Is aviation market overheated and facing downturn?

The ever-increasing growth of airlines and their demand for new aircraft might point to the fact that the industry is boiling hot right now. But the bubble-burst of the airline financing market would affect a lot of airlines that are operating under tight margins or are already at a loss. However, while for some the current situation is quite grim, for others it has become the perfect medium to grow their operations sustainably, at least for now.

But growth in aviation requires a crucial item – new aircraft. Whether they are brand spanking new, or older, used aircraft, some form of financing is needed to come up with the money to cover aircraft deliveries or leases. And airlines have taken upon the favorable conditions, as interest rates hit an all-time low and acquiring aircraft is easy like never before.

Lease rates have decreased, while the amount of money an operator would receive for selling an aircraft at the end of its lease is increasing.  Gediminas Žiemelis, the chairman of the board at Avia Solutions Group, while speaking at Air Convention Europe 2019, highlighted the situation with a lease for an Airbus A321-200:

In 2009, the lease factor for the A321 was $380,000 with a potential sale-leaseback (SLB) price of $43 million after a 12-year lease. But in 2018, the same aircraft had a lease factor of $312,000, with a $52 million SLB on an 8 years lease.

For example, even financially weak airlines have issued bonds, as Žiemelis highlighted two cases: one airline based in Northern Europe, while the other is in Central and Eastern Europe. The former issued bonds while operating at a loss of $22 million, while the latter did so with a small profit of $5.9 million. Both airlines shared similar revenues when issuing their bonds, with $486 million and $450 million, respectively.

As a consequence, airlines have a unique opportunity to earn money by selling back aircraft after a lease expires and have access to the non-secured bond market resulting in higher yields. However, aircraft prices are going up, both in the used and new markets – but carriers have an opportunity to increase non-operating activity revenues by selling back aircraft after a lease, providing further financial stability.

While this might point to an overheating market, Žiemelis has highlighted that the current freak events of the Boeing 737 MAX groundings and problems with aircraft engine reliability have created a situation where planned growth of capacity had to be put on hold. As a result, airlines have a financial market where growth is still favorable and a shrinking aviation industry is not a likely scenario in the short-term outlook.

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