Airline Economics Aviation Industry Leaders Podcast Series 2020

In January 2020, Airline Economics in partnership with KPMG, published its annual Aviation Industry Global Leaders Report, which assessed the general state of the industry based on interviews with a variety of industry leaders. Now that the aviation landscape has changed dramatically with the devastating impact of the COVID-19 pandemic continuing to ravage the industry, Airline Economics and KPMG are returning to those same leaders for their reaction to the current crisis in a series of podcast interviews.

In this latest podcast, Joe O’Mara KPMG’s Head of Aviation Finance, speaks to Bénédicte Bedaine-Renault, who is head of aviation finance within Natixis covering the Europe, Middle East and African regions. Her team, based in Paris and London, covers both airlines and lessors in the EMEA region. Natixis has four decades of experience in aviation finance and has a current portfolio of 850 aviation assets worth approximately $5bn.

Bedaine-Renault says that the quality of client relationships has been key for both operating lessors and banks during the past few months. “Banks, including Natixis, during this particular phase, has been to support to the strongest relationships, which are those that have been built in a trustworthy environment for the past few years,” she says. “It doesn’t always mean highly-profitable relationships, but must have that strong element of trust.”

Natixis has been supporting operating leasing companies with various facilities that were already in place as airlines turn to lessors for deferrals and other means of support, Bedaine-Renault believes that more airlines will now turn to the commercial banks for help as a second step in raising cash to survive this crisis. “It’s going to be interesting to see how that develops notably after the summer season.”

She notes the industry-wide challenge regarding asset valuations, which were already considered to be high before the crisis. She expects there to be an increased scrutiny of aviation asset exposures for banks. “It is difficult to determine what is the real exposure at risk.  It will be interesting to see how the different financiers in the industry will react to the new level of risk, and if there can be a significant incremental amount of debt poured into this sector.”

Valuing aircraft is difficult in this market, she adds, suggesting that one way is to determine values and NPV from recent sale-leaseback deals conducted between airlines and lessors, which can be cross-checked with the different appraiser values. “To have a view on the asset class and the asset prices using the different metrics, it’s a call that you take on the airline creditworthiness, maybe looking at the level of state support it has received and how you value the firm with an NPV type of mechanism to determine aircraft residual value.”

Bedaine-Renault adds that the additional challenge to this will be ESG elements: “We clearly see a trend of moving towards younger, more efficient aircraft. And because some of the state guaranteed loans came with strings attached to regarding carbon emissions, there is an open question regarding residual value.” She notes that this is a challenge for airlines and banks but also present new opportunities in the field of green finance.

In terms of more immediate financing, Bedaine-Renault sees the increase in the importance of the export credit agencies, which she says will certainly “come back into fashion” noting the innovative transactions the ECAs have closes in the past few years using different collateral and financial structures. “There is an opportunity for certain players to gain market share and to keep exposure in the aviation sector, while limiting dramatically the risk, thanks to the offset of the export credit guarantee.”

In January 2020, Airline Economics in partnership with KPMG, published its annual Aviation Industry Global Leaders Report, which assessed the general state of the industry based on interviews with a variety of industry leaders. Now that the aviation landscape has changed dramatically with the devastating impact of the COVID-19 pandemic continuing to ravage the industry, Airline Economics and KPMG are returning to those same leaders for their reaction to the current crisis in a series of podcast interviews.

In this latest podcast, Joe O’Mara KPMG’s Head of Aviation Finance, speaks to Marc Iarchy, a partner at aircraft leasing company World Star aviation, about his thoughts on the impact of the crisis so far and for the future of the market.

Based in San Francisco and London, World Star Aviation is a full service lessor that currently owns or manages a portfolio of approximately 75 assets, mainly in the mid-life space. Iarchy and the team has been working closely with lessees to help them and the broader industry weather the current crisis, where they can make a difference.

“We are trying to be helpful where we can, and particularly where our help can make a difference,” he says. “There is limited value where we’ve got an old aircraft with a large airline that has 500 aircraft, because helping them makes zero difference to their chances of surviving. Whereas where we have two out of five aircraft with an airline, our help makes a very big difference to them.”

World Star Aviation’s main aim is to help airlines avoid bankruptcies where possible, therefore avoiding a repossession situation in a market where aircraft demand is so low. The lessor has negotiated deferral agreements that involved longer lease terms, power-by-the-hour agreements and other lessee friendly  terms for a short period. As those three-month arrangements come to an end however, Iarchy notes that airlines are beginning to request another three-month or even longer reductions in rent obligations, which will begin to impact the chain more severely.

“A loss of three months cashflow was a bit of a problem for sure,” he says. “But we expected and hoped that things would recover by the summer so that we can also stand by our own obligations vis a vis our financiers and our investment partners… we now need to look at extending those arrangements for another three months or longer… We have also had one or two airlines wanting to talk to us about returning aircraft. That’s obviously a much more difficult conversation.”

