a lot of supply chain disruptions and issues, delays on aircraft and engines with the ramp-up. These airlines really want these aircraft and they're looking again for help. And again, you leasing companies and BOC here have really come into that and a big shining light, if you like, on what it is that leasing companies can do. But with that comes risk. You are also, when you're doing these deals, these are huge assets, et cetera. You have a bit of news, I think. Robert, can I start with you? You've got a bit of news today that's very interesting on some of the risks regarding the planes you had in Russia.
Robert Martin:
Thanks, Karen, and we're delighted to be speaking to you today. The first thing I'd just say about risk is we're in a business that takes risk. The crucial thing is to manage that risk and make sure it's correctly priced. And so leasing companies not scared in any way of risk, they just know they have to manage it.
Now, one good case in point is the one where we announced some news today where we've just recovered $208 million in relation to eight of the planes that were taken from us in Russia from an airline called Pobeda. We were very prudent last year, we took a full write-down against all of the aircraft that we couldn't recover from Russia, which was 17 owned aircraft in total. And through careful negotiation over the last few months, I'm pleased to tell you now that we've recovered $208 million against those eight aircraft.
Karen Walker:
Very good news indeed. Steven, you're currently CFO. I mean I know you're both watching the money, but you probably even more closely. Has your view changed as an organization in terms of how you do manage that sort of risk when you're doing these deals and when so many people are looking to you for assistance in some ways?
Steven Townend:
I don't think our approach has fundamentally changed. I think in this situation in particular, our total exposure when the problems emerged was to the tune of just over $800 million. But if we took then the security that we were holding against that position, that was almost $300 million against that which was materially higher than a lot of our peers within the industry. And it's one of those ways, as Robert said, that we manage that risk.
I think the other key risk that you have to look at as you go through these periods of disruption is also the financing risk for lessors. I think managing that liability side of the balance sheet is always the most important as you go through that. Typically, lessors do not get into trouble because they can't lease aircraft. They get into trouble because they mismanage the liability side of the balance sheet.
Karen Walker:
That's fascinating. Now, like I say, we're here in Singapore. We're actually on the sidelines of the AAPA Assembly and so we've got all the CEOs of all the major Asia Pacific Airlines here and we're hearing of course a lot of talk about the market growth here. It lagged a bit because border openings were longer to take place than in Europe and America, but just like we saw there, it's coming back fast and furious and yet this is also clashing with the supply chain issues and a lot of delayed aircraft and engines and parts.
So two parts to that in terms from a leasing perspective. Can you talk a little bit about what are airlines most looking... I keep hearing people say, "We know we can't get that delivered, but you can't get them leased either." So what are the big asks? You're a customer too, so you've got this massive portfolio, you've got certainly a lot of new narrow bodies, the MAX and NEOs, delivered. What are you seeing when it comes to where your aircraft are coming? Maybe, Robert, you'd like to start there.
Robert Martin:
No problem. So the first thing is as a leasing company you have to take a long-term view and that's what we do. Both Steve and I strongly believe in how we envision looking out 10 years, but you then adjust your short-term strategy to the market situation and in particular listen to the customers as to what they need.
So let me give you an example of that. So as we were going through the COVID crisis, we were very active in the first year. We did $6 billion of new business in 2020, but interestingly enough, the financial markets came back quite quickly and by February 2021, we were no longer competitive in the sell leaseback market. So what we began to do is plan for the next stage of the cycle, which was obviously going to be the airline recovery. And as the airlines recovered, we've been working with them on a new product, a finance lease product, which has been very successful with over 60 of those being executed since June this year. That certainly helped the airlines because their balance of operating leases to finance leases have probably moved too far towards the operating lease during the COVID period and they're gradually moving it back.
Now take a step forwards then to supply chain financing issues. So there's several ways in which we're helping our airline customers. The second is we've taken that finance lease product and also now made it available for spare engines. So this means then to the extent airlines can get spare engines from the engine manufacturers, they have a viable source of financing that doesn't force them to have a fixed end to a lease of the engines. They can choose basically when they want to sell the engine themselves and it gives them much more flexibility.
The second thing is on our existing used aircraft in the portfolio, and bear in mind, as Steven said, we've got a $23 billion portfolio. As those are coming towards the end of their leases, we've seen the extension rate increase from 30% to now close to 95% and people are even extending today aircraft that are due to come back in 2026. So people realize this is going to be a much longer-term situation in relation to some of those engines. And at the same time with our own aircraft orders, we've then been placing those further and further forwards. Earlier this year we placed some in 2026, which is three years away, which we wouldn't normally be placing out that far, but it's because the manufacturers are sold out on single aisle until 2029, and so people are trying to make sure they position themselves so they can build their own growth into their networks looking forwards.
Karen Walker:
Steven, would you just like to add to that in terms of your confidence level as a customer for particularly the narrow bodies and your confidence level of where the deliveries will come against schedule?
