KBRA analyses the APAC aviation markets

Eleanor Steed
By Eleanor Steed November 1, 2017 11:37

KBRA analyses the APAC aviation markets

In a new report, Kroll Bond Rating Agency (KBRA) examines the credit factors driving the expected growth in the aviation markets in APAC, and highlights the expected credit strengths and constraints. Key themes include:

•    KBRA views the overall macro factors for the aviation markets in the APAC region as credit positive given the significant potential for passenger as well as freight traffic growth during the next two decades.

•    To support this demand, the forecast for fleet growth in the region is consistent with both the need for new aircraft as well as the replacement of older aircraft. In KBRA’s view, this is positive for original equipment manufacturers (OEMs), for aircraft lessors and for financial investors who have increasingly supported the funding for the sector and continue to allocate more capital to it.

•    Consolidation in the leasing industry has allowed for the creation of several large and diversified global lessors with highly seasoned management teams, extensive global customer relationships, and good access to funding as well as preferential pricing from the OEMs. KBRA remains cautious, however, with respect to the proliferation of numerous smaller leasing companies in the APAC region that do not yet have the depth of servicing and origination platforms and the deep bench of management needed for success in aircraft leasing.

•    As a group, airlines in the APAC region are equally expected to reap the benefits of the impressive potential demand in traffic growth in the next two decades. However, the landscape for airline performance is much less sanguine given thin margins as well as the more dynamic and rapidly changing business models for this group with the ensuing impact on the competitive environment.

•    Aviation financing is heavily bank funded in the APAC region. Indeed, China, which has the highest capital need, finances the overwhelming majority of its aircraft purchases internally and based on relationships with local Chinese banks. However, the potential for capital market financing in China is positive given large pools of investor liquidity in search of yield and dollar assets in particular.

•    Finally, Asian OEMs continue to make strides in manufacturing and assembling their own aircraft. Chinese OEM COMAC has reportedly more than 700 orders in place for its inaugural narrowbody, the C919, with its first delivery scheduled sometime in 2020. Nearly all the orders are by local Chinese and other Asian airlines and lessors. The eventual entry of both Chinese, Japanese and perhaps other Asian aircraft into the global markets has the potential to put pressure on the incumbent OEMs while vastly changing the dynamics of aircraft supply and demand in the area.

Eleanor Steed
By Eleanor Steed November 1, 2017 11:37