Arena Aviation Capital CEO Patrick den Elzen talks to Ishka about the aircraft investor landscape, Arena’s busy year for purchases, and a potential equity gap on the horizon in 2025.
An equity gap in the midlife aircraft financing space may come into play in 2025, potentially driving up returns for some buyers, Arena Aviation Capital CEO Patrick den Elzen tells Ishka. The Dutch aircraft asset manager has been one of the most prolific buyers of 2024 and is on track to add over 20 aircrafts to its portfolio by year-end.
“I wonder, sometimes, looking at all of these midlife aircraft that are on the market today - and there are literally hundreds - if there is ultimately even enough capital to be deployed in that space,” ponders den Elzen. “If indeed that is the case, I see a potential opportunity for buyers to get a slightly better return next year.”
Any gap, den Elzen specifies, would be firmly on the equity side - not debt. As things stand, the majority of midlife aircraft are being bought by US fund management money raised through limited partners (LPs), with the fundraising climate still “difficult” despite some improvements.
Aircraft trading levels remain high and are likely to continue that way into next year, speculates den Elzen. Deep-rooted supply issues from both major OEMs and the wider supply chain are making prospective buyers comfortable with assuming the kind of “punchy” future lease rates and residual value expectations required to get deals done, while relative interest rate stability is keeping cost of capital under control.
From an aircraft seller’s perspective, den Elzen adds, maturity of financing facilities and portfolio management priorities are also driving a need for trading, particularly from investment grade lessors needing to maintain allow average portfolio age.
Record number of aircraft purchases
Arena has been busy recently, picking up three equity mandates in the last two years, and is on target to close on a 30-aircraft deal pipeline it built up in 2024.
I’m very proud of this team,” says den Elzen. “I’m very proud of us being on track to buy this unprecedented number of aircraft this year, which is in large part thanks to people that have been working very hard and have been very tenacious in pursuing opportunities outside of the famous RFP battlefield,” he adds, citing bilateral deals as a key enabler in Arena’s portfolio growth.
Ishka notes that the aircraft market is experiencing renewed interest from equity investors, with many looking for mid-teen returns on their money (see insights: “Aircraft investors shoot for mid-teen returns”).
Den Elzen agrees - but notes that the types of deals investors target can vary depending on how long a respective fund has been active for. “If you talk to US money, they do typically want mid-teen leveraged returns, that’s a constant amongst almost all of them. But, that doesn’t mean that you need to show everybody middle of the fairway deals,” he explains.
Some funds with limited years left until their harvesting period are likely to be focused on stub leases and short deals, in order to recycle capital and repay LPs. Other more nascent funds are looking for longer deals, while across the spectrum investors continue to be varied in their amiability to regional and asset risk.
Asian and European money, however, continues to prioritise capital preservation, adds den Elzen, resulting in a much stronger focus on newer aircraft and stronger credits.
Residual engine values likely to smooth part-out inflection point
Assuming that both main aircraft manufacturers stabilise their production output in the medium term, den Elzen acknowledges the inevitability of an “inflection point” early next decade, when the number of latest-generation aircraft in operation exceeds previous-generation assets, and green time value begins to fade. However, the Arena CEO tells Ishka that the idea of a ‘cliff edge’ for residual values is over exaggerated - and that engine values, being easily 75% to 80% of the aircraft value, will be more robust even as aircraft lease rates and values drop
“Even in 2031 or 2032, there will still be thousands of current technology aircraft flying around. So green time engines will retain their value for a long time, well into the next decade.”
Leases expiring beyond the early 2030s, says den Elzen, will require more conservative estimates on residual values.
“And investors will do that. Nobody will assume that the strong leasing market and aircraft shortage that we see today will still be there seven years from now. It would be a bit stupid to assume that.”
Will lease rates plateau or rise?
Travelling back to the present, lease rates have plateaued slightly, confirms den Elzen, but the Arena CEO believes they could rise further. Low production rates and supply chain issues, with the added disruption of Boeing’s recent strike, will continue to constrain demand and support lease rates. On the other hand, den Elzen points to several factors impeding lease rate growth or potentially threatening drops.
“A good example is the US market - which is really doing comparatively poorly, with Spirit’s Chapter 11 and just overcapacity in general,” he notes. “US carriers are cutting back on their fleet plans, on their capacity, which may be one reason lease rates are stabilising a little.” Other well-performing markets, he points out, are still providing ballast.
“If everything stays as it is today, I think lease rates may even slowly creep up further,” adds den Elzen, qualifying this with the usual caution about geopolitical events and regional economic issues.
The Ishka View
The fundraising environment, despite encouraging signs, appears to still be tricky. A potential equity gap, combines with a need for aircraft trading, leaves open the potential for higher returns for the right mid-life buyers in 2025. Given this is still a difficult equity raising environment, Arena’s achievement of attracting three recent mandates is impressive.
Arena has been a nimble operator, with a relatively agnostic approach to asset acquisition. Investment targets, explains den Elzen, are all driven by the wants of investors. “If they want old stuff, we’ll bring them old stuff. If they want new stuff, we’ll do that too,” the Arena CEO tells Ishka.
The asset manager has had a busy year, and is on track to have added 30 aircraft to its deal pipeline in 2024 - the same year it celebrates its 100th aircraft acquisition and 10th year of operation. Next year may be quieter but, as den Elzen is keen to stress, size is not Arena’s end goal.
“It’s not our objective or our strategy to become big. It’s our strategy to be better and perform better than others, and that’s how we make our money.”
You can also find the full article published on Ishka Global.