Steven Townend:
I guess for all of us who have orders in place for all types of aircraft, the delivery schedules have been moving around a lot in the last 12 months, but I think, Karen, we're now starting to make our way through this. Both manufacturers still have their challenges really with parts of their supply chain. For Airbus, it's been very much about the engines. For Boeing, it's been very much about the fuselages, and both quite publicly. I think for both of them, they're still advising all of their customers that we'll continue to see delays through the course of next year. The big question now for me really is how they are able to ramp up to the levels of deliveries where they want to be. I think neither of them today are delivering at the level that they want to be and not really where their airline customers want them to be either.
Karen Walker:
Right-
Steven Townend:
Maybe if I can just add, Karen, there's one other thing going on. Whenever we get large shocks to the market, as we've seen with COVID and then with the Russia situation, you'll go through periods where some of our customers will be over-ordered and some will be under-ordered. And so, one of the roles we play, which I think is very important to helping this is working with the manufacturers across the board, helping to redeploy some of those surplus orders from airlines that frankly don't need the aircraft today because, for example, they may have relied in the past on a lot of outward bound traffic from China. Now they don't have as much to those carriers that have under-supplied order books where we can basically place the aircraft and we've just done that early this year with a couple of planes to be Viva Aerobus and Mexico where they needed some aircraft in a hurry and also to Turkish Airlines.
Karen Walker:
That really shows the difference between being a leasing company versus an airline, as you say. Maybe the closest analogy comes to a large airline group that they can switch some things, but you've got a lot of flexibility there.
So in terms of the portfolio itself, like I say, it's a large number of aircraft still on order, and it's a wide mix of both Airbus and Boeings going right from the A220 right up to 787 and A350. Can I just ask you, do you feel you do have the right balance of that portfolio and particularly thinking, because of course through the COVID everybody was saying, "Oh, the wide-body market is dead and dead and dead," and now we're seeing you only had to look at Paris Air Show? Everybody was ordering huge amounts of wide bodies. And also your thoughts on the XLR, the extra-long-range narrow bodies and what you're seeing demand wise on those?
Steven Townend:
Okay. I think broadly across our portfolios it sounds today, yes, we are comfortable with it. What you're trying to do as a leasing company clearly is to reflect the demand from your airline customers. You're not trying to drive the market yourself. Very roughly about 60% of our fleet by value is narrow-body aircraft. About 40% is wide-body aircraft, which is in line with the global mix. And as you said, it's reasonably well-balanced between the Airbus product and the Boeing product.
I think your point on why bodies is a good one, what we saw obviously as we started to emerge from COVID was that domestic markets recovered the fastest than the regional markets, which supported the rebound in narrow-body aircraft values, narrow-body aircraft lease rates. What was much slower to come back was that long-haul intercontinental traffic, which is predominantly obviously the wide-body market. But we are seeing that now and I think where we're seeing it exacerbated is for a lot of airlines, they to a certain extent used COVID as an opportunity to change their fleets. They used it as an opportunity to retire a lot of older, particularly the older four-engine wide-body aircraft, but it was in an expectation that when the market recovered, they could quickly and easily get the latest generation to replace it. And for all the supply chain issues we just talked about, that's not as easy as they had expected.
And so I think that's the reason why we are seeing demand for wide-body aircraft increasing. Certainly this year now we're starting to see lease rates on wide-body aircraft moving back up again. We're seeing valuations start to move as well, and it's why you're seeing all those large orders being placed.
Robert Martin:
Now, in addition to that, Karen, what we're seeing is, so Steve's talked about the demand side from the airlines. There's also a significant supply side issue to the lessors, which is the cost of money. If you look at how interest rates have risen from two years ago to today, we've gone from 1% to 5% base rate. That's not the cost of funding because then you add a margin to that, which means all leasing companies and anyone who's raising money to finance aircraft has to now realize the cost of financing has gone up no matter whether you do on balance sheet financing, debt financing, or you're doing operating leases. And we do not think that cost of financing is going to go back down to where it was during the golden age during the previous decade.
Karen Walker:
That's a really interesting point. Yes. And I just want to just quickly follow up on that in terms of, as you say, now that we've seen the demand for wide bodies coming back, does that affect the demand for these extra-long-range narrow bodies? Is it an either or is it both?
Robert Martin:
There's an element of both. I think there's a lot of routes where the capacity required needs the larger aircraft. There's a lot of airports which are slot constrained. We're seeing a number of airports in Europe now starting to constrain the number of movements, which is actually encouraging airlines to larger aircraft rather than the smaller aircraft. So I think there will be certain routes which work well for those longer-range narrow-body aircraft. What we are not clear on yet is really how many of those routes there are as traffic really comes back. It's going to be a few years yet before we're totally clear as to whether that is going to really move forward as a mainstream product or remain in that niche.
Karen Walker:
I'd just like to ask you a little bit about specific markets, markets that are getting talked a lot about. India, everybody's looking to India, huge market and a lot of things happening, big, big numbers there. We're starting to see really big orders and everything. So that's changing. China, the slowest of all to open up. We know it's a big market, but things have changed somewhat in China. I'd just love to have some of your viewpoints on those markets.