The damage to airline balance sheets is becoming much more apparent now, says Iarchy, adding that the next round of renegotiating leases will have much greater ramifications for leasing companies and their own obligations.

“We have been in a deep freeze for three months, but now that airlines are trying to reopen and relaunch routes, it is becoming very painfully obvious that there’s going to be some deep, deep changes in the industry, as well as a decent amount of bankruptcies,” says Iarchy. “Airlines that haven’t paid their bills for three months are going to be catching up for the rest of 2020 and with a reduced capacity they simply aren’t going to be able to do it in that time. Unfortunately for many airlines, they may never be able to get there.”

Iarchy goes on to doubt even the ability of the big US carriers to avoid a Chapter 11 scenario: “Even though in the US the government aid is massive, it may be no more than a Band-Aid,” he says. “When companies like American Airlines borrow in double digits in the capital markets, then a Chapter 11 bankruptcy solution is probably not too far off.  And what I’m particularly worried about in terms of the US is that when one of them goes Chapter 11, they all will.”

Iarchy talks in more depth about the aviation financing market including the impact of the crisis on asset-backed securitisation vehicles. “At the moment, for our SPRITE ABS we have paid all the tranches and have avoided a downgrade but the situation obviously is what it is and we can’t conjure money [if the airlines can’t pay].”

Despite the stressed environment, Iarchy remains surprised at the prices that aircraft are being sold in the market as expensive: “Maybe there’s some people that still have very low cost of capital, or they have money that they have to deploy before the end of this year.” World Star remains an active player in the aircraft trading market and is working on a number of acquisitions but Iarchy states that those are only opportunities “where we truly feel comfortable that in a mayday scenario, we’ll still end up okay”.

Listen to the full podcast for more from Iarchy on the broader aviation finance and leasing industry. On the whole, despite the extreme challenges facing the market, he remains confident in the future and the recovery of this industry.

“The demand for travel will remain; people like to travel and go on holiday. The middle class continues to grow. These trends remain and although there will be a dip that will take longer to recover from than previous crises, I have no doubt that we will.”

In January 2020, Airline Economics in partnership with KPMG, published its annual Aviation Industry Global Leaders Report, which took a general state of the industry based on interviews with a variety of industry leaders. Now that the aviation landscape has change dramatically with the devastating impact of the COVID-19 pandemic continuing to ravage the market, Airline Economics and KPMG are returning to those same leaders for their reaction to the current crisis in a series of podcast interviews.

In this latest podcast, Joe O’Mara KPMG’s Head of Aviation Finance, speaks to Firoz Tarapore, CEO of DAE Capital, about his thoughts on the impact of the crisis so far and for the future of the market. DAE owns and manages approximately 400 aircraft worth $15bn.

Firoz praises the rapid and substantial government intervention to date but feels more support will be required:

“Based on our figures, over $110bn of government-backed support has been announced – with 80% of that in the US and Europe,” says Tarapore. “About 60% of that total is the form of repayable loans, some which have come with quite a few conditions. While we are really encouraged by the quantum and the speed of government to support for a critical industry in a lot of these jurisdictions, what we haven’t seen and most seen is governmental support in other parts of the world where airlines play an even a bigger role in national economic development. Those governments will need to step up sooner rather than later, and make sure that their national champions are well supported.”

This varied national response to the crisis means an uneven recovery and driven by health concerns first and foremost, observes Tarapore: “The recovery is going to be driven by how comfortable people feel on the health side compared to theirs reasons for stepping on a plane in the first place.”

The entire industry is focused on rebuilding confidence in flying, and for Tarapore the key will be for industry to work with governments and global organisations to ensure there are clear and standardised rules and precautions for ensuring safe flying. “There needs to be a good degree of uniformity in how different jurisdictions around the world approach that to make people feel more safe and secure that when they travel, and to know if something does go wrong, that that there is a solution available, be it treatment, vaccination etc., which then in turn will support a very decent trajectory in the recovery of our industry.”

For lessors like DAE Capital, which are well capitalised and have exercised strong financial underwriting discipline, Tarapore says have an advantage in the current environment but for those who haven’t been so diligent that it is “too late to fix” the portfolios now. “If you underwrote the asset that you wanted at the price that you wanted, and selected the lessee and put the right lease in place, then I think your ability to navigate the current situation is actually quite good,” he says. “So even if an airline gets into trouble, if you have the right structural protection around the asset and the exposure, lessors will do fine. If on the other hand, you had excessive concentrations of credit or aircraft types, , you are are going to end up hurting.”

DAE Capital has been approaching negotiations with lessees on a case-by-case basis, with the perspective that as the company is secure from a liquidity standpoint, it is able to offer its clients assistance at this time. “The approach that we have taken is that if our customer needs help, we are here to provide it because we have entered this crisis in a relatively decent position from a liquidity perspective, but all of those discussions need to be had around the concept of partnership because it just cannot be that one person does well and the other one doesn’t.”

