In recent years, the aviation industry has witnessed a growing reliance on competitive financing solutions such as Japanese Operating Leases (JOL) and Japanese Operating Leases with Call Options (JOLCO) in response to the prevailing "higher-for-longer" interest rate environment. These products are used to deploy Japanese equity, offering airlines diversified and cost-effective funding avenues, enabling them to cover 100% of their asset costs. While both JOL and JOLCO options are available, it is essential to understand their differences. A JOL is a straightforward operating lease, whereas a JOLCO, while technically like an operating lease, resembles a finance lease with an embedded option to purchase the aircraft at a predetermined date and price. Airlines are generally expected to exercise the call option in a JOLCO due to the associated costs of returning the aircraft to full-life condition and the potential impact on their reputation within the Japanese market.
Despite their attractiveness, JOLCOs are inflexible, as amending their terms during the transaction's duration is challenging. The COVID-19 pandemic significantly affected both JOL and JOLCO products, leading to situations where airlines rejected JOLCO aircraft through bankruptcy proceedings or sought to renegotiate their terms. Additionally, some airlines declined to exercise their call options, exposing Japanese equity investors to residual value risks. In the post-COVID era, innovative debt structures combining traditional JOLCOs with sustainability-linked financing or private insurance products are expected to gain prominence in future aircraft deliveries. For example, ABL Aviation recently facilitated the delivery of a Boeing 777-200LRF to Atlas Air through JOLCO financing combined with debt guaranteed by AFIC, marking a significant milestone in aviation financing.
Amid the industry's growing focus on sustainability, integrating cost-effective funding alternatives like JOL and JOLCO with sustainability Key Performance Indicators (KPIs) has become imperative. These structures not only support sustainability efforts but also provide significant financial benefits, including lower funding costs. An example is ABL Aviation's financing of a Boeing 787-8 Dreamliner for EL AL Airlines, which used Sustainable Aviation Fuel (SAF) for its delivery, marking a milestone for EL AL's sustainability initiatives. Furthermore, ABL Aviation facilitated the sustainability-related JOLCO financing of three A321neos for Wizz Air, highlighting the industry's commitment to modern, efficient, and sustainable aviation practices. These transactions incorporate sustainability-linked features, tying financing terms to Wizz Air's future achievements in reducing CO2 emissions.
As the aviation market rebounds and expands, JOL and JOLCO financing remain appealing, with ABL Aviation and other firms actively developing customized financial solutions to meet industry demands. The sustained interest in JOL and JOLCO financing is evidenced by robust investments, particularly in Japan, indicating confidence from both investors and airlines. Industry projections anticipate continued demand for aircraft financing, estimated at between $105 and $110 billion in 2024, with lessors expected to play a significant role.
