Forecast: Lessors could be stung by another ‘lost’ summer peak season

Ishka summarises four key takeaways about what lies ahead for investors and lessors in 2021, from Ishka+ Original, Forecasting with a Murky Crystal Ball.

 

Prepare for another potential ‘lost’ summer peak travel season

Lessors should be prepared for a potentially disappointing summer travel season, warn aviation veteran forecasters independent consultant Dick Forsberg and MUFG’s head of aviation research Bert Van Leeuwen, as uncertainty over recent Covid-19 variants continues to dent air passenger demand.

New Covid-19 variants and the time needed to roll out Covid-19 vaccines could lead to another missed peak travel season, warns Van Leeuwen, which is set to stress revenues further. Airline yields and revenues have been impacted since November by weak passenger demand and flight cancellations have risen to over 60% in January 2021. “There will be more airlines failing if we can’t get a summer peak season running and I am increasingly concerned we are not going to get that to any great extent,” adds Forsberg.
 

OEMs will continue to defer deliveries for airlines and lessors
 

Aircraft manufacturers will continue to try to accommodate the plight faced by their customers and will do their best to offer deferred places, particularly to airlines, explains Forsberg, who points to the low number of unplaced lessor deliveries over the next few years. Airbus’s backlog has been the least affected by the crisis, while Boeing has suffered multiple MAX order cancellations as lessors exercised cancellation options following delivery delays. Instead, lessors have shifted focus from these speculative orders to direct sale/leaseback transactions with the airlines, including for MAX aircraft.

 

Distress could appear Q2/Q3 2021 for some leased assets

Revenues have been stressed but so far there have been few distressed aircraft sales. Many banks have offered a series of waivers on secured loans which has helped lessors avoid the need to sell assets.

However, Van Leeuwen warns banks will quickly lose patience with lessors or equity investors if assets are not being maintained properly, especially for special purpose vehicles (SPVs) with no recourse to the borrower, and could seek to repossess assets if they are not properly stored and maintained. He adds that “you cannot extend forever” if there is no real expectation you will be paid back and states distress could appear between now, the “next few months”, and “mid-year”.

On a related, but separate note, expect to see some “tough” negotiations between lessors and their airline customers this year, particularly between carriers who are not paying their aircraft rents but which have received cash from various government bailouts. This observation matches a recent rise in the number of lawsuits between lessors and airlines (see Ishka’s On Watch series of Insights). There will be lots of “challenging” conversations, explains Forsberg, as lessors prepare their fourth series of rent deferrals, increasingly in the shape of power-by-the-hour schemes, which “makes absolute sense” for airlines because it reduces their cash burn but will continue to test lessors.  

 

More equity investors will look to start leasing platforms

 

Expect to see at least two or three new equity investors coming to the sector in the next 6-12 months to build leasing platforms as they take advantage of a “once in a decade opportunity” to invest in leased aircraft at the bottom of the cycle, states Forsberg. But investors will need to team up with experienced asset managers given the complexity of the industry and the abundant risks in the current market, adds Van Leeuwen.

A rush of top-tier airlines names coming to the sale/leaseback (SLB) market since the pandemic began has been enticing for many lessors and investors looking to acquire aircraft but the volume of potential SLB deals in 2021 might be smaller than perhaps many anticipate explains Van Leeuwen. A mixture of fewer deliveries this year and the fact that many airline portfolios are already committed as collateral via other financing structures will limit the volume of deals. But the recent easing of EASA restrictions around the MAX could help entice lessors to do some more MAX SLBs.

Given the amount of interested capital seeking to acquire assets, don’t be surprised to see investors move towards weaker assets such as older tech narrowbodies or twin-aisle aircraft and/ or weaker credits for SLBs as “money burns a hole in investors’ pockets”. Terms could also start to soften.

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 Lewis Price (lewis@ishkaglobal.com).

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