Tarapore acknowledges that the leasing fleet is currently between 35-40%, which he believes will increase as the airline industry seeks additional funding help.  “Although leasing may be suppressed for a while, when the world deals with this health issue, the airline industry will want the flexibility that the leasing capital provides to further accelerate its growth over the next decade and the decade after that. Our primary message is that we have enabled an industry by providing capital that allowed them to grow. It’s a difficult period for everybody. We’re here to help, to the extent we can, but the solution always has to be where both people do well. Most clients have internalized this message and are looking to the future because ultimately it’s not just that today you need to survive. The reason you’re surviving today is that you want to prosper tomorrow. And so far that’s the fundamental approach we’ve taken with our clients.”

For Tarapore and DAE Capital, the spikes in infection rates in certain jurisdictions hopefully will push the world to act together that will help “propel a more predictable path to recovery”.

During the podcast, Tarapore remarks on the manufacturers reaction to the crisis and any impact on the recovery, as well as the many challenges facing lessors and asset managers, including negotiating with clients, managing rent deferrals and managing returned aircraft, and financing, added to the potential opportunities the recovery will hold for an acquisitive company.

In January 2020, Airline Economics in partnership with KPMG, published its annual Aviation Industry Global Leaders Report, which took a general state of the industry based on interviews with a variety of industry leaders. At that time, the industry was focused on the impact of the grounding of the 737 MAX as well as a general slowing in growth and the rise of the climate change agenda. The novel coronavirus, COVID-19, was only just beginning to make headlines and despite the downturn, the market was still awash with liquidity and the future looked positive. Even those with a more pessimistic outlook that were predicting a shock to the system could never have envisaged such a significant exogeneous shock as the current pandemic.

With many countries in Europe and the US on total lockdown to slow the spread of the disease, the aviation industry has been hit particularly hard. Most of the world’s airlines have the majority of their fleet grounded. And with the virus setting the timetable, the aviation industry is taking stock of its options to ride out this crisis to survive intact by the time the recovery surely comes.

As an addenda to the Aviation Industry Global Leaders project, Airline Economics, once more supported by KPMG, has launched the next in a series of podcast interviews with industry leaders to assess their reaction to the current crisis.

In this podcast, Joe O’Mara KPMG’s Head of Aviation Finance, speaks to Ted O’Byrne, Managing Director, Co-Head of Aviation at Carlyle Aviation Partners, about the current crisis weighing on his decades of experience in the aviation industry through many downturns working at AerCap and Airbus before joining Carlyle Aviation.

O’Byrne speaks about his refusal to accept that this crisis will change travel forever and that although this is a deeper crisis for sure, current actions echo those of previous crises: parking older equipment in favour of new aircraft; defaulting airlines probably leading to consolidation – this time most likely in Europe rather than the US which occurred after 9/11, that could be viewed as a positive. O’Byrne points to the positive bounce back in traffic in China, which gives the rest of the world a reason to be optimistic, but drawing on his manufacturer background experience, he also predicts more pain for the OEMs as airlines defer and cancel deliveries. One positive he highlights from the slowdown in OEM production and R&D is a more stable environment for aircraft investors. As a lessor and asset manager, O’Byrne further describes how Carlyle Aviation Partners is working with its lessees to negotiate longer leases rather than rent deferrals, which works well for investors and the airlines, as well as managing the company’s capital position and relationships with its equity investors and bond holders.

In January 2020, Airline Economics in partnership with KPMG, published its annual Aviation Industry Global Leaders Report, which took a general state of the industry based on interviews with a variety of industry leaders. At that time, the industry was focused on the impact of the grounding of the 737 MAX as well as a general slowing in growth and the rise of the climate change agenda. The novel coronavirus, COVID-19, was only just beginning to make headlines and despite the downturn, the market was still awash with liquidity and the future looked positive. Even those with a more pessimistic outlook that were predicting a shock to the system could never have envisaged such a significant exogeneous shock as the current pandemic.

With many countries in Europe and the US on total lockdown to slow the spread of the disease, the aviation industry has been hit particularly hard. Most of the world’s airlines have the majority of their fleet grounded. And with the virus setting the timetable, the aviation industry is taking stock of its options to ride out this crisis to survive intact by the time the recovery surely comes.

As an addenda to the Aviation Industry Global Leaders project, Airline Economics, once more supported by KPMG, has launched the first in a series of podcast interviews with industry leaders to assess their reaction to the current crisis.

In this first podcast, Joe O’Mara KPMG’s Head of Aviation Finance, speaks to Stephen Hannahs, CEO of Wings Capital Partners, about the current crisis weighing on his decades of experience of the impact of exogeneous shocks to the aviation industry.