Picture credit: magele-picture@stock-adobe.com
This article is the second in the special four-part series on GSE rental and leasing, prepared by Marc Delvaux, former CEO and Chairman of the TCR Group and today Chairman of Nayak, together with our former Editor, Alwyn Brice, and aviation industry expert from ADLittle, Mathieu Blondel. After the description of the various leasing options in our last edition, this section is now aiming to assess the advantages and disadvantages of the GSE leasing model.
Advantages to leasing
The advantages of equipment leasing can be generally listed as follows. Leasing is a convenient, easy to implement and fast process to use an asset; cancellation options are valuable when activity is volatile; the risk of premature obsolescence or low usage is passed from the user to the lessor; and maintenance is provided when lessors are well armed to provide it efficiently. Leasing generates low administrative and transaction costs; tax shields can be used; and the lessee can focus on core business activity and reduce capital expenditure, whilst relying on safe equipment and benefitting from external expertise. Moreover, maintenance and problem resolution are provided; the risk of the asset is kept by the owner (especially at the end of the lease period); fleet management and data analysis are provided; and leasing service providers often deal better with obsolescence (whether technological, environmental or regulatory). Worth mentioning also is the reduced risk and effort on disposal at the end of the asset’s life cycle; an operating lease allows off-balance sheet financing (subject to applicable accounting and reporting principles); and leasing activities do not generate a purchasing hurdle, requiring less specific equipment knowledge. Needless to say, equipment units are easier to relocate.
In short, and as a rule of thumb, assets that depreciate are usually better leased and assets that appreciate are better owned. However, regarding GSE, which is a critical component in the airport organisation, this statement deserves some more elaboration.
The possible substance of leasing deals
In our industry, one can identify five main types of leasing arrangements which have, each of them, a very different strategic substance and purpose, whether financial, operational or tactical.
- A simple fleet extension, for which leasing is chosen for a small, new fleet. This is often the case to complement a core fleet, whether leased or not, for the high season, for example. These deals are rather short-term and straightforward, and price and availability will likely be the main consideration.
- A full fleet conversion (initial outsourcing of an existing fleet, with or without a buy-back mechanism). These programs might be much more complex, as they often involve a full transfer of equipment ownership, the maintenance workshops, the technical staff and the expertise of the service provider, as well as a share of the value chain. The rationale for such deals can be various, amongst which is the Total Cost of Ownership reduction, although this is not the only reason. Here, the long-term goal and arithmetic should be carefully addressed in advance, as this strategy is not easily reversible once implemented.
- The replacement of an already rented fleet by a new or more technologically advanced fleet is another possibility. These arrangements are most of the time a continuation of (2) and are useful for adapting the fleet to conform to the latest technology, which is important, amongst other things, for improving the productivity, the safety or the footprint of the equipment.
- The supply of equipment to support the launch of new operations is a further instance. A large new fleet might be required in the case of new licences won by handlers at new or existing airports. Here the CapEx minimisation, the on-time availability and the risk and effort sharing with the service provider are clearly the main drivers.
- Pooling (i.e. shared equipment between different handlers) are arrangements organised at the airport level. Their main drivers are to reduce the amount of equipment on the ramp and thus the congestion and emissions at an airport.
The stakeholder’s point of view
The aviation industry is a very complex and strategic sector wherein all stakeholders, mainly the airport operators, the airlines, the ground handlers and the service providers or OEMs, must be perfectly aligned and operationally integrated, in a unique collaborating model, to guarantee a Just in Time, efficient and safe service. Accordingly, it would appear essential for each stakeholder to fully comprehend the pros and cons of the leasing solution, and take a global industry perspective.
For GSE manufacturers, dealing with leasing providers is regulating their order book because leasing companies have a continuous yearly CapEx flow that ground handlers may not offer them. Also, the leasing service provider will be able to translate more easily the Total Cost of Ownership of the new technologies developed by the OEM through an immediately attractive offer, by eliminating the CapEx and risk barrier. Similarly, the organisation of a rational second-hand market will also reduce the TCO and thus accelerate the development of innovative equipment.
However, it is important that the OEM keeps direct contact with the ground handlers and vice versa, to continue improving the equipment and developing and promoting the technologies of the future.
