In a new industry forecast paper, Avolon, predicts airline failures and falling profits in 2019.
The paper says that the airline industry will see a further moderate decline in profitability, although returns will remain above the gradually rising cost of capital. It adds that there will be more airline failures, but aircraft demand and values will remain robust as capacity is quickly re-absorbed. Perhaps hopefully, the paper predicts a return to more realistic levels in the sale-leaseback market, which has been so overheated that many players have simply halted playing in this financing channel. Avolon also says that the insurance financing products will gain further ground in financing deliveries, with both European and US providers increasing their market shares.
The paper echoes the sentiments of the market that the capital markets will maintain their growth trajectory, with continued ABS and EETC activity in 2019. New investors will continue to enter the market and partner with lessors to build aircraft portfolios.
The paper advises that the anticipated economic headwinds will require “diligent risk management on the part of lessors, but attractive opportunities will arise for insurgents with access to liquidity”.
And finally, the paper declares that Boeing will conclude its evaluation of the NMA and launch a mid-market family aircraft during the year.
Dick Forsberg, Head of Strategy, Avolon, commented: “While not at the recent record levels, 2018 represented the airline industry’s ninth consecutive year of profitability. While load factors continue to rise globally, airline profitability remains highly concentrated, with nearly half being allocated by North American carriers. Additionally, numerous airline failures over the last year have indicated that full planes are not always cause for celebration. This leads to the conclusion that, although supply and demand is nominally in balance, there are simply too many cheap seats being sold in the market and too few expensive ones.
Continued oil price volatility will leave some less well hedged airlines exposed. In this fuel price environment, the most effective hedge against oil price movement for airlines is operating the most fuel-efficient fleets. For lessors, the ability to apply appropriate risk-management processes to their airline customers, and pick up early warning signs of trouble ahead, will be critical in determining success.”