Thursday, March 12, 2020

Aviation finance: expect market turbulence as Covid-19 hits air transport hard

The Covid-19 pandemic and disease-containment measures by governments,

most drastically the US ban on flights from most of Europe, will shake up

the aviation finance sector as airlines struggle to conserve cash amid a

collapse in international traffic.

Scope Ratings says the rising risk of airlines defaulting on their debt payments –
 (5 March) - will lead to a steep decline in aircraft values across the board.
“Investors need to brace themselves for a direct hit on aircraft values 
which will increase the credit risk ofaircraft-financing transactions,” says Helene Spro, aviation finance 
analyst at Scope.
“Investors exposed to some highly leveraged transactions are likely to see a loss,”
 says Spro.
One caveat concerns the degree to which governments, particularly in Europe, 
will be willing to providefinancial support for airlines – notably national carriers - 
to ensure their survival through the crisis.
Aircraft-leasing companies also face challenging times, sure to find it harder 
to efficiently remarket their fleets.The largest lessors, which have 
diverse customer bases and the cash resources to cushion their finances
 from a prolonged grounding of aircraft, will have some measure of protection 
from the market turbulence.
Small lessors which do not have in-house, technical asset management 
capacity will be hit the hardest.
“The sector at large will find it hard to escape the consequences of a rapid slowdown in global economic
 growth and recessions in some major economies,” says Spro.
Aircraft makers Boeing Co. and Airbus Group also face repercussions from the 
For Boeing, the timing of return of the B737MAX jetliner to commercial service 
may be one casualtyif regulators turn their attention to pandemic-related 
travel issues rather than focus on the recertification of the aircraft. 
If the crisis results in many airlines defaulting, the B737MAX might
be recertified amid a glut of aircraft on the market - at least for a short period.
Airbus and Boeing face the additional headache that long-haul travel is 
proving particularly vulnerable to the efforts to contain the virus. 
“This could mean a quicker end to the service life
of A380 superjumbos than previously expected,” says Spro.
The decision by US President Donald Trump to ban flights from
 Friday from much of Europe, including the Nordic region which is 
home to specialist long-haul airlines such asNorwegian Air Shuttle and 
Finnair, will lead to the grounding of even more widebody aircraft.

Scope’s aviation finance analysis has factored in a possible downturn
in the industry since the end of 2018. 
In our Aviation Finance Outlook 2019 – Lack of discrimination hints at a hard
 landing to come
 Scope analysed 26 years of historical market value data. The data suggested
that already in 2019 inflated aircraft values and lack of discrimination 
had created a market vulnerable to external shocks. 
Scope’s 2020 Aviation Finance Outlook again
 highlighted the vulnerable state of the industry.

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