Which area of commerce has grown almost twice as quickly as the global economy over the past 50 years – and is set to continue to do so? The answer is air travel. The International Air Transport Association (IATA) reveals that growth in commercial air travel, as measured by passenger miles, has outstripped global economic expansion by a factor of 1.7 since the 1970s, despite shocks such as the 9/11 terrorist attack on New York, the global financial crisis and Covid. IATA predicts growth of 3.4% a year over the next 15 years.
If that record and outlook doesn’t pique investors’ interest, perhaps estimates of the need for 42,000 new aircraft globally over the next 20 years will get their attention. The airline sector is at least 2,000 aeroplanes short of the total fleet size it needs, says the consultant McKinsey: manufacturers slowed production during Covid and have not caught up. The market is thought likely to remain undersupplied for a decade, according to Greg Belonogoff, a principal at AB CarVal, owned by the investment manager AllianceBernstein.
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Most airlines these days prefer to lease new aeroplanes as they maintain and expand their fleets, rather than buying them outright. The latter option ties up too much balance-sheet funding in businesses that want to focus on operations, rather than large capital investments. Accordingly, aircraft leasing finance is now a fast-growing asset class.
Investing in aircraft leasing offers a stable income
From investors’ perspective, aircraft financing is a relatively simple concept. A leasing company raises money through a combination of equity – selling its shares to investors – and debt from a finance provider such as a bank. The company uses this money to buy aircraft, which can then be leased to airlines.
Over the term of the lease, some of the income the firm receives from the airline covers the cost of debt repayments – finance is usually “amortised”, meaning the lessor makes both interest and capital payments. What’s left of the lease income can then be used to fund regular and predictable distributions to shareholders.
Debt repayments are structured so that by the end of the lease, the lessor will usually own the aircraft outright. It can then try to re-lease the aircraft – to the same airline or one of its peers; or more typically, it can sell the aircraft on the second-hand market, with the proceeds distributed to investors.
As a result, investors in aircraft-leasing vehicles can look forward to regular, stable and often generous income payments, as well as a capital return later on. It’s an alluring mix of returns, all backed by a physical asset in the form of the aircraft.
“Think of aircraft leasing as being a bit like property with wings,” says Matthew Hose, a senior vice president at the investment bank Jefferies. “You’re earning an income from a physical asset, and when you’re ready, you’ll be able to generate a capital return too by selling the asset.”
One other attractive feature of this asset class is its low correlation with other assets that investors will have in their portfolios. Returns move almost entirely independently of what’s happening on global stock markets, for example, but there is also little connection with the investment performance of other alternative assets, such as infrastructure and property. That makes aircraft leasing particularly valuable as a tool for managing risk. It provides investors with a means to achieve genuine diversification in their portfolios.
“Even when markets are volatile, the aircraft leasing sector is more or less stable,” says Belonogoff. “If you go back to the drama around Liberation Day back in April, the airline stocks saw some sharp sell-offs, but the listed aviation lessors just carried on; in our view, the uncorrelated nature of these assets is very attractive and has proved itself over several decades.”
The aircraft leasing sector is far from foolproof
That’s not to suggest this is a risk-free investment. Airlines can – and do – go bust, in which case they will default on the lease. Failures can leave the lessor scrambling to find a new airline to rent its aeroplanes, while trying to stay on top of its debt repayments. It may be forced to sell the aeroplane to keep its lenders happy, with no guarantees about the price it will get, particularly as the sort of climate in which airlines go bust is the sort of climate that isn’t supportive of the value of aircraft in the second-hand market.
“The key for lessors is to balance assets and liabilities very carefully,” says Hose. “Ideally, they want to lease to high-quality airlines with strong finances, but the quality of the asset – the aircraft – is understandably important too.” One debate for lessors is whether to concentrate on the really large wide-bodied aircraft, which cost more and where shortages are particularly acute, or on narrow-body aeroplanes, where the market is more liquid.
Similarly, investors can’t rely on a significant payday at the end of the investment cycle; that will depend on the state of the second-hand market at the time the fund is trying to sell its aircraft. Right now, the market looks healthy, with airlines desperate to get their hands on more aeroplanes to meet increasing demand from passengers. But the lesson of recent times is that a shock to the global travel sector is always possible. Even an economic slowdown might reduce demand, and thus the value of aeroplanes.