Robert Martin:
India is now the most populous country in the world. It's just overtaken China. Both of them have roughly 1.4 billion people, but in the size of the aviation market, India is dwarfed by China. If you look back 20 to 30 years, China was at the same stage where India is today. And with the rising middle class in India, which will soon be bigger than the whole of the EU put together, then we are going to see definitely increased demand for travel in India, both domestically and internationally.
Now that's good, but there is another difference between India and China. China has the four largest banks in the world to support this industry. And the Chinese state has been very supportive, and so financing has not been a problem as China's gone through this period. In the case of India, that is not the case. The Indian banks are much smaller. Their ability particularly to finance US dollars is a lot less. And so this is why you're seeing a lot of operating leases go into India. But we've also had some recent setbacks with the legislation in India, and I think if we're going to think about the Indian market growing to the same rate as where China is today, I think as an industry we have to deal with those. And if we don't deal with that, that is going to constraint growth in India.
Karen Walker:
Then of course another big difference is just how much, as you say, China has invested in airports, that infrastructure there. Steven, do you on China specifically?
Steven Townend:
I think, to Robert's point, China today is about 18, 19% of the world's population and about 18, 19% of the world's aircraft fleet. So it is now in line in a way that India still isn't. To just put some numbers around what Robert was talking about in terms of financial markets, I was looking at something recently and the size of the entire financial market in China is roughly 20 times larger than that of India. And so their ability to support that growth has been very, very different.
I think there's other dynamics in China as well. I think the whole of China is evolving in a number of ways. They've obviously at the same period of time built out this amazing high-speed rail network, which, again, you don't have in India and is good evidence the way that they have invested in that infrastructure around this. But it's a large country with a large number of people and therefore air travel is going to be crucial to what they do. Domestic travel is already ahead of pre-COVID levels and we're starting to see international travel come back now. I don't think it's come back as quickly as maybe we anticipated at the beginning of the year, but Chinese cross-border travel is probably seven times ahead of where it was at the beginning of this year now. A lot of it still to Asia, growing in Europe, less so to the Americas at this point, but it's still going to be a market that will require a lot of aircraft over the next 10 or 20 years.
Robert Martin:
Karen, we've talked a lot about passenger traffic. We also need to think about freight. I know there's a number of members, my staff around the world who are looking forward to Singles' Day, particularly in China, and that is always a huge boon to ecommerce. And the one thing that China has done recently that I think is very smart is focus very much on growing the freight of fleet in China, both domestically and internationally, and this is part of the 14th five-year plan. To date we've not seen that same emphasis in India, but it has to come because you're also going to get demand for particularly packaged freight growing significantly over the next few years.
Karen Walker:
That's interesting. This is a fabulous conversation. So interesting. I just would like to sort of draw to the end here if I may, first of all, by coming to you again, to you Robert. You've had a fantastic career at this company, in this industry, really a top performer here. Could you maybe share a moment of what it's meant most to you or most memorable moments, something that's really stood out for you of enjoying what you've been doing?
Robert Martin:
I think for me the key thing is, when I joined the company back in 1998, we were just 10 people and 10 aircraft and what we've done since by growing the company, we've now got 450 owned and managed aircraft in the fleet, but more importantly, we have 200 very, very dedicated colleagues. And one other thing that gives me most joy is seeing how people have thrived during this period and how they work together through all of these crises. The most important element, I think, of a leasing company is your human capital and growing that human capital. I run an internal session with all our mid-level managers called CEO Circle, which we use to give people experience of other parts of the business to the one they're working and get them working together. We've now seen people who have moved through this CEO Circle rising up into middle management and senior management in the company, and that to me is the greatest joy and I'm very honored to have worked with such a dedicated team.
Karen Walker:
It truly is an amazing story. I can't believe that 10 people, 10 aircraft to what it is today. And then, Steven, maybe a quick last word from you in terms of what you're most looking forward to in your new role.
Steven Townend:
It's actually going to be a great challenge because, as you said, we've got a great company that's been hugely successful and it's now how do we move that forward? Our strategic plan always involves us being one of the five largest leasing companies in the world. We are that today with a fleet of roughly $23 billion of aircraft. If we look forward to the end of the decade, to maintain that position, we probably need to be getting close to $40 billion. So that's a lot of growth that we need to feed through. We think we have a plan how to get there. We think we know how we're going to achieve that, but to the point Robert just made, that requires the people who can help us to do that. One of the things we spend a huge amount of time on is not just the recruitment, but then the coaching and the managing of that talent to make sure that we've got the right people to enable us to build that in the right way.
Karen Walker:
Well, I wish you every success or continued success and, again, congratulations to both of you and, again, a huge thank you for your time today. It's been such a pleasure talking with you. And of course a big thank you to our listeners. Make sure you don't miss any of our weekly programs by signing on at Apple Podcasts or wherever you listen. This is Karen Walker disembarking from Window Seat.
