In recent years, aircraft financing has increasingly become visible as ‘non-traditional’ investors have discovered the merits of the asset class. Aviation’s ability to attract new investors since the global financial crisis continues to grow.
The global economy is strong, unemployment low, as are interest rates. Even though for some investors there is a question about whether the upward trend will continue, most can recognize that the low correlation to other asset types, the cyclical nature of the industry and growth dynamics suggest that aviation is a solid hedge.
Investing in an unfamiliar asset class can be challenging for any investor, making it essential to have the right resources at hand. As you navigate the aviation industry, there are a few questions you can ask yourself to make sure you’re in the best position to make the right decisions at the right time.
1. Do I have the knowledge I need to assess the risk?
Attracting new finance sources to the asset class remains a target for many in the aviation industry; however, it can be a challenge to convince investors that aviation is now a mainstream investment option.
In 2017, aircraft lessor TrueNoord secured some institutional investor backing, BlackRock among the pool of backers from outside the traditional debt or equity sources. The regional space offered good yields, which shows that slightly more niche areas of commercial aircraft when duly researched and analyzed also do present attractive opportunities.
“[Investors] still like aviation; it is just really a process of them developing their own risk and valuation models, and that entails this period of monitoring,” said Sibylle Paehler, managing director at Doric GmbH and Doric’s structuring entity. “The reason they need to do this is that aircraft deals are complex. It’s not just about understanding the jet itself, but being able to understand how the lease-rate factors, the maintenance reserves, the return conditions all affect a deal’s viability. There’s a lot to understand and become comfortable with for these new investors.
Investors other than the sector specialist lenders tend to be generalists and seek out sector expertise. Consulting with industry experts about your investment can help you feel more confident in your ability to evaluate opportunities. Expert advisory is designed to help educate clients and provide due diligence support through quantitative analysis overlain by qualitative input on context bringing forward insight on trends investors need to be aware of to help them continue to monitor market and asset risk. Finding the right team of experts to aid your risk management through helping you understand what’s driving industry changes and equipping you with the data, insight and expert opinion to assess your exposure is key to a successful investment.
2. Am I allowing headlines about airline bankruptcy to scare me?
Airlines have had, on the face of it, a pleasant operating environment over the last few years. While headlines put the spotlight on changing market dynamics and an uncertain political climate, low oil prices have allowed airlines, on the whole, to post substantial profits. The International Air Transport Association expects airline net profits to rise from a forecast $34.5 billion in 2017 to $38.5 billion in 2018.
Despite this favorable backdrop, internal decisions can have a long-lasting impact. Some high-profile airlines in Europe slid into administration in 2017. For example, Air Berlin and Monarch Airlines were casualties of poor business models, while Alitalia has been on the watch list for a while as it continues to hunt for new investment. Even so, a central question the finance community are keen to understand is how quickly the aircraft operated and leased by airlines could be remarketed. In the cases of Air Berlin and Monarch, the jets have been absorbed by the market relatively seamlessly, in some cases garnering higher lease rates, although this is also symptomatic of the current market dynamic.
The critical fact to remember here is that even when airlines are operating high-demand routes, the business models of those airlines could fail because they aren’t meeting the required standards for success.
The aircraft themselves will always be necessary, and they remain a good investment for several reasons:
- Aircraft are liquid
- Aircraft are easily remarketed by highly competent and experienced lessors
- Even the more ‘distressed’ assets are being placed
Again, it comes back to accessing the right insight, support and information to provide options, and manage risk, whether the airline business is booming or the market is in a correction cycle.
3. Am I equipped to make informed asset choices?
Similar to how airline bankruptcies are not necessarily a cause for concern, the decline of some aircraft models could also have little bearing on your ability to make substantial investments in aviation.
For example, several assets came under scrutiny in 2017. Values for the Boeing 777 have continued to decline at a rate steeper than normal depreciation. Recently, there have been corrections of the asset values for 777-200ER, powered by Pratt & Whitney. The Airbus A380 is another aircraft that was delivered into a market scenario that had changed from when it was conceived, and with the first ones starting to come off lease, the viability of the secondary market for Airbus’s flagship wide body remains a delicate subject.
When hearing about these challenged assets, it is important to understand that these assets were challenged for their reasons and had characteristics that many other aircraft overcome. Many airlines favor developing routes with smaller widebodies, giving them greater network flexibility and less risk of filling seats. For investors, this strengthens the business case for investment in aircraft like the Boeing 787 and A350 families.
Knowing the nuances of the industry will help mitigate future challenges by empowering you to understand risk better and put in place mechanisms to keep abreast of the market.
4. Do I know where to find the right tools to help me measure changes in the cycle?
Aviation is a cyclical industry that has enjoyed eight years of unprecedented airline profits. But industry analysts are continuously monitoring the factors that could affect aviation finance in the future, including:
- An interest-rate hike
- An external market shock
- A global recession
- Changing airline behavior
While some factors can be monitored by keeping up with industry news and economic trends, there is still a complex story to map when it comes to making investment decisions. Determining where we are in the cycle requires the measurement and analysis of several key data points such as:
- Traffic growth
- Airline yields
- Fleet changes
- Aircraft values
Not many people even know where to begin when tracking these metrics. But there are tools to help. Benchmarking return and modeling portfolio performance can be a primary differentiator to your confidence level. Having an integrated view of the global fleet, time series data and ratings highlighting the winners and losers can deepen even an experienced investor’s understanding of the asset risks.
At the end of 2016, some global political factors were seen as a threat to globalization, Donald Trump’s surprise US presidential election victory and the UK’s Brexit vote could have had an impact on operating yields. While these dynamics remain latent and any impact averted, the aviation industry continues to prove its worth as an investment class.
“Our asset class is definitely mainstream now – it’s not even alternative anymore, and it’s here to stay,” Domhnal Slattery, chief executive of top three ranked lessor Avolon, told delegates at a recent air finance conference.
While threats continue to linger, it is not impossible for investors who are new to the aviation space to properly manage their risk based on expert advice and reliable data. If airline profits rise to $38.5 billion in 2018 as IATA predicts, the industry may be celebrating another year of expansion and success in 12 months’ time.
When you’re ready to add aviation to your portfolio, our award-winning Ascend Consultancy can provide personalized guidance and access to performance benchmarks, such as the Aircraft Return Index.
At Cirium, our experts are constantly monitoring and analyzing the industry trends. To learn more, watch expert insight video. Or read more articles like this.