Institutional investors buy planes to lease

By Lee Hyo-sik

Airplane leasing has emerged as an attractive investment option for intuitional investors such as pension funds and insurers, who sit on the huge cash reserves, amid the continued low interest rate, according to financial industry analysts, Thursday.

To realize higher returns, more investors are showing interest in purchasing planes from Boeing or Airbus and leasing them to airlines rather than putting money into treasuries or corporate bonds.

Leasing airplanes is also said to be safer than to invest in stocks and real estate properties as carriers pay 6 to 8 percent of the airplane value as rent annually unless they go bankrupt.

The investors also can dispose of planes at decent prices when they need to retrieve money.

On Aug. 28, KDB Daewoo Securities bought a Boeing 777-300ER from Emirates Airlines for $65 million and leased it back to the Middle East carrier. The airline pays rent for using the plane.

In June, KDB Daewoo and other local institutional investors signed a $92 million airplane lease contract with DHL under which the investors bought the Boeing 777-200LRF plane from the logistics firm and leased it back.

“More and more institutional investors are turning their eyes to alternative investments as it became difficult to earn handsome returns amid the prolonged low interests,” said Kim Ki-myung, an analyst at Korea Investment & Securities. “The airplane lease business has so far been proven to be relatively safe and profitable.”

According to the British consulting firm, Ascend Flightglobal Consultancy, airplane leasing generated an annual average of 6.2 percent return worldwide from 1991 to 2013.

Recently, SBI Savings Bank, which invested 4.3 billion won to acquire a stake in the airplane lease investment, reportedly earned an annual return of more than 8 percent.

Airlines, particularly smaller ones, prefer to lease airplanes these days rather than raise funds to buy planes from manufacturers. Normally, it costs hundreds of millions of dollars to buy a new plane.

Korean Air, which operates a fleet of 156 airplanes, said about 20 percent of its planes are on lease. Asiana Airlines said it currently leases 77 of its 85 airplanes, only owning the remaining eight.

Korea’s five low-cost carriers -- Jeju Air, Jin Air, Air Busan, Eastar Jet and T’way Air -- lease most of the airplanes they operate.

The analyst said planes tend to hold their value so investors can get decent prices when they dispose of them in the market.

But he cautioned that investors may get into trouble if planes are involved in accidents or carriers go bankrupt.

“Investors could face difficulties in retrieving planes when airlines go bankrupt. So, it is important to check the creditability of airlines to which they lease planes,” he said.