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The US Market Overview: Aircraft ABS
Covid-19 has altered investor’s risk appetite with respect to airlines and aircraft, with an emerging preference for airline with robust credits and assets with higher liquidity.
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Team Perspective
Yinan Qin
Senior Aviation Analyst
Cirium Ascend Consultancy
PART TWO OF THREE – READ PART ONE: TRAFFIC AND PART THREE: AIRLINES
The aviation asset-backed securities (ABS) market has encountered considerable challenges during and since Covid-19, further exacerbated by geopolitical conflicts and a relatively gloomy global economic outlook. These factors have collectively led to the downgrade of several ABS portfolios and a silent ABS market in the past two years, with a total of less than five portfolios issued in 2022 and 2023.
After two years of market stagnation, lessors are now cautiously re-entering the market. In the first nine months of 2024, six new ABS portfolios were issued. Four of these consist purely of passenger aircraft, while the two PKAIR portfolios are essentially loan pools. The basic information of these portfolios are as follows:
Several key changes observed between current market vs pre-pandemic market
Covid-19 has altered investor’s risk appetite with respect to airlines and aircraft, with an emerging preference for airline with robust credits and assets with higher liquidity. Comparing the four 2024-issued portfolios with those from 2019 within Cirium’s watchlist, there has been a notable shift towards next-gen aircraft. As more airlines upgauge and modernize their fleets with newer generation aircraft for better fuel efficiency and operational performance, lessors are naturally following this trend and building portfolios that feature these advanced aircraft.
Single-aisle aircraft remained the dominant type in the new 2024 portfolios, representing 94% of the total asset pool measured by aircraft count.
Popular variants continue to be the Boeing 737 Max 8, Airbus A320ceo and A320neo. On the twin-aisle side, all variants in the asset pool are newer generation aircraft, including the 787-9, A330-900neo and A350-900. This contrasts with the 2019 market where the A330-300 and 777-300ER were popular options.
With regard to aircraft operating regions, lessees based in Asia-Pacific, Europe and North America were the top three in 2019 while Latin American lessees have become the largest market segment in the 2024 portfolio. There are no aircraft operating in Russia due to sanctions, while exposure to the Chinese market has declined significantly in 2024. This reflects investor concerns about the stagnant Chinese economy and increasing political tension between the USA and China.
Coupon rates have inevitably increased for comparable tranches to reflect the higher interest rate environment. For instance, examining Carlyle’s ABS portfolio over the last couple of years reveals that the tranche A coupon rate has risen from around 4.0% (AASET 2019-1, AASET 2019-2, AASET 2020-1) to over 6.0% (AASET 2022-1, AASET 2024-1). Additionally, the tranche structure has been simplified with limited subordinate tranches and E notes issued after 2022.
Overall, it is quite evident that the market preference is now leaning towards single-aisle, advanced technology younger aircraft with limited exposure to secondary market deals.
Meanwhile, investors require higher yields during the post-pandemic period to mitigate the risk associated with higher interest rates and market volatility.
Near-term ABS market outlook
The ABS market has shown several positive signs that have further improved investor confidence. Meanwhile there is robust recovery in global traffic, an undersupplied market and an increasing presence of newer generation aircraft driven by fleet modernisation. Additionally, airlines have shown improved financial performance, bottom-line growth and balance sheet deleveraging, which have enhanced their credit ratings since the pandemic.
More importantly, a confirmed interest rate drop will further enhance the market.
The recent Federal Reserve interest rate cut of 50 basis points (rather than the expected 25 basis points) reflects improvements in inflation and employment rates and indicates lower likelihood of a tightening monetary market again. This reduction in interest rates will increase margins in asset pricing. Therefore, an increase in aviation ABS portfolios is anticipated in the future, although a return to levels seen pre-pandemic is unlikely in the near term. Investors are expected to re-enter the market cautiously, focusing more on asset quality than quantity.
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