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09. Mar 2017 Scope research  – Cross-sector

Aviation Finance Outlook 2017: Lessors pave the way for a soft landing

Scope Ratings' (Scope) aviation finance outlook for 2017 is stable. Aircraft lessors are helping to mitigate the risk in aviation finance, by preparing a soft landing for the industry once the current benign environment ends.

The aviation industry is currently in an up-peak cycle which started around 2010. Since then Scope has seen strong aviation demand, which has resulted in a more cost-efficient and consolidated industry compared to seven years ago when the cycle began. Air-travel demand has outpaced the build-up in capacity, and the passenger load factor for the entire industry has been growing since 2005.

Aircraft lessors are helping to mitigate the risk in aviation finance, by preparing a soft landing for the industry once the current benign environment ends. Lessors streamline aircraft allocation amongst airlines across the globe, thus serving as aircraft-market-makers. Nevertheless, lessors are also contributing to aircraft price inflation, which could result in downturn volatility in fire-sale scenarios.

The current credit-risk environment is favourable to the aviation sector, also supported by the airlines’ generally good operating performance. Airlines are benefiting from low fuel costs and strong demand for air travel. Further, the current low interest rates are catering for abundant and relatively cheap funding sources, as aviation finance draws more attention from investors.

The competition between investors often results in transactions with higher leverage, or in transactions that fund the acquisition of less-liquid aircraft. This competition has driven up aircraft-purchase prices in operating leases and decreased lease factors. For some investors, overall risks have increased in the case of a fire sale. Effective leverage is higher due to the slow amortisation and the likelihood of above-market purchase prices for leased aircraft.

The search for yield drives investors into riskier, less-liquid transactions. Currently, achievable yields are low for transactions with first-tier airlines and first-tier aircraft. Consequently, some investors are seeking to invest in niche aircraft models; in cargo aircraft; or in aircraft leased to second- or third-tier airlines.

Download the full report: 'Aviation Finance Outlook 2017: Lessors Pave the Way for a Soft Landing'.

Analyst Conference Call

Scope Ratings discusses its aviation finance outlook for 2017 in a telephone and web conference call on Thursday, 16 March 2017, 2:30 pm CET. Following a brief presentation, Scope analysts will be available to take questions.

When: Thursday, 16 March 2017, 2:30 pm CET
How: Conference call and web presentation
Analysts: Thibaud Genin, Carlos Terré

Please register here.

Contact

Scope Ratings AG    Phone: +49 (0)30 27891-0
Thibaud Genin    t.genin@scoperatings.com
Carlos Terré    c.terre@scoperatings.com
Oliver Müller    press@scopegroup.com