By Rob Morris, Global head of consultancy at Ascend by Cirium
Aside from a handful of ISTAT and smaller conferences over the past 24 months, the great and the good of the aircraft finance and leasing industry have not been able to get together en masse since the traditional annual kick off events in Dublin, last possible in 2020.
That was put right in true order when a reported 3,800 delegates descended upon Dublin this week for what was surely the largest ever Growth Frontiers conference.
Ascend by Cirium’s team was there in force with six of our consultants – George Dimitroff, Connor Diver, Michael Graham, Max Kingsley-Jones, Tim Li and Rob Morris – and were joined by a similarly large contingent of commercial colleagues. Over the full three days the team had full schedules of meetings covering two rooms, whilst three of the team also appeared on stage to share our collective insights and opinion. Feedback and requests for copies of material presented has been overwhelming, and should you wish to see the material, please do contact us directly. Meantime, first impressions from the event are shared by way of five key takeaways.
- The RDS was a fabulous location and May is better than January
The event relocated from its typical January slot at the Shelbourne Hotel to the Royal Dublin Society (RDS). Although the new location was further from the centre of Dublin, the venue offered greater space for networking and meeting. The lecture theatre also offered far better facilities both for speakers and the audience. Despite the reports of almost 4,000 delegates, the venue never felt overcrowded and there were plenty of opportunities to bump into old and new contacts in addition to excellent meeting spaces to facilitate booked meetings. Frankly, it was simply euphoric to be able to meet again in the manner we all took for granted pre-Covid and although the virus remains with us, likely forever in some format, we very much hope that this is now just the start of a ‘new normal’ which is much more akin to the ‘old normal’.
Let’s hope that Dublin and the RDS in May can become a regular slot in that ‘new normal’. - There is much concern about general inflation, interest rate rises and aircraft price and lease rate escalation
With US CPI already exceeding 8% and forecast to reach double digits later this year, there is much concern around increasing interest rates and new aircraft price escalation. Virtually every meeting and interaction included some questions and discussion around this point. Monday’s OEM panel was moderated by Max Kingsley-Jones and he asked panellists their views on new aircraft contracts and specifically escalation, which Ascend by Cirium estimates could be running around 6-8% based upon traditional formulae in uncapped contracts. There was some discussion about risk sharing but also a key point made that hyperinflation clauses, if present, could render caps meaningless. It does look like we are heading towards territory where OEMs and customer share the increases above a certain amount, which will inevitably lead to higher aircraft delivery prices than perhaps envisaged at contract signature.
With respect to interest rates, there is an implicit assumption that lessors will be able to increase rentals in line with increases and thus protest yields. We are sure that the situation is far more complex than this and in an increasingly competitive leasing environment, we wonder if lessors will be able to command the higher rentals than they demand.
It is likely that this will become the key theme of 2022 (alongside sustainability considerations; that’s a whole separate theme for another day) and thus Ascend by Cirium will share more thoughts on this in the coming weeks and months. - Demand recovery continues apace, and demand is strong, but resources continue to constrain supply in 2022 at least
Demand recovery remains strong in most regions as the release of frustrated demand continues to trump increasing economic concerns. Rob Morris was clear in his Monday morning keynote Economic Outlook presentation that for now Ascend by Cirium’s recovery scenario six remains on track for global recovery to 2019 demand volumes by August 2023.
However, there do remain dual concerns to the recovery hypothesis. In regions with strong recovery – North America and Europe in particular – there remain significant supply issues with many airlines struggling with crew and other personnel shortages inducing delays and cancellations which are likely to constrain true demand recovery potential in 2022. Clear examples were seen in many flight cancellations for delegates who struggled to get to Dublin. We saw another where many delegates struggled to find taxis to get around the city during the event, a consequence we were told of 1,500 drivers, some 10% of the total licensed taxi population in Dublin, leaving the sector since 2020. In some regions these shortages are seen as structural with many discussions around longer-term shortages and how they may impact growth specifically for airlines towards the smaller end of the ‘food-chain’.
The second concern is of course China where unwavering insistence upon zero COVID-19 continues to drive lockdowns and significantly depressed demand at this time. Other regions, including most of the rest of Asia-Pacific, are learning to live with the virus and travel restrictions continue to be lifted. We were finally able to meet with clients based in Asia and North America at this European event, something we have truly missed since 2020.
Demand recovery will also be a key theme of 2022 and we will continue to report on progress both in our regular client decks and in webinars and other events. - Lease Rates and Values are strengthening
Of course, most of our client conversations include discussion around specific trading data points as our team obsessively search for data to feed back to our Value Review Boards to facilitate calibration of our Current Market Lease Rate and Value opinion. A significant majority of those discussions appeared to capture data points which indicate stability or positive pressure on market trading values. There is much optimism about the balance of demand and supply, most specifically in single-aisle markets where we hear of limited availability of aircraft (perhaps in contradiction to some of our data, which maybe draws to the conclusion that many idle / parked aircraft available today are not ready for service and thus are clouding the true availability picture). There is some more concern around twin-aisle markets but even there optimism is seemingly fuelled by increasing aircraft placements. Likewise, the regional sector is also seeing increasing activity so perhaps the bottom of the cycle has been reached for most types?
Our Value Review Boards are constantly reviewing all of our Market opinion and all changes are reported regularly in our Inside Track on Value updates. - Russia is in the rear-view mirror
We have all been answering myriad questions over the past few weeks about the fate of the international leased fleet in Russia and the impact on values. Those questions continue but the most telling quote came from one of the Lessor CEO panels – “Russia is in the rear-view mirror”. Whilst efforts continue to seek to recover further aircraft, alongside discussions around recovery of records for those aircraft already recovered, this really means that the next phase of insurance claims and legal discussions continue. Most lessors have plans in place and now the long drawn-out process of that fiscal recovery will play out over many years.
However, Russia will drive a fundamental change in jurisdiction risk appetite and pricing. In that regard there were many discussions around what drives increasing jurisdiction risk, since none truly could have predicted the actions Russia’s leaders took which have pitched operating leasing (amongst many other industries) into the mess we have today. There were also conversations around pricing risk, but rather like the increasing interest rate debate we wonder if lessors will be able to command appropriate risk premia in the future (as opposed to demand them). The reality is that as leasing continues to grow past the 50% share of the global fleet we observe today, there can only be limited jurisdictions completely out of bounds. In the fullness of time perhaps even Russia will become an accessible market again. We even heard whispers of some investors looking at opportunities in the 430+ aircraft which we think are stuck in Russia today.
From every crisis comes opportunity and whilst the first phase of Russia is indeed in the rear-view mirror, the reverberations from this episode will be felt in the leasing sector for many years to come.
Meantime, we trust that you all returned from Dublin safely and healthily. And of course, we look forward to seeing you all again in 2022 and beyond in this ‘new normal’.
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