Recently I had the pleasure of participating in a Finance Dublin Aviation Finance Roundtable. As part of the Roundtable, I was asked to give my views and assessment of the impacts the Covid-19 Pandemic has had on the Aviation industry both globally and in Ireland. Read my responses to the questions asked here:-
Q.1 Do you foresee a U shaped or L shaped recovery in the medium term for commercial aircraft traffic revenue globally, and what are the broad implications for Ireland's aircraft leasing industry of that?
It seems most likely that it will be an L shaped recovery on the basis of recent projections from the International Air Transport Association (IATA) which expects airlines to lose $84.3 billion in 2020. In 2021, while travel is due to increase notably, losses are still expected to be as high as $15.8 billion despite a rise in revenue of 40% based on the prior year. These projections are based on the assumption that there is no second wave of Covid-19. The implications for this dramatic industry shock are yet to become fully clear, however, it is likely that a significant number of airlines will not survive and demand for leased aircraft will consequently decline. On the positive side, for those willing to take a long-term view, lessors can benefit, for example, by acquiring distressed assets or by entering into favourable sale and leaseback transactions with airlines.
Q.2 As the source of a net contribution of over €500 million in tax revenues (and 1,700 jobs) to the Irish Exchequer in 2018, how hopeful are you that the industry can continue to provide such major support to the Irish economy in the medium term?
While the tax revenue figure is likely to decline over the next 18 months, I would remain confident that the industry will provide coherent and safe measures to build confidence in air travel in the medium term. As a result this should help to stabilise the market and I would expect Ireland will be at the forefront of coordinating any such recovery.
Q.3 In what principal ways can the Irish aircraft leasing industry, with over €100 billion in new aircraft on lease worldwide play a role in supporting global airlines in their current difficulties due to Covid-19, and how should the industry respond to the question of possible early returns of aircraft from lessees to lessors, the provision of rental holidays, and repossession?
The leasing industry in Ireland has already played a significant role in supporting airlines, as lessors have, en masse, agreed to provide airlines with rent deferrals under their lease agreements. Their role is equally important on the debt side of aircraft financing, in that they have liaised with financiers to encourage a relaxation of enforcement provisions in light of the restrictions brought about by Covid-19. This reflects an understanding of that, during the first four months of the global pandemic, the scope for aircraft repossession remains very challenging across the globe. Over the medium term there may be a significant number of aircraft coming off-lease within a short period of time. If this is the case, it would be recommended that lessors agree GTAs with service providers across the globe and research requirements for temporary registrations in order to ensure aircraft are returned safely and quickly.
Q.4 What are the most fundamental changes that you think are likely to occur in the aviation industry as a consequence of the Covid-19 pandemic and how will this affect the challenge of funding aircraft acquisition and aircraft leasing in the future?
Airline debt will increase dramatically over the next 12 months and broad government intervention will be required in order to keep many airlines afloat. Weaker airlines may be consolidated with stronger carriers, which could result in decreased competition. However, in the short to medium term, airlines seem likely to discount ticket prices to stimulate demand. As the market is likely to remain fragile over the next few years, financiers may be reluctant to invest in aircraft at previous price levels as asset values will be susceptible to ongoing shocks, i.e. a second wave of infection.
Q.5 Given the uncertainty over the timing and volume of a recovery in passenger air transport, what do you think the implications are for different types (narrowbody vs widebody) and vintages of aircraft and what do you expect the knock-on effects to be on aircraft values and future production?
Narrow body aircraft have traditionally been a more liquid asset than wide body aircraft. This gap seems likely to increase over the next few years as, for example, we have seen various airlines announcing plans to shelve the A380 aircraft indefinitely. Various aviation consultancies have also predicted that up to 10% of narrow body aircraft over 10-15 years old, are likely to be withdrawn from circulation due to a combination of fleet restructuring, airline failures and also scheduled lease expiries.
Click on the Finance Dublin 2020 Yearbook link below to read the full Roundtable (pages 56 - 61) which includes contributions from a number of business and legal experts.
On publishing the Yearbook, Finance Dublin Editor Ken O'Brien said -
"Despite the devastating and tragic impacts it (Covid-19 Pandemic) has had on society, overall a hopeful picture emerges that shows the industry (Financial Services) has coped reasonably well with the initial phase of the pandemic, and is confronting the challenges with determination."