The US dollar is up; oil prices are buoyant and likely to go up as demand outstrips output, which will be the case in 2022 unless OPEC moves to increase output from current levels.
Airline debt is at record levels and revenues at the same remain depressed by COVID. As such the very first thought that comes to mind is that 2022 should be a very strong year for the sale and leaseback market. However, lease rate factors below .5 for a MAX aircraft are normal in this market for a good quality “survivor” airline. The demand for sale-leaseback (SLB) transactions is off of the scale across the globe and the clamour from lessors to service this market is equally as strong, which in turn will keep SLB rates very low. The compounding factors in this matter are competition and manufacturer output. Even though we have seen a large amount of consolidation in 2021 in the leasing sector, it is clear that there is extreme competition, all backed by a wall of cash and that will not change in 2022.
The current COVID-induced reduced production rates at Airbus and Boeing compounds matters and the demand for new aircraft is outstripping supply, even with passenger demand lower due to COVID. So in short – 2022 should be a very strong year for aircraft lessors. The major question marks for our market centre on whether passenger demand will return in 2022. Many airlines are saying no; many airlines and airfields are now reporting that 2023 is optimistic for a return to normality.
A prime concern is whether China retain its current zero COVID policy, or open-up to the world once again. The political standpoint suggests strongly that China will retain its zero COVID policy for much of 2022 at least, which will have significant ramifications for the entire global industry, all lessors and asset managers and a great many airlines across the globe will suffer. These matters could combine to create a loss of confidence from investors in general aviation. It is the case that some investors are losing confidence in asset managers, especially those in Korea and Japan.
The strength of the US dollar will be extremely detrimental to airlines with revenues in other currencies, which will make SLB agreements less attractive, but this is more than off-set by fuel cost savings and environmental impact mitigation that new aircraft bring. This brings us back to fuel, it seems certain that OPEC will look to recoup COVID losses for an interim return to normality period at least. With the recovery stalling in many jurisdictions, oil prices will only go up in the near term, unless there is another lockdown, which will be even worse for airlines.
There are a worrying set of data streams coming from all angles and a great many headwinds remain, but overall the consensus is that the leasing share of the market will push above 50% in 2022, and moreover the year should be a strong one for lessors. However, it may yet be the case that the rush to deploy cash will overtake return on investment, and that is the problem that investors see transpiring right now. It is also that case that the market for widebody aircraft, save for the 787 and A350 remains depressed, and there is no sign that is going to change for the better in 2022 at this time, cargo aircraft and those with conversion slots aside of course.
So who is going to rule the blue in ‘22?
Right now lessors are set for a seemingly solid year with market share pushing 50. Banks have been far more resilient that first thought, much more so that in the fallout from the 2008 crisis, but even so banks have pushed for high rates and better credit across the board – opening up markets to lessors. With SLB deals priced as low as they are, even for operators that are heavily in debt, at 0.5-0.6 for MAX aircraft and A321Neo aircraft, one must argue that a great many deals are running a dangerously fine line between profit and loss in the long term. With environmental concerns growing substantially, it is more imperative than ever to ensure that aircraft make a good return in the first eight years of life. My view is that those companies able to purchase books with significant value and those able to renew their fleets replacing old for new at a profit are the real winners in this market. That means going into 2022 the pick of the bunch are AerCap, Carlyle Aviation Partners and Aergo Capital. Investors should look to what those three companies have achieved over the past 12 months as a first port of call. Aergo Capital and Carlyle Aviation Partners are the two companies that will come out of the pandemic so much stronger than they went in. Adding to this group will be SMBC Aviation for sure – look out for that colossal deal.
It is impossible to list all of the successes of 2021 across all of the leasing companies, I have here selected a few standout names from the bunch. If I were handing out an award right now then it would go collectively to technical managers at leasing companies everywhere. All have been outstanding during this crisis, and I am afraid to have to add that they will need to be at the top of their game again in 2022, because this crisis is not over. For many airlines the situation is getting far worse as the cost of funding increases and debts mount for all the aforementioned reasons (and more besides).
Good luck for 2022 to one and all.
Philip Tozer-Pennington
philipt@aviationnews-online.com