Aircraft lessors could be forced to repossess planes as the Covid-19 crisis pushes airlines into bankruptcy or insolvency, industry analysts warn in a new report.
The Republic is a key centre for aviation finance, with about 60 per cent of all leased aircraft worldwide, worth about €100 billion, held here, while 14 of the top 15 companies in the business are based here.
A report by Alton Aviation Consultancy, which has its headquarters in New York, estimates that about four out of every 10 leased aircraft are grounded as the pandemic continues to hit air travel.
At the same time, it warns that about 900 aircraft are leased by airlines with enough cash to last two months or less and that are not government owned, leading the consultants to class them as high-risk.
Pressure on values and limited scope to find replacement customers mean that lessors are reluctant to repossess aircraft when clients have difficulty meeting rent or payment obligations.
However, Alton predicts that “as more airlines enter bankruptcy/administration repossessions will become more frequent”.
This will hit lessors’ revenues and leave them facing extra costs as they could be left with planes that they may not be able lease for a period.
“When the market comes back, lessors will face a trade-off between getting the aircraft on to lease at low rates and a longer downtime while waiting for rates to improve,” Alton adds.
Deferring rent
The report says lessors should “invest in understanding” the ability of each airline to weather the storm and sustain their businesses afterwards.
Lessors have been deferring rent from airlines or offering broader restructuring of their contracts in an effort to support customers, which is putting pressure on their own revenues.
In terms of their own strategies, many of them, including leading Irish players Aercap, Avolon and SMBC Aviation Capital, have cancelled new orders.
Over the longer term, companies could have fewer options for borrowing cash or refinancing debt, which could affect their future profits.
However, the report, whose authors included Leah Ryan, managing director of the firm's Dublin office, and John Mowry and Laetitia Achille, managing directors in New York, indicates that the crisis could create opportunities for better capitalised companies.
“We expect to see an increased portfolio consolidation, with well-capitalised lessors acquiring assets or full portfolios from smaller players and investors looking to rationalise their holdings or forced to sell,” Alton says.
