Partner Insight: Ready for takeoff - the investment case for aircraft leasing

With summer getaways behind us and the festive holidays approaching, air travel remains top of mind for many. Passengers may recognise the airline logo on the tail, but the aircraft itself is often owned by someone else. Behind this familiar experience sits an investment proposition worth a closer look: owning the aircraft that airlines pay to operate.

Aircraft leasing is a tangible segment of asset-based finance (ABF), in which investments are backed by physical, mobile, infrastructure-like assets and contracted cash flows from airlines around the world. For investment teams exploring private markets, the opportunity merits attention. It pursues strong risk-adjusted return potential with regular income from lease payments. Investors may also benefit from capital appreciation through an aircraft's eventual resale value. Realising that potential requires careful asset, credit, and jurisdictional underwriting.

The model is straightforward. A lessor buys an aircraft and leases it to an airline, which keeps its capital free rather than tying it up in an expensive purchase. A common route is a purchase leaseback, where the lessor buys an aircraft from an airline and immediately leases it back. The airline gains access to modern fleets; owners receive contracted rent.

Leases typically run for eight to 12 years, with fixed monthly rent paid in advance in US dollars. Aircraft are typically bought with a lease already in place, so income begins from day one. Most leases are "triple-net leases", meaning the airline pays maintenance, insurance, and operating costs. They also may include "hell-or-high-water" clauses, which require rent to be paid whether or not the aircraft is flying.

The market backdrop is supportive, reflecting a sustained imbalance between demand and supply. Commercial aircraft deliveries have remained well below pre-pandemic trend levels since 2019, resulting in a cumulative shortfall of more than 5,000 aircraft (iata.org) while supply chain constraints continue to hold back manufacturers' output. Order backlogs now stand at more than 60% of the active fleet compared with 30-40% historically.

Airlines can wait years for new aircraft, leaving them to compete for planes already in service. Leasing has also become a structural feature of aircraft finance, with more than half of the global commercial fleet now leased (iata.org). Steady growth in passenger demand may add a tailwind to the attractive market dynamics.

The economics are simple supply and demand. When fewer aircraft are available than airlines need, lease rates and resale values move up. Airlines waiting for replacements also have greater incentive to extend existing leases. For the owner, an extension helps to avoid a gap in rental income and the cost of reconfiguring the aircraft for a new airline.

Defaults also work differently when you own the asset. Rather than relying solely on a recovery claim, the owner (lessor) can repossess the aircraft and re-lease it to another airline, limiting the time without income. That takes an experienced technical and commercial team. Successful redeployment depends on understanding the aircraft's condition, local legal and regulatory requirements, and demand from prospective replacement airlines.

The risks are real: airline creditworthiness, residual values, enforcement in some jurisdictions, and travel shocks such as the pandemic. Each risk needs to be carefully underwritten.

These market dynamics create a broad opportunity set across commercial aircraft, but finding relative value takes discipline. For example, risk-return profiles differ between early-life and mid-life aircraft, and between standardised narrowbody models and more bespoke widebody aircraft. Buying, financing, maintaining, transitioning, and ultimately selling aircraft calls for specialist management and a well-founded view of airline demand.

For investment teams seeking income from private markets, aircraft leasing may deserve consideration alongside private credit and income-producing real assets. Return potential comes from contracted rents and residual aircraft values, which are shaped by airline demand, fleet needs, and manufacturing constraints. That can give investment teams a distinct set of return drivers with historically low correlation to public markets (pimco.com).

Realising the opportunity depends on specialist implementation: combining aircraft expertise with capital markets capabilities to pair the right aircraft with the right airline at a disciplined price.

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