A spotlight on aviation finance trends at ISTAT Americas

We take a look at the emerging trends from day 1 at ISTAT Americas that are affecting aviation financiers and lessors in 2020

“Be vigilant.”   

Those were the opening remarks of Gerry Butler on Day One of ISTAT Americas.  

He was talking about maintaining the health and safety of the attendees in the face of the growing spread of COVID-19. However, the same advice could apply to how the aviation industry must respond to the economic effects of the COVID-19 outbreak.  

(Gerry Butler, ISTAT President and Chief Marketing Officer, Merx Aviation Finance opens ISTAT Americas 2020)

Many of the Day One speakers mentioned the difficulties that lie ahead, stemming from fluctuations in supply and demand. It is not a question of if we’ve reached the end of the cycle. We most certainly have. And so, it is important to remain vigilant as we monitor the data to tell us when we’ve finally reached the bottom and search for indication that recovery is on its way.  

Although this new reality and words of caution may strike fear in the hearts of many, several presenters at ISTAT Americas expressed a sentiment of optimism for the future. As Mark Pearman Wright, Head of Marketing, Aircraft Investors, at Airbus, said, “we triumph during adversity through innovation.”  

(Mark Pearman Wright, Head of Marketing, Aircraft investors, Airbus & Darren Hulst, Managing Director – Marketing, Boeing participate in Boeing vs Airbus at ISTAT Americas 2020)

Looking back at how the aviation industry has historically recuperated from economic strain, particularly global health issues, there is even more reason to expect to see a light at the end of the tunnel in due time.  

Rob Morris, Global Head of Consultancy at Ascend by Cirium, pointed out how in 2004, following the SARS outbreak, global traffic grew by 14%.

“Don’t lose hope,” Morris said during his global economic update, “We do need to prepare for a short term of low returns but expect growth in 2021 and beyond once COVID-19 is contained.

If you missed Rob’s talk on the aviation market and Covid-19 then you can access his slides here

(Rob Morris, Ascend by Cirium started the day off with a market update, focusing on the impact that Covid-19 could have on the aviation industry)

While concerns surrounding the implications of COVID-19 were at the forefront of many of the conference discussions, there were a few other topics of interest as well and many could be considered black swans to the market. Here is an overview of some of the key issues that were discussed throughout the day:

Sustainability

After the threat of COVID-19 has been mitigated, the next challenge the industry will need to address is environmental protection. William H. Brown, Commercial Engines Marketing Manager at GE Aviation, said it best when he expressed that “every time we take one step forward, we take three steps back.”

The question of the effectiveness of carbon credits came up in several panels with a few speakers holding the opinion that travelers can want to be activists but when it means paying more for their ticket, they are unwilling to make the commitment. Ultimately, manufacturers, airlines and travelers need to work together to build an economically sustainable model that lowers carbon emissions.

During the Black Swans and Gray Rhinos panel, it was pointed out that investors are starting to ask airlines more questions about their plans for Environmental, Social, and Governance (ESG) requirements. There could be a future where lease rates are lowered, and financial incentives are given to those who are taking steps to reducing their environmental impact. These steps will need to be more than retiring an older fleet and slapping a green label on younger aircraft. Airlines will be expected to create a convincing narrative around sustainability

GE quote

(William H. Brown, Commercial Engines Marketing Manager, GE Aviation, Paul Finklestein, Director of Marketing, Pratt & Whitney, Richard Goodhead, Senior Vice President – Civil Aerospace, Rolls-Royce, Alan Kelly, Vice President of Services, CFM International)

Max fallout

Who would have thoughts that there would be a time when the grounding of the Max 737 could be seen as a positive for supply and demand? While the chaos created by COVID-19 is making the Max 737 issue seem like a blessing in disguise, there is still much discussion about whether the aircraft will ever be a success now that its name has been marred by stigma.

Darren Hulst, Managing Director of Marketing at Boeing said their number one priority is returning the Max to service, but there is some doubt about its ability to contend with the success of the A321neo.

Will the MAX be fine because memories are short? If so, how short are they? Most presenters seemed confident that the stigma will not persist ten years from now; however, there were varying opinions on how quickly the market will forget.

737 max poll

(A poll of the ISTAT Americas audience on the 737 Max)

Predicting the future of COVID-19

One of the best actions to take when navigating this period of market uncertainty is to look back at the data that might help tell us what the future will hold. Several comparisons to SARS and the 2008 recession were made as indicators that it may only take 3-6 months for the industry to bounce back from COVID-19.

The appraiser panel questioned the way we use history to forecast and expressed doubt about how long recovery will take. During the SARS time period, narrowbody values dropped by at least 11% and widebody values dropped by at least 14%. The market didn’t recover from over a year. Additionally, we were in a completely different place in the cycle when SARS made its impact. COVID-19 may have quickly plunged us into the bottom, but it was merely a catalyst for what was already on its way.

Appraiser panel - Dan Hall

(Dan Hall from Ascend by Cirium 2nd left participated on the appraiser panel at ISTAT Americas)

Overall, COVID-19 will expose weaker carriers and test lessors on how much they can tolerate payments. The negative traffic growth could result in the demise of several airlines.

Cautiously optimistic

The day finished with a panel of Lessor Chief Commercial Officers with representatives from Orix Aviation, GECAS, Aircastle and FPG Amentum Ltd (the panel should also have featured DAE but they were unable to attend due to a travel ban in the company) and they focused on the two most prominent issues of the day, COVID-19 and 737 Max. From this session, there was one question from the audience that stood out.

In a day that has provided a degree of anxiety for the aviation finance community, could these CCO’s offer up a positive for the audience to consider before heading to the networking event?

GECAS stated that they are cautiously optimistic about the future and they echo earlier comments that the future is looking bright for growth rates. In agreement with these views, Eamon Forbes from FPG Amentum added that he saw a glass half full for the future. He predicted that once the 737 Max is back in service and Airbus solved their production challenges with the A321neo, the future is bright.

Day one of ISTAT Americas proved to be an immense success, kicking of with a market outlook from Ascend by Cirium’s Rob Morris and closing with the CCO lessor panel. Although the industry faces challenges from COVID-19 and the 737 Max grounding, there is a strong desire from within the industry to work through these challenges together. There’s no greater proof of this than so many delegates making the decision to be in Austin for ISTAT Americas 2020.

If you couldn’t be at ISTAT Americas then you can access Rob Morris’s presentation on the aviation market and Covid-19 here 

 

 

 

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