For Airport Operators, a strong local leasing provider will offer stability and permanence by securing the equipment supply, whilst offering flexibility to the ecosystem. For instance, in the situation of handling contract transfer from one handler to another, the equipment will be generally transferred by the leasing provider without any hurdles. The responsibility of the airport authorities is, then, amongst other things, to make sure that the transfer is operated smoothly, and that enough maintenance facilities are provided for the servicing of the equipment. Also, nowadays, most airport operators are specifying the kind of equipment that can be operated on the ramp, and in particular their maximum age or energy supply, with a view to increased safety and reduced carbon emissions.
In this regard, the development of recharging infrastructure by the airport is becoming a key debate in the development of electric (and likely hydrogen) powered GSE. In the same manner, the presence of fully automated equipment (as already visible in other industries) will require of the airport infrastructure serious adaptation.
Regarding Airlines (in this case as handling customers, not as handling providers), the management of GSE through a third party makes them less dependent on the handling providers. Indeed, when a handling contract is transferred from one operator to another, the handling staff is often transferred according to local TUPE rules, although nothing dictates the transfer of the equipment to the new handler. An external leasing provider will manage the transition since it has an interest in securing the lease with the next handler to prolong the lease of the assets.
As for Ground Handlers, they can be classified into two categories: the IGH or Independent Ground Handlers and the AGH, or Airport Handlers and Airline Handlers. The independents, which are facing more volatile levels of business (renewal of licences, renewal of airline contracts and seasonal changes of air route) and a highly competitive workplace, are expecting low CapEx and flexibility to adapt a GSE fleet in case of contract loss; whereas the AGH, which have a better view of their medium-term schedules, are looking to master their Total Cost of Ownership in the longer term. Both are, of course, looking to secure high quality standards, safety and a reduction of their environmental footprint.
Accordingly, the IGH is likely to be more responsive to the advantages of the full-service rental on a global basis whilst the AGH, who needs less flexibility, might be more focused on only part of the leasing offer, depending on their strategy focus (dry lease, fleet management, repair and maintenance or a combination thereof).
Finally, outsourcing existing fleets through sales and rent-back is a way to renew a fleet as the leasing service provider will progressively introduce greener and/ or safer equipment, whilst managing to offer a second life to the older fleet.
However, handlers must accept that a third party is managing a key component of their value chain whilst protecting both their barriers to entry into the market and their critical differentiation with their competitors.
In this regard, positive negotiation skills with the service provider and close management of the outsourcing contract in a full collaborative model become key competences. For the purpose, ground handlers should keep building up a high level of expertise regarding GSE and technological development to maintain a balanced dialogue with OEMs, leasing providers, airlines and airports.
Regarding the leasing service providers themselves, they have all an interest in developing the leasing offer and model further, and expanding their presence at an airport (and geographically) in order to offer a wider coverage to their customers and derive benefits from the economies of scale for all stakeholders.
For the air transportation industry globally, GSE leasing brings stability and offers benefits to airport operations whilst allowing flexibility in the ecosystem, since leasing providers can offer GSE availability, service levels, network coverage and breadth of service, whilst helping with the green transition. The development of both the leasing model and the adoptions of new technologies, like the sharing of the carbon savings credit or the implementation or sharing of the necessary infrastructure to deal with them, will also likely generate some further debates in the industry.
Conclusions
The complexity of airport operations, the stakeholders’ complementary position, the comprehensive range of the GSE leasing offer and the strategic importance of GSE together calls for a deep strategic, financial and operational analysis with clear objectives, both short term and longer term, when deciding to manage GSE in-house or to sub-contract it to an external service provider.
In all cases, when choosing the leasing route, handlers should aim at selecting leasing providers which can offer them resource availability, flexibility, service level, coverage and network, price, breadth of service and a track record. However, as important, ground handlers need to amass an in-depth knowledge of their GSE fleet and develop close ties both with the equipment manufacturers, which are developing the new technologies, and the leasing service providers, which are deploying the fleet whilst interacting with the airport authorities to implement the infrastructure that will address the new equipment’s requirements. Keeping a GSE expertise centre somewhere in their network is thus recommended and this is for the benefit for all participants in the value chain. Indeed, in the main challenge of going green, and later, the automation of a GSE fleet, all stakeholders have to collaborate closely.
Of course, beyond the strategic consideration, the economic and financial fundamentals remain essential for the industry - and this is why Part 3 of this global study will address this topic, and will discuss the leasing pricing mechanism, together with some contractual element discussions, which are closely linked to the pricing theory.
