The long-term bull market in aviation was set to end in 2021 and the appearance of COVID 19 has simply hastened the inevitable, said Adam Pilarski, senior vice president, consulting at Avitas.
“We were in a bubble environment, it had to burst. Since 2004 the number of aircraft delivered went up for 14 years in a row and 2019 that ended. Not because the industry became more rational, but because of the problems with OEM production, " he said.
Pilarski was speaking on Airline Economics webinar, ‘Understanding the impact of COVID and how creditors can preserve value in the airline restructuring process’, which was broadcast today, and he highlighted the problems faced in appraising aircraft values given not just the lack of transactions but also the basic absence of passengers.
Pilarski was pessimistic over the airline industry’s recovery trajectory saying that while passenger numbers could recover to 2019 levels by 2022, total traffic won’t be the same until 2023 or 2024 at the earliest. Pilarski said that with traffic not likely to rebound for four or five years there would be significant downward pressure on aircraft values.
"So how many new planes with be needed in the next few years? The answer is not many. We are predicted demand for planes will be 5000 fewer than previously predicted. This will have a massive knock-on impact on aircraft values"
Freight has been one bright spot for the aviation sector since the start of the pandemic and fellow panellist Doug Kelly, chief appraiser of Avitas, was positive that the shift by consumers from physical retail shops to the internet was a structural change that would continue.
"The impact of e-commerce won't go away after the pandemic and there will be a long-term upward impact on freighter values as a result," said Kelly. “In terms of the broader aircraft market we expect values to return to their base value around 2024," he added.
Joining the panel from New York Philip Jackmauh, senior counsel in Watson Farley & William’s asset finance practice said that given the pressure that airlines were facing it is critical that they prepare a “credible restructuring team now”, adding that the cash situation of most carriers now resembled tech start-ups, with high cash burn rates and no income. But he said airlines that had a credible chance of surviving the COVID 19 pandemic were in a potentially strong negotiating position with lessors versus their weaker rivals.
“Airlines that are potential survivors should use that leverage to renegotiate lease payments, which is bad news for lessors. Likewise power-by-the-hour contacts make sense for airlines and while this isn’t optimal for lessors at least they bring in some revenue in the short-term while repo costs and the risks of finding a client to re-lease to.
A full recording of the webinar can be found here.