HONG KONG The sale of one of the world's top aircraft leasing companies to a Chinese consortium is the boldest signal yet that China's aviation industry will increasingly look to the cash-rich home market for specialist finance to support its expanding fleet.
International Lease Finance Corp (ILFC), the aviation arm of U.S. insurer AIG (AIG.N) which confirmed the $4.8 billion sale on Monday, joins a growing number of homegrown Chinese leasing firms looking to exploit the world's fastest growing air market.
For China, the rise of a powerful air finance industry is a third pillar in its aviation development, alongside parts manufacturing and assembly for foreign planemakers like Airbus and Beijing's own Comac C919 commercial jetliner project.
"It's a huge investment and (ILFC) are the second biggest leasing company in the world," said Paul Sheridan, chief Asia consultant for specialist aviation think-tank Ascend.
China is seen as one of the most promising markets for aircraft leasing, in which airlines rent aircraft to keep the cost of ownership off their balance sheets.
The world's second-largest economy will need 5,260 new aircraft worth $670 billion through 2031, according to Boeing Co. About half of these new planes would be owned by leasing firms, adding about $100 billion to the market size which is expected to rise to $268 billion in the next two decades.
PLANE PURCHASES NOT KEEPING UP WITH DEMAND
China is a major purchaser from both Airbus EAD.PA and Boeing (BA.N), often in batches of 100 or more aircraft to coincide with state visits in the spirit of balancing U.S. and European supplies.
But government-coordinated purchases have failed to keep pace with demand, leaving a gap in the market for lessors armed with speculative orders.
"We believe that there are not enough aircraft in order in China at the moment. (Buying ILFC) will help Chinese airlines to get more aircraft," Ascend's Sheridan said.
Until now, that has been an advantage for ILFC and its main rival GECAS, the air leasing arm of General Electric (GE.N), as they compete with China's own domestic lessors.
"They are growing but not at the expense of ILFC," said Henri Courpron, the chief executive of ILFC, which is expected to remain U.S.-based with the same management after the sale.
"We have something that they don't have - an order book," he said before the deal was announced.
Chinese lessors have so far been growing by doing sale and leasebacks with cash-constrained airlines and by purchasing from other leasing companies.
ILFC owns or manages around 1,000 jets and has some 230 aircraft on order. China is already a major outlet for its planes - it has around a 35 percent market share there.
Meanwhile, China's domestic leasing industry is growing.
ICBC Leasing and CDB Leasing Co Ltd are both owned by well-capitalized banks -- Industrial and Commercial Bank of China (601398.SS) (1398.HK) and China Development Bank CHDB.UL.
China Everbright Ltd's (0165.HK) China Aircraft Leasing Co Ltd made its name on the international stage in July at an airshow in Farnborough by committing to buy 36 Airbus' A320s worth $3.1 billion.
And China has also been spreading its wings abroad.
Bank of China (3988.HK) (601988.SS) bought Singapore Aircraft Leasing Enterprise (SALE) in 2006 and renamed it BOC Aviation. Hong Kong Aviation Capital (HKAC) acquired Allco Aviation in 2009 as a route into the international market, which is estimated to need $4 trillion of new aircraft over the next 20 years, with about half owned by lessors.
PILES OF CASH
For now the gap between the international market leaders and Chinese rivals is large - the fleet value of the biggest, BOC Aviation, is less than a fifth of GECAS and a quarter of ILFC's.
But Chinese financiers in the aircraft industry have been growing rapidly for a decade, with additional impetus provided in 2007 when Beijing lifted a 10-year ban on banks conducting leasing, which had been imposed in response to reckless investment and poor management in the 1980s and 1990s.
China's big banks are sitting on piles of cash thanks to strong economic growth and state bailouts over the past decade which have together amounted to more than $500 billion.
The ILFC deal, involving a consortium headed by asset manager New China Trust, which is one-fifth owned by Britain's Barclays (BARC.L), will also help bring more Chinese capital from banks into a global business.
BOC Aviation Chief Executive Robert Martin says he expects to clock growth of about $1 billion each year over the next five years, raising China's share in its portfolio to 25 percent from the current 18 percent.
"We are a capital-dedicated lease operating company and will grow roughly from $8 billion today and to $12-13 billion in five years time," he said.
Funding for this pace of growth appears to be available in abundance - CDB Leasing just concluded a $1.5 billion bond offering after receiving $16.5 billion in orders.
Aircraft makers are aware of the financial muscle these institutions are beginning to flex.
Chinese and other Asian banks are offering funds into the aircraft market as some European banks retreat due to the region's financial crisis and tougher capital rules.
"There is a lot of Chinese money and there has been a huge growth in Chinese leasing companies over the last five, six years, in particular it's promoted by government policy," said Andy Solem, vice president, sales, China & North Asia Bombardier Commercial Aircraft at a recent air show.
"I don't see that slowing down. All the big banks have leasing arms or subsidiaries, which do leasing. They are buying more and more airplanes."
(Additional reporting by Tim Hepher in Paris; Editing by Alex Richardson; Editing by Alex Richardson)