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 – see Airlines: coronavirus outbreak accelerates industry consolidation; conserving cash key to survival  (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  pandemic. 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.