Moderate oil prices decrease aviation credit risk, Scope research suggests

Darren Wood
By Darren Wood July 16, 2019 10:04

Moderate oil prices decrease aviation credit risk, Scope research suggests

Growth in global oil demand is expected to slow, new research from Scope suggests.

The report expects Brent crude to average between $60 and $70 per barrel for the second half and for full-year 2019.

“Supply will increase if oil prices increase, and this will put pressure on oil prices, thereby providing a natural cap, even if this enhances volatility and can lead to higher oil prices over shorter time periods,” said Marlen Shokhitbayev, associate director of Scope.

The report suggests that the oil price increases of the past two years should be manageable for airlines that have good control of its operating costs.

The report says that fuel-efficient aircraft fleet is important for airlines in a rising oil-price environment. Older-technology aircraft are less fuel efficient but more reliable than new-technology aircraft. The research goes onto state that: “This balancing-out effect means that in today’s market, the value depreciation of older aircraft is stable. The lower reliability of new technology translates into a value disadvantage”.

Helene Spro, director in the project finance team of Scope Ratings, added: “The higher the oil price, the higher the present value of fuel-efficient new-technology aircraft compared to less fuel-efficient older-technology models. Increasing oil prices therefore provide less of a credit risk for investors invested in new-technology aircraft compared to older-technology aircraft.”

In addition, the report stated that a strong rise in oil prices will increase airline bankruptcies. It will also increase the credit risk of aircraft financing transactions.

In conclusion, the report added: “The impact of higher oil prices will depend on the timing of the increase. Airlines will be better positioned if a sharp increase in oil prices happens when they are able to fully utilise the increased efficiency of the B737MAX and A320neo.

“The reliability of older-generation aircraft at current oil price levels continues to support their higher fuel consumption compared to the less reliable new-technology aircraft”.

Darren Wood
By Darren Wood July 16, 2019 10:04