There are four things aircraft lessors need to consider right now: Is your airline customer in a strong cash position?Does the airline customer have government backing?
- Does the airline customer have political sway – are they too large to fail?
- Can the airline customer withstand shuttering its business for over a week?
If the answer to all of these above is no then you need to move that airline to the top of your worry list. Contact them, talk to them about rental deferrals and get your technical teams in place and appoint the repossession team and move them to standby.
In some instances this will boil down to flag carrier versus private airline as to who gets assistance and who does not. Post 9/11 we saw this with JAL and ANA along with a myriad of others – we will likely see it again. The airlines in the Middle East are suffering punishing losses of passenger traffic, Emirates and Etihad, Qatar and Gulf Airlines would all be doomed to fail if left without political and economic assistance.
All sound a bit dramatic and over the top? Well it always does, right up until the point when it is your asset at risk. Be prepared – that is what you need to be.
Digging up the stats records from 9/11 and looking at how that impacted airlines is also a good tool in this situation. Helane Becker from Cowen & Company has a good report on this out this morning (see US airline news below).
Looking at the situation now, there is a real prospect of COVID-19 shutting down aviation in a sharktooth fashion, one country after the other. Italy has followed the standard set by China in shutting down its country. It is likely that, unless there is a dramatic turn of events for the better, to some extent across the globe all major economies will suffer the same shutdown to some extent for a period of time soon, which will in turn temporarily shutdown those home airlines.
On top of this, huge fuel hedging losses are being reported by airlines, losses that alone will drive many airlines into the red even without the collapse in traffic. Bonds may well suffer margin calls over the coming weeks and the prospects for equity note holders on ABS deals just got a whole lot worse.
Kroll Bond Rating Agency released a report on aviation ABS today detailing that the virus “could directly influence aviation ABS transactions by possibly reducing the amount of cash available for such transactions” and warns that for ABS transactions with large exposures to airlines in China and APAC “have the potential to experience near-term impacts from the virus sooner relative to others”. KBRA estimates that 30% of KBRA-rated transactions consist of aircraft leased to Asia-Pacific airlines.
Airlines are looking to dump capacity fast; aircraft and engine lease agreements are suffering a huge rise in defaults and virtual non-stop calls for deferral of rental payments across the board. We have reports of a very large increase in enquiries for sale-leaseback deals from airlines, lessors should be able to take advantage of this to further underpin SLB rates and at least obtain some betterment from this situation. On new aircraft, should anyone be able to have one delivered, we will see a rush back to export credit and/or insurance backed deals. The outlook is not good for mid-and lower-tier airlines in all this, their finance costs are going to increase exponentially from this point.
The European Commission needs to act, it needs to take the USA example from post 9/11 and run with it. Allow forced mergers and government assistance, while it is relaxing the slot fulfilment requirement rule it needs to do more and allow the suspension of routes during this crisis and overhaul taxation.
Governments across the EU can assist airlines unless they choose to follow the rules to the letter, it is no use for the likes of the UK government to sit back and do nothing while the Italian government (for example) moves to assist/prop-up Alitalia (and they are). The collapse in traffic is far greater and will be far more sustained than it was post 9/11.
The level of cancelled bookings by passengers (not airline cancellations) is far greater than it was post 9/11 and far more widespread across the globe. Only internal traffic within the Americas (North and South) has been insulated to an extent up until now, the rest of the world has seen massive Easter booking cancellations.
The next few weeks will be pivotal in determining which scenario plays out and if a recovery will be more swift than after SARS and 9/11. However, the short-term shock to demand may be too much for the weaker airlines to handle.