Aircraft lessors face bumpy landing with ratings at risk
“The industry was surprised that the only real consolidation to date has been at the very tippy-top part of the market with AerCap and Gecas merging, but I think you’re going to see lessors losing their investment-grade ratings,” a former EVP at Aviation Capital Group LLC told Third Bridge Forum. “That means that these lessors no longer have that access to the cheap capital and that, to me, is your real driver for (1) impairments and (2) consolidation.”
Indeed, in a capital-intensive industry, investment-grade ratings are “huge to your competitiveness”. According to the specialist, all lessors except Bank of China and SMBC are at risk of losing their investment-grade rating.
The industry’s recovery depends on several factors, we heard, namely how governments react to the Delta coronavirus variant. “We’ve seen already that you can end up with quite mismatched policies or approaches and that has a significant impact on international travel in particular,” the expert said. However, there’s “only one number that really counts through everything that’s going on”: cash flow. This is because “standard accounting practices can obscure what’s really happening at both airlines and at lessors”.
Turning to valuations, the number of aircraft without an operator currently “tells quite a story”. Focusing on mainstream aircraft, there are over 400 surplus A330s and 777s, the Interview revealed. Whether or not these will be reabsorbed remains to be seen, as new aircraft continue to be produced and operators are still taking deliveries. “If you can’t reabsorb the surplus, then… their values are going to be heavily, heavily impacted.”
The specialist ended the Interview on an optimistic note regarding leasing penetration over the long term. “Especially if lessors stay investment-grade-rated, they’re going to have better access to cheap capital than a bunch of airlines, so, if you look forward to the 10-year mark, I think 60% will be lessor-owned.”
To access all the human insights in Third Bridge Forum’s Aircraft Leasing – travel recovery & leasing economics update Interview, click here to view the full transcript.
The information used in compiling this document has been obtained by Third Bridge from experts participating in Forum Interviews. Third Bridge does not warrant the accuracy of the information and has not independently verified it. It should not be regarded as a trade recommendation or form the basis of any investment decision.
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