The aviation asset management division of ST Engineering has entered into an agreement with Temasek, an investment company headquartered in Singapore, to set up a 50:50 joint venture (JV) undertaking freighter aircraft leasing.
The JV will address the growing demand for freighter aircraft as e-commerce and air cargo volumes expand across the globe. According to research by Oliver Wyman management consulting firm, the number of cargo aircraft in operation is expected to grow 2.4% annually between 2020 and 2031, on par with the 2.3% annual growth rate of the previous decade. Demand for more than 750 freighter conversions is forecast over the 10-year period: an increase of 28% over the previous decade.
According to ST Engineering the JV targets to build a portfolio valued at around US$600m within five years, mainly investing in passenger aircraft to be converted into efficient freighters. ST Engineering will provide the associated MRO services for these aircraft, and will also be the asset and lease manager to the JV.
The portfolio will primarily comprise older narrow-body passenger aircraft converted into fuel-efficient freighters. This environmentally sound approach is in line with the JV’s focus to implement an environmental, social and governance (ESG) policy to guide its operations and business development. The JV will set relevant ESG criteria for its investments and work with prospective clients on measures to reduce their carbon footprint, including the use of sustainable aviation fuels and enhanced engine maintenance programmes.
On the supply side, the JV expects to be able to purchase passenger aircraft feedstock at lower prices than previously, as the values of some passenger aircraft value has been affected by theresponse to the pandemic. The JV intends to finance these aircraft through a mix of equity and debt.
“This joint venture represents a significant step by ST Engineering in growing our aviation leasing business as we expand beyond passenger aircraft and engines to include freighter aircraft assets as part of our portfolio,” said Jeffrey Lam, president of ST Engineering and its head of commercial aerospace. “As we embark on this exciting venture with our partner, Temasek, we also welcome and look forward to working with other potential like-minded partners who are looking to invest in the strong freighter aircraft leasing market. In the medium to long-term, the JV intends to securitise the leasing income streams by way of a business trust to unlock capital.”
Uwe Krueger, head of industrials, business services, energy & resources at Temasek, added, “The joint venture with ST Engineering represents an opportunity for both of us to identify solutions for the reduction of carbon emissions, even in a traditionally carbon-intensive industry, by putting capital to work in those solutions. We expect to work with like-minded partners and customers to tailor solutions that are efficient and sustainable, while being commercially viable.”
