Aircraft lessors face bumpy year ahead

Singapore

SOME observers see aircraft lessors operating in a tougher environment this year, whereas others expect a slight improvement for lessors in Asia-Pacific though some financial aspects will still be under pressure.

David Yu, a finance professor at New York University in Shanghai, said bank-backed lessors will face pressures from their financiers, and this pressure, in turn, will be placed on airline customers. "So this is going to be a tough year. I think it's actually going to be a tougher year for the airlines that are still around."

S&P Global Ratings analyst Isabel Goh told The Business Times that she expects lessors in Asia-Pacific to continue facing pressure on the leasing income, cash flow and asset-value fronts, but modestly improving from 2020.

She said compared to other regions, Asia-Pacific aircraft lessors with greater geographical exposure to China - where domestic air traffic has rebounded fully - face lower revenue risk. Lessors in the region are expected to recover a portion of lease revenues deferred from 2020.

But as carriers continue to face the challenge of controlling their cash burn and some undergo restructuring, S&P Global Ratings anticipates negotiations and disputes between airlines and lessors around lease returns and redeliveries to ensue.

These could chalk up further impairment, additional rounds of lease deferrals, aircraft repossessions and lease rate reductions.

S&P Global Ratings stated in a report that if it takes beyond 2021 for global air traffic to recover, more airlines could fail, causing demand for aircraft to decline. This would cause more lease restructurings, aircraft repossessions, lower lease rates, and aircraft impairment charges for lessors.

The Singapore-headquartered BOC Aviation has furnished a profit warning on Jan 4 to the Hong Kong stock exchange that its bottom line for 2020 could be 25 to 30 per cent lower year-on-year, after provisions for "doubtful debts and impairment charges".

Lessors including BOC Aviation had to shore up their own liquidity by raising funds and also cutting down on capital expenditure, as their cash flow and other financials were affected by airline customers that sought rental deferment, defaulted or went bankrupt.

Avation's executive chairman Jeff Chatfield noted in a trading update that his company had been managing airlines, bankers and finances on a daily basis for the duration of the pandemic.

It had a total of 13 aircraft on lease to Virgin Australia when the latter entered administration and owed the lessor US$74.7 million (S$99.05 million).

AerCap Holdings has rescheduled the delivery of over 100 aircraft that were originally expected to be delivered in 2020, 2021 and 2022. The rescheduling of these deliveries has lowered its capital expenditure in 2020 and 2021 by US$5.3 billion.

Several lessors have sued airline customers over defaults, including BOC Aviation, which took AirAsia X to a UK court for more than US$23.4 million in relation to aircraft leases; and AerCap, which sued a subsidiary of Chinese airline Hainan for US$7 million in missed payments.

As airlines see lessors becoming choosy in whom to offer credit, alternative sources have become available. For example, Castlelake, a global private investment firm, has partnered aircraft maker Boeing to provide up to US$5 billion of capital for new Boeing commercial aircraft deliveries via senior secured financing, mezzanine financing and high loan-to-value finance leases.

Pimco and GE Capital Aviation Services have reached a preliminary agreement to develop an aviation leasing platform to support up to US$3 billion in aircraft asset financings.

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