Industry showing continued resilience

The recent assessments by S&P and Moody’s, published on June 25, offer a highly favourable outlook for the aircraft leasing industry, with several key takeaways to consider. Central to this positive perspective is the industry’s demonstrated resilience in the face of unexpected and unprecedented challenges. The COVID-19 pandemic was a black swan event, with its global impact far surpassing any prior crises, such as 9/11 or the volcanic ash cloud, which had more localised impact. During this period, the aviation sector faced immense difficulties, with widespread fleet groundings leading to requests for rent deferrals from airlines and a decline in the value of certain aircraft and engine types.

Despite these challenges, aircraft lessors maintained strict liquidity discipline and provided crucial support to their airline customers. This support is now beginning to bear fruit. The lessor community has emerged with a stronger market share than ever before, now accounting for approximately 50% of the global fleet. This trend is expected not only to continue but to accelerate, with projections suggesting that 65% of new aircraft deliveries will be financed by leasing companies. The takeaway message is clear: the current favourable market conditions for aircraft leasing are likely to persist, bolstering the aviation leasing sector.

Supply and demand dynamics

With the resurgence of air travel back now to pre-pandemic levels, this has led to an increased demand for aircraft – a demand that outstrips supply. This imbalance is due in part to production issues faced by Original Equipment Manufacturers (OEMs) as well as constraints within the Maintenance, Repair, and Overhaul (MRO) sector. Delays in new aircraft deliveries from OEMs, coupled with MRO capacity limitations, have resulted in an uptick in lease extensions, often at improved rates. Lease rates are also on the rise for new transactions, helping to offset the impact of elevated interest rates.

For some time, there has been a steady increase in interest rates, with lease rates trailing, as would be expected given the long-term nature of lease contracts. However, we are now witnessing an alignment, with higher lease rates for new aircraft transactions being triggered by these supply issues. We expect that these supply constraints and delayed deliveries of new aircraft will take several years to resolve. These factors have also led to an increase in aircraft valuations for certain models that experienced depreciation during the pandemic.

Investor engagement and market trends

The investment community has tapped into these positive industry indicators and there’s a palpable resurgence of interest in aircraft leasing among investors, with new market entrants such as HPS Investment partners rumoured to be investing in the industry with the Falko deal alongside a number of startups. There is an expectation that the market will continue to see consolidation and portfolio transactions as top-tier lessors further solidify their market positions.

The reopening of the ABS market is another sign of the industry’s vitality, with Carlyle’s issuance of AASET 2024-1 marking the first commercial aircraft ABS issuance in two years. This event signals a potential uptick in activity, given the backlog of warehouses and other finance facilities that have served as interim solutions while the ABS market was dormant. It is likely that this is just the beginning of a series of issuances that will capitalise on the current momentum.

A sector poised for continued success

Overall, the aircraft leasing industry is demonstrating a remarkable capacity for growth and resilience. The combination of strategic support during challenging times, an increase in market share, and a favourable balance of supply and demand has set the stage for sustained success. The renewed interest from investors, the potential for market consolidation, and the reactivation of the ABS market all contribute to a strong and optimistic outlook for the future. As the industry continues to navigate through the post-pandemic landscape, it is well-positioned to capitalise on emerging opportunities and to continue its trajectory of growth and prosperity.