Movements in interest rates can also affect returns. Higher debt costs will mean less lease income to pass on to investors, even if airlines can be made to share in the pain. Some lessors also take on mezzanine debt, which isn’t repaid during the lease’s lifetime; that borrowing must be repaid from aircraft sales before the proceeds are made available to investors.
Nevertheless, this is an asset class with an enduring long-term appeal. “After all the big shocks to the system, demand has come back and we’ve kept moving forward,” says Belonogoff. Rising demand “means we need more aircraft coming into the industry and that requires more financing; lessors are also playing a bigger role because most airlines are moving away from owning their aircraft to leasing them”.
Investment opportunities in aircraft leasing – where to look now
One way to get exposure is to buy shares in aircraft leasing companies. It’s not a huge sector of stocks, but does include US-listed AerCap (NYSE: AER), the world’s largest aircraft lessor. BOC Aviation (Hong Kong: 2588) is Asia’s number-one player, while European aircraft leasing companies include Avation (LSE: AVAP) of the UK. Dublin remains the world’s biggest centre of aircraft finance, with most public and privately owned lessors maintaining a presence in the Irish capital.
Investing this way isn’t pure-play aviation finance: investors are buying equities rather than the underlying asset class, so they may not get all the diversification benefits that the latter offers. But shares in these firms do act as a proxy for aviation finance.
An alternative is the investment-trust industry, through which a number of investment managers have sought to democratise aviation finance in recent years. There are currently three funds to choose from, though Doric Nimrod Air Three (LSE: DNA3), the oldest of the three, is nearing the end of its life. It is due to liquidate during the first half of 2026, having recently sold its four aircraft to Emirates for $180 million.
Elsewhere, DP Aircraft 1 (LSE: DPA) was launched a few months after Doric Nimrod, in 2013, but ran into major problems during Covid, when Thai Airways and Norwegian Airlines, to which it had let its aeroplanes, both hit financial trouble. That saw the fund plunge in value, although it has recovered recently, particularly as Thai has emerged from bankruptcy.
The fund now owns two aeroplanes, both leased to Thai Airways until 2026, and has recently announced that these aircraft will be re-leased to Poland’s LOT Airlines for a further 12 years. It is in the process of renegotiating its financing arrangements, which will determine how much of the $168 million of payments it expects to earn from LOT will be available to distribute to investors.
The third aircraft leasing investment trust is Amedeo Air Four Plus (LSE: AA4). It is the largest such fund by some distance, but also the most complex. It owns eight aeroplanes leased to Emirates, with the leases due to expire between 2026 and 2028; the fund is widely expected to sell these aircraft to Emirates, with investors taking encouragement from Doric Nimrod’s recent deal with the airline, which was completed at an unexpectedly high price.
In addition, the fund owns four aircraft leased to Thai Airlines until 2035 and 2036. But these aren’t producing significant income for shareholders because the lease agreements were struck during Covid, when rates were under pressure. The income from these aeroplanes is therefore required to service the fund’s borrowings.
The additional complexity with Doric Nimrod is that it has a chunk of mezzanine debt that will eventually need to be repaid from aeroplane sales. That leaves it unclear whether investors will see a return of capital. Nevertheless, the fund has its supporters. For example, broker Panmure Liberum issued a buy recommendation earlier this year, setting a target price of 66p; the shares trade at 62p. “Second-hand aircraft market conditions remain positive,” says Panmure Liberum’s Gerald Khoo. Demand for travel “continues to grow, with demand resilient in the face of economic and geopolitical uncertainty and volatility”.
That might persuade more investment trusts to come to market in this sector. Some analysts expect to see more fund launches over the next year or so, particularly given current heightened demand for private assets. And that could be to investors’ benefit. “The aircraft-financing model is now a proven one,” says Jefferies’ Hose. “Lessors have shown they can execute on the model.” Retail investors just need more opportunities to take advantage.
This article was first published in MoneyWeek’s magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
