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"Demand continues to rise, liquidity is strong and the only real blip on the radar being the continued uncertainty of the broader geopolitical climate."

Flying high: Is the aviation finance industry set to soar in 2019?

25 Jan 2019

Dublin is currently playing host to aviation week, welcoming well over 4000 delegates across the Airline Economics and Airfinance Journal conferences.

The number of delegates attending these two conferences has grown five-fold over the past five years, with new entrants attracted to this consistently strong performing asset class that is still riding high in a prolonged super-cycle.

You'd have been hard pressed to find anyone with a negative take on the market's prospects for 2019, all participants predicting a busy and profitable year ahead. Demand continues to rise, liquidity is strong and the only real blip on the radar being the continued uncertainty of the broader geopolitical climate.

Demand

Geographically, Japanese and Korean markets are particularly buoyant; passenger numbers are up globally but Asia is leading the charge with over 6% annual growth and China alone having received 25% of all jet deliveries in the last four years.

The airlines have strong order pipelines, often paying cash for new fleet but the percentage of leased craft in their fleets is on average, up around 20%, nearly double that of the average five years ago. The increase in leased fleet has led to a sizeable increase in the lessor population, the most successful of which are gaining competitive advantage by offering multiple options to airlines, operating lease, pre-delivery payment (PDP) and multi-currency leases.

Financing

There is so much liquidity in the market. Chinese banks have been entering in force and private equity and sovereign wealth funds are returning to this asset class that has been profitable for over 10 years. The continued market success has led to holistic credit improvement and consequently a shift from secured to unsecured lending. 

The increased number of non-banking players; PE, pension funds and insurers with a taste for bespoke structures are driving market evolution; aviation linked securitisation is vibrant and showing great innovation, not least in financing using a wider range of intangibles.

Outlook

This resilient asset class not only weathered the financial crisis but is looking in remarkable shape at this point in the order super-cycle. When the market correction does eventually come and orders are deferred and dry up, it may well be the smaller and less experienced lessors that are the biggest casualties. However, unless there is a major geopolitical event, it looks like soaring demand could well prevent a market crash.

It appears that the key strategy for all who want to be playing in five years time is to maintain discipline and make sure the T&Cs are in good shape.

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