The Gathering Storm & The Silver Lining

Lauren Eldershaw
By Lauren Eldershaw February 6, 2019 15:54

The Gathering Storm & The Silver Lining

When Ryanair makes a loss, you know most airlines across Europe are in trouble. Ryanair is no longer the profit machine it once was due to hikes in labour costs, impacts from strikes, pilot shortages and air traffic control problems. Even so, it remains the airline in Europe with some of the best margins. Every airline from Emirates through to American, are reporting slowing traffic and pressure on margins. For many airlines the problems with customer sentiment are compounded by equipment problems across just about every new aircraft type save for the A220/C Series. Indeed, where would Virgin Atlantic be without those A330s it took on? We must all watch to see if Air Baltic is to an extent insulated against passenger weakness by the A220’s “exceptional savings” of 20% as stated by the airline’s CEO last year. Wizz is suffering from headwinds and Norwegian’s business model across the Atlantic is continuing to be smashed by equipment failures. How long can Norwegian continue?

In all this though what of the lessors? Lessor consolidation has been widespread over the past 24 months; all main players have their funds in place and are positioned and ready. The major downside for lessors remains the strength of the US dollar. But before we all go a reach for the drinks on the top shelf and get too worried, consider for a moment the likely course of action in this market right here and right now: Airlines are seeing margins narrow rapidly and demand is falling. The likely effect – forced consolidation or bankruptcy. The knock-on effect from this is the increased cost of financing as increased risk is faced by lenders. A further impact is an increased reliance on export credit agency (ECA) backing, but US Ex-Im is running a virtual shadow operation these days compared to 2008 when it last saved the market. The European ECAs are not what they once were either, save for UKEF which is powering many deals through the market. Maybe the Airbus CEO might consider the UKEF advantage next time a letter is sent threatening to pull manufacturing from the UK, but for now if it has an RR engine on wing then UKEF help is there and ready.

Those not able to secure ECA assistance will have to meet significantly increased costs for delivery financing, which should lead to deferrals or as we used to say cancellations. In turn this should lead to slowed production rates for aircraft as manufacturers battle to avoid white tails on the apron.

Such a situation, my friends, should all play right into the hands of the lessors, which will keep their deliveries rolling and which will be able to assist airlines. The cost of leasing will look ever more attractive, but at the same time lessors should make sure that this chance is taken to increase lease rates and sale-leaseback rates back to normal acceptable and realistic levels. Will 2019 bring with it a return to a buoyant sale-leaseback market, which is once again a buyer’s market? It should.
The downside for lessors is airlines not meeting payments and aircraft trapped on the ground as we have seen in Brazil. As ever geo-political risk remains a dangerous factor in aircraft leasing at this time, none could have predicted that Brazil, a Cape Town signatory, would withhold aircraft – that is the biggest danger for lessors.

Lauren Eldershaw
By Lauren Eldershaw February 6, 2019 15:54