By Gary Fitzgerald, chief executive of Stratos

The commercial aircraft leasing industry has grown over the last 50 years to become a key enabler of air passenger and cargo transportation – mainly by helping airlines to grow fleets flexibly without heavy capital investments.

Over half of all commercial jets are now funded via long-term dry leasing arrangements but this year our industry is facing several interlocking challenges which we have not faced since leasing became a widespread – in particular rapidly intensifying geopolitical tensions across multiple continents, supply chain issues and funding challenges.

Geopolitical disruption

The recent surge in worldwide conflicts and protectionism has brought an almost unprecedented increase in geopolitical risk – which in turn plays a massive role in shaping airline fleet strategy and asset deployment.

Covid in 2020 materially disrupted the demand for aircraft worldwide and took over four years to fully recover from. Sanctions against Russia following the Ukraine invasion in 2022 have led to the effective confiscation of over 400 leased aircraft which has only recently been resolved through insurance claims. Consequently, the aircraft leasing industry welcomed 2025 with a cautious optimism that has swiftly turned into concerns about sustained demand for aircraft in the medium term.

Trade policy uncertainty further clouds the landscape – building and maintaining commercial jet aircraft is a truly global affair. Starting with raw materials – the largest producer of titanium (a critical component in airframes, gears and engines) is Russia, China is the world’s largest producers of aluminium, Indonesia for nickel (high temp alloys), China dominates over 80% rare earth materials market, critical for magnets and weight reduction and heat protection in alloys. Lastly, cobalt is a critical ‘superalloy’ used in engines with over 60% produced in DR Congo.

There is no question that the tariff war kicked off by the US in 2025 will disrupt component flows and inflate costs over time. Similarly, Airbus and Boeing are reworking supply-chain footprints to hedge against future protectionism – but this seems more like rearranging furniture on the Titanic.

Persistent supply chain disruptions

A key driver of today’s lease market dynamics is the ongoing tension throughout the supply chain. The leading aircraft manufacturers are dealing with persistent shortages –  in engines, airframe structures, cabin systems and skilled labour – that are preventing them from meeting production targets.

“A key driver of today’s lease market dynamics is the ongoing tension throughout the supply chain.”

Airbus, for instance, has delayed ramping A320 output, citing “persistent specific supply chain issues mainly in engines, aerostructures and cabin equipment”. The cumulative shortfall in production amounts to around 4,000 aircraft in the past five years, aircraft which will never be produced. Consequently, lease rentals for some used aircraft have jumped at least 20% above pre-covid levels – almost entirely explained by the shortfall in new production and the decade-long challenge by the engine OEMs to improve the on-wing performance of the new generation of engines.

Some lessors have become far more focused on leasing engines as ongoing shortages of parts and constrained overhaul capacity have sent engine lease values sharply upwards. It remains to be seen how long this market will hold, but Stratos believes it is underwritten by a structural issue in the industry rather than a temporary supply-side blip.

Shifting financing dynamics

Higher appraised values of aircraft are coinciding with a more cautious financing environment. With the industry almost entirely referenced off USD interest rates, stubbornly high rates and tightening credit conditions are driving a marked shift in lease structuring – post-Covid has seen the rise of alternative (non-bank) lenders as the traditional commercial lenders have moved to stricter underwriting.

Additionally, both operating and finance lease structures are evolving. Securitised structures (EETCs, ABS) and extendible operating leases are regaining traction as lessors and airlines seek greater flexibility and balance sheet optimisation.

In this tightening funding market, lessors with strong balance sheets or access to efficient funding sources (i.e. discretionary funds, Japanese investors, US Capital Markets etc) may edge ahead, able to secure the most competitive funding. Others are pushed to adopt alternative financing routes or focus on secondary market aircraft to maintain fleet growth.

Strategic impact on lessors

These macro pressures are reshaping lessor strategy in several ways. With new aircraft backlogged, lessors and asset managers are holding older models longer and finding in many cases that investing in refurbishing engines rather than selling for spares is a more economic way to maintain asset liquidity. In such a highly capital-intensive business, aircraft lessors compete in large part on their respective cost of capital: access to competitive capital remains key. We expect supply shortages to benefit well-funded asset managers and lessors for several years.

“With new aircraft backlogged, lessors and asset managers are holding older models longer and finding in many cases that investing in refurbishing engines rather than selling for spares is a more economic way to maintain asset liquidity.”

Lessors constantly strive to diversify their risk, but this is being curtailed by the fact that most top credit airlines have reverted to bypassing traditional dry leases in favour of cheaper (albeit less flexible) finance leases [or sale-and-lease-backs from alternative lenders/lessors]. Consequently, the average credit rating of airline lessee’s has been in decline in the past decade and the concentration of risk on single airlines has reached alarming levels.

It has become difficult to diversify technologically as the same conditions which bring fuel efficiency to new generation aircraft (namely hotter and higher speed engine cores) is also putting a big strain on remarketability and therefore residual values for the crucial second decade of these aircraft.

Looking into the future, Stratos predicts that supply chain constraints will persist into the early 2030s. As such, leasing will remain at a strategic premium, with lessors repositioning toward flexibility, diversified financing, and new aircraft types.

Policy volatility – whether due to war, tariffs or sanctions – along with the myriad of technical challenges add urgency to pre-emptively planning aircraft transitions, repossessions and ultimately liquidating the intrinsic maintenance value to realise the highest return outcome for owners.

Conclusion

Now mid-way through 2025, the aircraft leasing industry stands at a crossroads with a surprising number of hard-to-predict outcomes on the horizon. Given how volatile world conflicts, politics and trade flow have suddenly become, nobody is able to accurately predict where the leasing industry will be in the medium term.

“Given how volatile world conflicts, politics and trade flow have suddenly become, nobody is able to accurately predict where the leasing industry will be in the medium term.”

The industry is vulnerable to its long-embedded supply-chain fragility, tighter capital markets and high geopolitical uncertainty. These factors are shaping how asset managers such as Stratos are working to mitigate risks. If we are indeed on the cusp of a funding, supply or even a demand crisis: those best positioned in aircraft leasing will be agile, have access to appropriately priced capital and be diversified across different jurisdictions.

Investors and airlines alike would be wise to stay alert to these macroeconomic pressures: the next decade of leasing will reward those with strong technical management skills, foresight and flexibility above all else.

Article written June 23, 2025.