The aircraft leasing market is seeing an upsurge in business , but a cloud hovers above the sector as several lessors ponder their next moves and Airbus and Boeing product decisions remain in flux.

What’s more, there is no consensus on how pronounced the rebound is. “I believe we are well into the recovery,” says AerCap CEO Klaus Heinemann, adding: “There has been a sustained and, in some cases, a substantial rebound among our emerging market clients in Asia and Latin America in particular.”

The prognosis for International Lease Finance Corp., the world’s largest leasing company , is somewhat less optimistic. Problems encountered in 2009 “will continue through most of 2010 and will have a negative impact on our future operating results through increased costs with repossessing and deploying aircraft,” the company’s latest earnings report states. However, the report notes that the growth in freight could presage a broader upturn “starting in late 2010.” In the meantime , lease rates have continued to decline , albeit at a more moderate pace.

Some indicators of slight improvement have occurred since the third quarter when ILFC reported that 18 customers with 69 aircraft were two or more months behind on lease payments —an improvement from the mid-year figure; by year-end the total was down to 12 customers operating 25 aircraft, similar to the 2007 level.

ILFC appears to be having more difficulties than others. Gary S. Liebowitz, a senior analyst at Wells Fargo Securities, notes that the number of aircraft ILFC is slated to receive in 2011-12 that do not have guaranteed placements with operators is surprising . If these guarantees do not materialize soon, “deferrals and/or cancellations are possible.”

With the economic climate remaining dicey, leasing companies are hesitant about purchasing aircraft . Many unresolved matters could delay bulking up order books at this point . One is what direction Airbus and Boeing will take with their narrow-body fleets, says Heinemann. Both are studying reengining options for their respective narrow-body families. A decision to modernize those would drive down residual values on the existing A320 and 737 fleets. “We believe that by the middle of the year there will be more clarity about how this looks in order to determine our next move ,” Heinemann says.

But plans by ILFC and others to shed some of their aircraft also give Heinemann pause. “We have to make sure that whatever bargain purchase we might get from a manufacturer is better than one we might get by taking on the order book of a competitor that cannot cope with it,” he says.

ILFC, for one, says it is reviewing offers for various aircraft in its stable, with an aggregate value of $3.5 billion. Most of those offers cover newer aircraft and, ILFC says, sale of these could come at a loss. ILFC’s debt obligations this year exceed $6.6 billion (with most coming due in the second half) and are expected to top $7.6 billion in 2011. Its total outstanding debt is $30 billion. The challenge facing management—which has been reshuffled since the departure of Steven Udvar-Hazy, ­­ILFC’s venerable chairman and founder—is “balancing the need for funds with the long-term value of holding aircraft and long-term prospects for us.”

Even if successful, however, ILFC parent, American International Group, notes that a sell-off will not just drive up aircraft age, it will also put more pressure on operating margins, which are being squeezed in an effort to raise secured financing.

The lessor had 993 aircraft in its inventory at year-end, with 120 more on order with Airbus and Boeing valued at $13.7 billion. ILFC has made some adjustments in its order book, including a recent decision to further delay A380s by a year, with the first aircraft now not due for delivery until 2014. The Wells Fargo report notes that “we do not think ILFC has placed a single A380 yet, and . . . believe a cancellation of some or all of three orders is probable.”

ILFC also has altered delivery plans for Boeing 787s in the past year, not just because of the development delays . The first of 74 ILFC 787s is due in July 2012. However, it also has slid some 2013 and 2014 delivery slots. So far, ILFC is retaining all its 787 orders, but also its cancellation options . Some aircraft have already been placed , although two will require a new home since Globespan Airways ceased operations last year.

Some of the market vagaries are reflected in the bottom line of leasing companies. While General Electric’s large leasing arm, Gecas, saw revenue drop 4% and net earnings come in 14% below 2009 levels, ILFC, by contrast, still delivered a 24% increase in pre-tax income with rental revenue up 6.7% year-on-year. AerCap income returned to profitability last year, after a loss in 2008. The latter also reports that it expects its acquisition of Genesis Leasing to close on Mar. 25.

Credit: BOEING