Uneven and slow recoveries in air traffic in the Asia-Pacific (APAC) region will continue to challenge aircraft lessors, says Fitch Ratings. The rating agency expects APAC air traffic will continue to recover in 2022, but does not expect it to reach pre-pandemic levels until 2024, lagging other regions.
APAC was a relative bright spot earlier in the Covid-19 pandemic, with travel resumptions outpacing other regions. Global aircraft lessors’ increased focus on the region (total market value exposure of around 38% among Fitch-rated lessors) makes the more recent reversal of this trend detrimental. That said, Fitch does not envision near-term rating impacts, given lessors’ strong leverage and funding positions and a demonstrated ability to work with affected airlines to renegotiate lease contracts, reposition fleets and manage the timing of new aircraft deliveries.
APAC air passenger traffic, particularly long-haul international business travel, remains badly affected by the pandemic. Fitch expects its recovery will, as a whole, continue to lag that in the US and European markets. In many key Asian aviation markets, such as China, Japan, Korea and Australia, vaccination rates have risen sharply in recent months, and now match those in the US or Europe. However, vaccination rates remain relatively low and slow in a number of other countries, including India, Thailand, Indonesia and the Philippines. As a result, the pandemic will continue to pose risks to growth and demand for air travel well into 2022.
Even where vaccination rates are high in Asia, there is uncertainty over how fast governments will be prepared to relax pandemic-related requirements and restrictions that deter travel. Fitch believes a number will adopt a more cautious approach than seen in many Western countries. For example, the announcement that China will permit only residents to attend the February 2022 Winter Olympics in Beijing may indicate that it intends to keep restrictions in place for many months to come. If this approach is followed widely, it will be a substantial drag on the recovery in APAC international traffic.
Uneven recoveries will continue to weigh on airlines’ credit profiles in 2022, but credit pressure should generally be less severe than in 2020 and 2021, in Fitch’s view, given remedial steps taken by airlines and government support mechanisms implemented since the onset of the pandemic. As a result, aircraft rent deferrals should fall as air traffic recovers.
Despite the aviation industry’s unprecedent downturn, asset impairments have been moderate for most investment-grade (IG) standalone lessors, and they have maintained leverage and liquidity levels sufficient to avoid rating downgrades. Fitch revised the outlooks on many aircraft lessors’ ratings to stable from negative in July 2021, reflecting its expectation that standalone IG issuers will maintain liquidity coverage greater than 1.0x and debt-to-tangible equity below 3.0x over the outlook horizon, although the sector outlook remains negative.
The credit profiles of support-driven aircraft lessors, notably in China, also remain stable, and their funding and liquidity positions continue to benefit from support from their parents. This should support their stronger growth through sale and leaseback transactions compared to international peers.
Lessors at the lower end of the rating spectrum have suffered more severely in the downturn due to greater exposure to problem airlines, elevated aircraft returns/impairments and weakened access to funding. Certain issuers with large near-term maturities restructured their debt to avoid default, in moves considered distressed debt exchanges under Fitch’s rating criteria.