Despite the recent collapse in passenger demand globally due to COVID 19, and questions over current aircraft values, the long-term fundamentals mean that aircraft remain an investable asset, according to Peter Sladic, head of capital markets and outreach at Boeing Capital.
“Aircraft will remain as investable assets, they have a lot of risk reducing characteristics; they are mobile assets, they have a large diversity in applications, and they are efficient in matching demand for air transport where it’s needed around the globe. This doesn’t change [due to the current crisis]. The fundamentals are still intact, nothing has changed in terms of demand for travel and what aviation can do, the industry is just going through a short-term shock.”
Sladic was speaking on Airline Economics’ State of the Market virtual conference yesterday, and his view that aircraft and the aviation sector remained an investable asset was backed by fellow panellists Betsy Snyder, director at ratings agency Standard & Poor’s.
Snyder said that the ratings agency has been “inundated” with new transactions recently and this enthusiasm had been matched by investors. Snyder said that has been very strong demand for both secured and unsecured debt by US airlines and pointed out that both Southwest and United were able to tap the equity markets recently, as well as some more unusual financings.
“We are also seeing some new collateral that we hadn’t seen before securing these transactions, such as the American loan that’s backed by their Advantage frequent flying programme, while last week United announced they had entered into a $5 billion financing secured by their MileagePlus loyalty scheme. And all these airlines still say they have more unencumbered assets they can use as collateral.”
In April Delta announced its was raising $3 billion secured against the company's slots, gates, and routes, consisting of domestic slots at JFK, LaGuardia, Washington National, slots at London Heathrow, Delta's London route rights, other European route rights and Latin American route rights.
According to Snyder when Delta went to market investor appetite was so strong the carrier upsized the deal from $3 billion to $5 billion. Likewise, JetBlue’s similar transaction completed last week was increased from $500 to $750 million due to investor demand according to Snyder.
“There’s a lot of demand out there for investors for these types of secured transactions, it’s been very surprising having followed the industry through several cycles to discover that they airlines are in better shape for this downturn despite its unprecedented nature. Aircraft are still valuable collateral and investors still like those.”
Snyder said that lessors have less need to raise capital than their airline clients, and she pointed to AerCap decision to pay back $3 billion of a $4 billion revolving credit facility that it didn’t need as a sign of the sector’s financial strength, particularly as production issues such as the Boeing MAX grounding has meant the capex spending is low in 2020.
“The lessors have been helped by the fact capex is down substantially – and orders are being cancelled , delayed and deferred, the need for capital for capex is therefore reduced. Lessors have learned from the past downturns and have spread out their debt maturities a lot more than in the past.
There doesn’t seem to be an issue for lessors in terms of access to liquidity despite the current environment. Obviously the longer this plays out and airlines runs out of assets to encumber it could cause problems but in the intermediate term lessors are able to access liquidity.”
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