The recent relaxing of pandemic restrictions in China might prove beneficial to Chinese and regional lessors as most of them have large exposure to Chinese airlines that have suffered significant financial losses during the pandemic, according to Fitch Ratings. The rating agency's report further adds that most Chinese lessors’ funding and liquidity positions will continue to be underpinned by shareholder support and a gradual recovery in China’s air traffic will drive asset-quality metrics and business growth for local aircraft leasing businesses.
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Graph above shows % change in revenue passenger-kilometre vs. same month in 2019[/caption]
However, the report also throws light on the volatility in Chinese domestic and international passenger volume. Fitch Rating claims that air traffic in China will remain below the pre-pandemic levels at least until end-2023 due to the high uncertainties around a sustained easing of the country’s pandemic-related controls and the economic headwinds both domestically and externally.
Many countries have loosened travel restrictions since the start of 2022. The gradual removal of travel restrictions in many Asia-Pacific countries has facilitated a slow passenger-volume recovery in regional cross-border air traffic. However, the regional and global volume gap widened as China remained under strict travel restrictions with air passenger volume lagging behind the global trend.
The third quarter of 2022 shows Chinese operators in negative with a recovery of 43% compared to the third quarter of 2019. Still Fitch Ratings anticipates that the demand for air transport in China remains strong, illustrated by the several rounds of a sharp rebound in revenue passenger-kilometre following the lifting of lockdowns. But policy uncertainty will continue to temper the recovery, while volatility could remain high in the near term.
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Chart above shows the gradual recovery in China's Aviation Sector that will benefit some lessors[/caption]
Fitch Ratings assumes that China will stick with its “dynamic zero-Covid” strategy which is a shift away from its strict controls in a more cohesive manner rather than sporadic refinements leading to a strong rebound and a more sustained recovery in air traffic recovery after an initial period of heightened economic volatility jolted by wider virus circulation.
This will add to the likelihood of regional and global air traffic returning to pre-pandemic levels and alleviate the impact of high inflation, interest rate hikes, and recession risk in advanced economies on the aviation sector, according to the report.
Thus, Fitch Ratings predicts that sustained recovery in China’s aviation sector and global air traffic could also improve the appraised value of aircraft and reduce residual value risk.