Long-term impact of Covid-19 on aviation finance unclear

8 June 2020 (Last Updated August 21st, 2020 11:56)

Even as the aviation finance sector is gearing up for Covid-19 distrubance with aircraft market values and lease rental factors dropping due to weak demand for air transport, the pandemic's long term impact is curently unclear, says Scope Ratings. 

Long-term impact of Covid-19 on aviation finance unclear
The decrease of aircraft market values and lease rental factors is said to affect the aviation finance sector amid the Covid-19 pandemic. Credit: Kevin Hackert.

Even as the aviation finance sector is gearing up for Covid-19 distrubance with aircraft market values and lease rental factors dropping due to weak demand for air transport, the pandemic’s long term impact is curently unclear, says Scope Ratings.

European credit rating agency also added that with the decrease of aircraft market values and lease rental factors, the aviation finance sector may see some disturbances.

According to Scope Ratings, a prolonged fall in the value of aircraft and leasing costs may help surviving airlines to acquire new aircraft. However, for airlines and aircraft lessors, the low aircraft values and lease rentals pose a burden.

Scope aviation finance analyst Helen Spro said: “Take the sale and lease back of unencumbered aircraft, which is one way that airlines can cope with some of the extra debt they have taken on to get through the crisis.

“The catch is that the level of financial benefit from a sale and lease back is directly correlated to the sales price the airlines can obtain for the aircraft.”

Lessors can only benefit in this situation if they are financially capable to undertake new acquisitions right now.

However, the demand for leasing new airlines will be reduced as the industry is expected to face a slump in air travel growth, with the assumption that world economic growth will recover slowly from the Covid-19 crisis.

The company stated that the importance of aircraft lessors has helped ‘distribute risk evenly’ in the aviation sector given the high residual value risk of a passenger jet is for airlines.

Spro added: “Avoiding this risk is one of the reasons airlines enter leasing contracts instead of owning their whole fleet, leaving lessors holding the residual value risk of the aircraft in their possession.

“If the crisis continues, many airlines are likely to use unencumbered aircraft to secure capital through sale-and-leaseback transactions. Considering a leasing contract is normally signed for between six and 12 years, the impact on the aviation market could be felt well into the next decade.”

There is still a lot of uncertainty regarding the aviation finance outlook.

Spro said: “Much depends on whether lenders and lessors remain willing to enter aircraft transactions without a strong rebound in demand for air travel, and the extent to which carriers retire planes from existing fleets.”

If the pandemic results in a high oversupply in the market, aircraft models may be retired and sold for parts.

Spro added: “This could, of course, lead to an even balance between aircraft being parted out and new lease contracts which would mean that the level of leased aircraft will remain similar to today’s in the future.”

However, if a large number of the fleets are parted out, the lessors will be affected. This will not provide new businesses to lessors, which will put them under pressure.