A panel of industry experts have assessed the impact of the coronavirus pandemic on the aviation finance and leasing market.
Speaking as part of Airline Economics’ Aviation Finance and Leasing: State of the Market conference last week, Ascend by Cirium’s Head of Valuations George Dimitroff was joined by colleagues from across the industry to talk about the challenges facing aircraft appraisers during the COVID-19 crisis.
In this post, we round up the top ten things aviation financiers need to know based on the discussion.
- Older wide-body aircraft are going to be hardest hit by coronavirus
The value of wide-body aircraft that are out of production or soon to end production will suffer the most as a result of the COVID-19 crisis. Four-engine models in particular, such as Airbus’ A340 and A380 passenger aircraft and Boeing’s veteran 747, are seeing their values decline in current market conditions. Older twin-engine aircraft, including older 777s and A330s, have already experienced declines in values of up to 20-25% compared with pre-coronavirus levels, due to oversupply. - The narrow-body market is also cooling off during the crisis
At the older end of the spectrum, the narrow-body market is also cooling off after a period of overheated aircraft values going into the crisis. Before COVID-19, investors were willing to pay high prices for older narrow-body jets due to a strong part-out market. However, single-aisle aircraft values are now trending downwards as with such a large portion of the fleet grounded, demand for spare engines and parts is extremely weak and the part-out buyers do not have the liquidity to trade. - Supply will outstrip demand over the next few years
Predictions from the International Air Transport Association and other industry bodies suggest that it will take between two to five years before demand for air travel returns to pre-coronavirus levels. This means that there will be an oversupply of aircraft, driving values down in the and impacting the aviation finance and leasing sector in the short-to-medium term. - Looking after existing assets will aid recovery
In this volatile market environment, it’s never been more important to look after existing assets. At a time when airlines have hundreds of aircraft in storage, proper maintenance, storage and record keeping of these jets is vital to avoiding costly repairs that could delay or even prohibit their return to service. The current scenario also presents carriers with an opportunity to undertake timely MRO work and upgrades while aircraft are parked – yet airlines’ desperate need to conserve cash means that in most cases they are not performing non-essential maintenance work. - Large aircraft don’t have a big secondary market
While much has been said about passenger-to-freight conversion of wide-body aircraft, this is still only a small part of the secondary market. Larger twin-aisle aircraft moving on after 10 to 15 years of service with their first operator don’t have many places to go. Appraised values are determined based on the highest and best use of an aircraft and, for the larger aircraft with limited secondary market, this highest and best use could rapidly become part-out.
Older 777s and A330s could easily end up costing airlines some 20 million dollars to return to service, between maintenance work and interior upgrades – sometimes making it more financially attractive to part-out. Even if kept in service, or converted to freighters, the investment needed to keep them flying would be factored into any buyer’s potential bid (thus reducing the “as is” value further). - Delays to the 737 Max will help ease oversupply pressure in the industry
The delayed return of Boeing’s 737 Max jet has been a ‘safety valve’ for the aviation industry during the coronavirus crisis. It’s likely that its return to service will be gradual and this could help manage supply in the market and support the continued operation of the 737 NG for some more time. Many 737 NG operators are holding on to their aircraft until they know with certainty that the Max can not only be re-certified and delivered but also live up to the operational reliability expectations of its predecessor.
The panel predicted that delays to the Max could grant the NG programme a two- to three-year extension of its life cycle. Cirium data shows that in Q1 2020, 40 A320 family aircraft were parted out by global operators compared with just six NGs. During the pandemic, aircraft values for A320s have also declined more than the NG, suggesting airlines are hanging on to older models until the Max is fully re-certified, although the latest signals from the market suggest the NG value declines may be catching up in the months to come. - Cargo market key to COVID-19 survival but demand will wane post-crisis
The freight market has been an indispensable source of revenue for the world’s airlines during the coronavirus pandemic. But demand for the transportation of PPE and other essential supplies via air travel is not sustainable in the long term. Overall cargo traffic is down year-on-year, but the drastic reduction in scheduled passenger flights has meant that there is not enough belly-cargo capacity, requiring main-deck freighters to work at full productivity to support global logistics. However, as more passenger aircraft return to service in the recovery, so will belly-freight capacity, thus easing demand for main-deck freighters over time. - Part out market will take time to recover as airlines favour self-sufficiency
The part out market has been severely challenged by the coronavirus crisis, with OEM and aftermarket distributors reporting revenue losses of between 80 and 90 per cent. This is because liquidity and self-sufficiency have become key to airlines, which have cut back on maintenance expenditure as much as possible and focussing on burning off green time already in their fleet.
Parts traders have struggled to sell inventory purchased before the pandemic because airlines stopped flying and demand dried up. But as airlines return to service, demand for this inventory will also recover. The question is whether part traders can hold out long enough to take advantage of this renewed demand. - Demand for parts will recover as overdue maintenance catches up with operators
Looking ahead, the part out market will see recovery because carriers are currently deferring maintenance and using up green time on engines in a bid to cut costs. If carriers only undertake essential line maintenance during this period, the backlog of heavy MRO work will quickly build up and a demand for spare engines is likely to pick up again, possibly sometime next year – especially for popular narrow-body types.
At this point, there will be a surge in shop visits as engines and aircraft are needed back in service, and it may be difficult for airlines to secure slots with maintenance facilities quickly getting booked up. This is when demand for spare engines and parts will increase once more. Until then, there is likely to be a reduced demand from part-traders for older aircraft and engines to tear down. - Aircraft lease rates are likely to remain low until demand recovers
Most aircraft lessors have given some 70% or more of their lessees a rental holiday, in the hope that operators survive and are able to pay back the arrears they’re accumulating during the crisis. If airlines are unable to pay what they owe and market conditions worsen, e.g. in the event of a second wave, lessors may begin to take more aircraft back and attempt to lease them out elsewhere.
The major difference between the COVID-19 crisis and 9/11 is that aircraft lessors now account for a much larger portion of the global fleet, including more than half of the narrowbody market. This potentially gives leasing companies an opportunity to influence overall supply, by retiring aircraft coming off-lease rather than re-leasing them. Not only would this help manage total supply, but it could also expedite the recovery of lease rates in the long term, particularly on newer aircraft. Whether this is financially viable for lessors is dependent on their book values for these aircraft and whether they can afford to take large write-downs by retiring aircraft early.
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