Picture credit: adobestock.com/Michael Derrer Fuchs
This final part of the global study will cover the environmental safeguards (ESG) aspects of this particular model, as well as some additional considerations that stakeholders may have on the subject, both now and in the future.
Air transportation is a dynamic industry, in which all stakeholders collaborate closely and just in time to offer a key strategic service to the world. The challenges of annually transporting billions of passengers safely, swiftly and comfortably are immense, as all readers know. However, today, this industry is under pressure to reduce its global emissions. In this regard, the efforts of all players within the value chain, whether it be aeronautics, airlines, airports, ground handlers, MRO, OEM or GSE providers, are paramount in the ongoing battle of emissions reduction; that said, flying an aircraft is likely to remain dependent on fossil fuel usage for a longer period when compared with other sectors. As a critical part of the airport’s organisation, the ground support equipment division is no exception to this major ESG shift.
Sustainable solutionsToday, whilst GSE OEM are developing ever more greener, safer and efficient equipment to answer the increasingly stringent specification requirements of ground handlers, airlines and airports, a leasing operator, from his side of the equation, offers by nature a dynamic business model that allows sustainable GSE use.
For instance, sharing GSE amongst users can be effected either sequentially (in an operating lease the equipment is transferred from one operator to the other at the contract end); or simultaneously (in the case of fleet of equipment pooled at a particular airport, allowing the quantity of equipment necessary on the station to be much reduced). Both of these approaches clearly avoid an excess of ground support equipment.
Additionally, leasing operators are deploying massive efforts and financial means to progressively replace older fleets with greener equipment and more technologically advanced units in an efficient, economical and smooth way for their customers in order to assist them in avoiding the “capex wall”.
For instance, ground handlers have the ambition of adopting electric GSE, to make up 60-70% of their global fleet by 2035; this, from a base level of less than 15% today, in order to match the expectations of external (public opinion, passengers, regulators) and internal (airlines, airport policies) industry stakeholders.
This represents a major effort, considering both (i) the operational challenges (electric grids of airports in many regions are simply not yet ready to support such a shift; electric current and plugs are not standardised; and mechanics must be re-educated to deal with electronic equipment) and (ii) the financial challenge. (Today the acquisition price of a unit of electric GSE is around 20% higher than for an internal combustion-engined equivalent, and that premium will remain, even though battery cost will decrease).
There is also the life cycle of electric equipment to weigh up, since this might not be the same as that for conventional equipment. However, from an investor’s point of view, the GSE leasing business is viewed as an appealing quasi-infrastructure asset. Indeed, GSE plays a pivotal role in the air transportation logistics chain.
Of note is the resilience of the ownership and management of a large strategic fleet of equipment which cannot be replaced easily, as well as the participation in the global energy transition. There is also the self-regulating cash flow and value generation model (if the business grows, the company consumes capex but generates value; whereas if the business stagnates, the company produces cash and reduces debts or pays dividends). The superior returns generated by the mix of a financial lease and operational jobs offers significant added value to the industry, too.
Finally, the important growth perspectives, not only in Europe but also in other regions where the model is still at an early stage, makes the GSE leasing business model very attractive for investors who have a long- term investment viewpoint.
A success story
Currently, the success of the GSE leasing model is indisputable and has led to a significant market share that is, in Europe at least, estimated to be close to 50% of the GSE fleet which would be provided under a full-service leasing agreement. However, alongside this success, the market dynamic is changing further; amongst other developments is the appearance of more structured competition, the emergence of alternative business models, the consolidation of the ground handling sector and the acceleration of technological change. Accordingly, whilst envisaging investment in the sector, it is recommended that investors address the following questions:
- What is the impact of electrification and automation on the leasing business model? How fast is the transition to new green technologies financially sustainable and what is the impact of this trend on the economics of the leasing business?
- Why does globalisation of the business make sense – and if so, to what extent? What are the synergies amongst the various regions?
- How exactly is the competitive environment going to develop in this regard? What are the interests of the customers with regard to their GSE suppliers’ competitive structure?
- What are the key criteria to valuing a leasing business? Which valuation method is the most relevant, and for which part of the business?
- What is the impact of the funding structure of the leasing suppliers on the business model? What are the sources and uses of the value creation mechanism?
For a long time, private equity and (more recently) infrastructure funds have emerged as the natural shareholders to sponsor the GSE leasing businesses.
We believe that infrastructure funds remain the best possible for shareholders to support leading leasing businesses, thanks to their strong financial capabilities to finance massive capital expenditure at an acceptable cost, together with their strong governance and ESG policies that protects this strategic business for the air transportation industry.
Moreover, their long-term views allow leasing businesses to develop the long-term strategies that are inherent within an asset-based business, notably in the strategy of deploying the huge investment necessary for ecological transition.
Finally, infrastructure funding or institutional investors have lower capital costs than other types of investors. As long as the business can demonstrate resilience, as has been the case historically, then these lower return expectations can have a positive impact on the competitiveness of the leasing offer.In return, a leasing business will offer a nice ratio risk return through its ability to reach superior but resilient returns and cash flow, whilst striving for further growth.
In conclusion
In summary, these four articles were aimed at providing an independent, in-depth overview of GSE leasing, a concept that has grown in popularity over the last 25 years. We have reviewed the various leasing models, described the pros and cons of the solution, discussed the pricing mechanism as well as points of attention about the contractual mechanism.
Finally, we have reviewed the attractiveness of the leasing model in the investment industry, whilst raising some major strategic questions over the future of the concept. We hope that this series of publications will have contributed to the market intelligence and the sustainability of the industry in general. As ever, only the future will tell.
