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The implications of coronavirus on the aviation finance industry

The implications of coronavirus on the aviation finance industry

As the coronavirus pandemic causes a significant reduction in flights and passenger numbers, Director of Transaction Management, Abigail Holladay highlights the implications for airlines and how it may drive an increase in restructuring activity.

An industry in nosedive

Notoriously volatile, the airline industry is often one of the first to bear casualties when global disaster strikes. Recent news that British carrier FlyBe had collapsed into administration came as little surprise then, given its long-term financial struggles and failure to secure a £100m government loan. For Europe's largest independent regional carrier, the demand-induced shock precipitated by the coronavirus outbreak has proven to be fatal.

The collapse of FlyBe and the US extending its European travel ban to include the UK and Republic of Ireland are just two of the latest signals of a rapidly escalating crisis within the aviation industry. Airlines around the world have adopted efficiency measures such as grounding flights, using smaller aircraft, freezing pay and making temporary layoffs. However, these measures have thus far failed to reassure investors and as this unfolds, we can expect weaker airlines to collapse with accelerated consolidation across the airlines and leasing companies.

Unsurprisingly, as the coronavirus pandemic continues, commercial aviation is amongst the worst hit sectors in global stock markets. Business in China and Hong Kong has slowed as they adopt a much more cautious approach to expanding their fleets. Concern is rising generally for airlines, do they have enough liquidity to survive until the flight restrictions and corporate travel bans are lifted, public fear subsides and more normal behaviour resumes? The International Air Transport Association (IATA) estimate that globally, the impact could be up to $113 billion in lost revenues in 2020.

Historically, for those airlines with precarious balance sheets, defaults meant planes being sold or leased to other airlines but with such scant current demand and no imminent sign of this changing, aircraft are remaining on the ground raising worries as to how these idle assets can be protected. Conversely, airlines from across Europe have been unnecessarily burning their way through thousands of tonnes of fuel flying near empty planes due to the EU's use-it-or-lose-it rules on airport landing slots. Reacting to the crisis, Brussels have temporarily suspended this rule to ease pressure on the aviation industry.

Restructuring the flight path

As airline bankruptcies and defaults rise, there is an increased need for financial restructuring. As part of this process, trustees on each associated aircraft and debt financing are triggered into action, operating to ensure that the interests of the noteholders and secured creditors are appropriately represented in any such restructuring. Ensuring that the trustee has the necessary capabilities to administer the defaulted transaction and has extensive experience operating in the aviation sector is paramount to streamlining such complex and sensitive proceedings.

At Ocorian, we offer a full range of domiciliation, administration and fiduciary services to all types of funding structures used in aircraft finance, securitisation, corporate debt funding, holding companies and cross-border structures. By partnering with us, we help to ensure the smooth execution and ongoing operation of these complex structures.

Get in touch with our specialist aviation team below or find out more about our aviation capabilities here.

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