Omicron set to disrupt aviation recovery by at least 3 or 4 months

The Omicron coronavirus variant is set to delay the recovery in air travel by at least three or four months, warn veteran aviation forecasters in a new podcast available on Ishka+ platform. Independent consultant Dick Forsberg and MUFG’s head of aviation research Bert Van Leeuwen said the slower recovery will add further strain to airline cash flows and could lead to more airline restructurings. 

Based on preliminary information about the new variant, both analysts argued that Omicron should not meaningfully deter a slow but steady trajectory of air travel recovery in 2022. Both also added that Omicron might lead to some airlines seeking further concessions from lessors in the way of extended power-by-hour lease (PBH) terms particularly for twin-aisle aircraft.

“I don't think we're going to see major reversions back to rental forgiveness. Power-by-the-hour agreements that are in place are probably going to be asked to be extended and that'll be on a case-by-case basis. We're not going to go back to simply granting a three-month rental deferral and putting it on the back end for the lease,” adds Van Leeuwen.

Forsberg stressed that the numerous travel restrictions imposed since the variant was first reported in South Africa in November were largely a knee-jerk political response from governments. “This next wave is coming through very rapidly and rightly or wrongly governments have to be seen to be doing something. And that something always seems to be to pull down the shutters and close the borders, even though it is already evident that 99% of the contagion from Omicron is within the community,” explains Forsberg.

Outbreaks of the Omicron variant had been reported in 63 countries by 12^th December with more countries being added daily, according to the World Health Organisation (WHO). The WHO has advised against travel bans, as they discourage countries from reporting fresh outbreaks and new variants.

However, 43 countries in the European region alone imposed travel restrictions in the first week of December in response to Omicron. So far, only Japan, Israel and Morocco have completely banned foreign visitors, while India and Australia have postponed their planned relaxation of international travel restrictions.

As Ishka goes to press, the UK has scrapped 11 countries from its red list arguing that as Omicron cases rise in the UK and in countries around the world, the travel red list was becoming less effective in slowing the incursion of the variant. Scheduling data from OAG suggests airlines are yet to make any significant near-term schedule changes, but some airlines have already warned that booking patterns are being negatively impacted.
 

No impact yet on deals but placing aircraft will become harder

 

Van Leeuwen states that Omicron is likely to make placing aircraft harder for lessors as some airlines hesitate on whether take additional aircraft. He also warns more airlines are likely to undergo some form of restructuring as the crisis continues, with carriers in parts of Southeast Asia particularly vulnerable given the limited long-haul travel recovery and the uneven roll-out of vaccines.

“We are not yet at the end of the impact of the Delta wave and the original virus. So, I think this will extend the problems for airlines and there will be more airlines getting into problems. Lessors are already seeing a more challenging environment to place aircraft coming off lease, especially for older equipment. It's going to be tough for the lessors to place those aircraft, especially at acceptable lease rates. On top of that, I expect that there will be a few more airplanes coming back from some Southeast Asian airlines who are now in restructuring.”

To date, 63 commercial airlines have entered or undergone restructuring procedures, liquidation or ceased operations since March 2020 (see Insight: "Avianca emerges from Chapter 11, LATAM submits restructuring plan”).
 

Expect a slow start to next year
 

January has historically been a busy month for lessors as they set acquisition targets for the year, or prepare portfolios of leased aircraft “to be sold. However, Forsberg warns that January 2022 could be a slower start to the year due to Omicron. "In a normal economic environment, there’ll be a lot of pressure to close deals by 31^st of December, I suspect there'll be less pressure to do that [this year]. There'll be more caution. There'll be more people saying: ‘well, let's back off, let's allow it to roll into 2022 when we've got a little bit more clarity. I think there's going be a lot of frustrated investors saying, 'we're going to deploy this capital somewhere, but we're not going to rush into the first deal that comes along, we're going find the right deal.'

However, Ishka is aware of plenty of potential lessors still seeking to buy leased aircraft. Van Leeuwen states that there has been a steady request for new warehouse loans from lessors seeking to build portfolios, some of which are potentially seeking to bring portfolios to the ABS market.

Forsberg also believes that there will be several deal opportunities next year as some airlines may seek to raise cash from unencumbered aircraft in 2022 given disrupted cash flows. He expects the leasing sector to “comfortably” do around 60% to 65% of new-delivery financing again in 2022.

Sign up for a free trial to watch the full conversation, and lots of other content, on Ishka+, Ishka’s digital conference and training platform or speak to Richard Jaques (richard@ishkaglobal.com).

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