Inventory Leasing – The New Normal / By Jason Reed
Cash is King! The old adage applies to all types of businesses at any time but specifically in times of downturn. We have been fortunate enough to ride a 10-year wave of aviation goodness only to watch it come crashing down in the last 2 months. My oh my how things have changed in such a short span. The majority of aircraft are parked, airline investment grades have dropped, finance yield demands are going straight up, and unencumbered assets are becoming scarcer. The only good news, oil is cheap. But even with that, the aviation industry is about to perform its greatest liquidity dance, which will define the way forward for years to come.
Many airlines over the past 10 years were able to drive significant profits and cash balances, ultimately allowing them to carry low-interest financing for their fleets and inventories. With profits flowing, most operators chose to take the buy and depreciation approach to their inventories, while assuming the risks that go along with that model. However, even with those profits and a lack of delivery slots available for new aircraft, many airlines globally made a gradual transition to asset leasing more and more with an elite group venturing into large scale inventory leasing. There is a specific set of challenges that go along with inventory leasing vs. asset leasing. Only a select group of companies can manage such an undertaking due to the jurisdiction and collateral hurdles that inherently go along with this type of transaction.
The New Normal is about to take shape, whereas the airline industry will reinvent itself for years to come. With fewer unencumbered assets to use as collateral, airlines need to focus attention elsewhere for liquidity. Inventory leasing is the natural selection and can account for billions on the balance sheet to an operator. The rising costs of next-generation aircraft, engines, inventory, and the significant residual value risks associated with ownership will now be the new frontier into which airlines will seek the next level of cash management.
And it’s not just parts inventory that will be part of the equation. Airlines own a significant amount of tooling and ground support equipment (GSE) to drive their daily operations. Take a look out the window of your next flight sometime after social distancing is a thing of the past. Try to count how many carts, tugs, deicing trucks, buses, trucks, baggage loading ramps, and fuel haulers are on the tarmac. Endless right??? Most take all of that equipment for granted, but if you look closer, that’s a lot of $ sitting there, and that’s newly found collateral. Some operators may own over $500M in tooling and GSE alone. Inventory Leasing opens the door to a better balance sheet, fixed operational expenses, and residual values mitigated in a time where CAPEX is a no-go item.
In a time like this, capital plays the most significant part of survival, and that’s where GA Telesis comes into play. We create solutions where there was no solution before. We provide financing where there was no financing previously. We take difficult, and we make it easy. We’re here to do our part in this recovery, and we’ve already started. Our mission is customer success.