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Ascend Consultancy, Expert view, Financial investments

Aviation finance goes big in Japan

April 26, 2023

Japan has long been a fixture in the global aircraft finance market, and unsurprisingly, it was something of a happy return for many in the industry at the Airline Economics Growth Frontiers event in Tokyo this week.

By Ellis Taylor, Cirium Dashboard, Asia Editor

Amid the strong recovery of the aviation industry globally, notwithstanding a lag from China, it appears that the finance sector is primed and ready to execute new deals. Japanese investors in JOL and JOLCO transactions are interested again, and trading among the wider industry is set to take off again later in the year. Nonetheless, supply chain constraints in MRO and with the OEMs are still causing headaches across the value chain.

Leaving 2019 behind

The starting presentation came from Cirium Ascend Consultancy‘s global head of consultancy Rob Morris, who predicted that capacity will be back above 2019 levels “in the last quarter of the year”, allowing the industry to stop comparing current data with those from four years ago.

He noted that although Asia’s recovery has lagged other markets such as North America and Europe, domestic travel in China and Japan has been near or exceeding pre-Covid levels.

Speaking in a subsequent panel discussion, Clover Aviation Capital executive director and chief technical officer Gareth Delaney welcomed Morris’s assessment.

“I was glad to hear that October is the date when we can stop talking about October 2019,” he quipped.

“International traffic is starting to recover now in Asia Pacific, so those are very positive signs. They’re the final pieces of the jigsaw, together with intercontinental travel, that will bring us back to growth again.”

The Japanese market is back – but this time it’s different

A large focus naturally was on the JOLCO (Japanese Operating Lease with Call Option) investor market, which is open once again after being battered by bankruptcies, non-payments and distressed debt sales during the pandemic.

In some cases, investors that branched away from tier one credits in 2018 and 2019 were hit when the airlines that used JOLCOs to finance aircraft entered bankruptcy, particularly those in South America.

Several Panelists pointed out that there were lessons to be learned for investors, transaction advisers and asset managers from being repeated.

“We cannot do the same mistakes and go down the credit line and have airlines that are not doing the collection, not having technical [expertise] in the JOLCO, and have debt being sold to hedge funds,” says chief executive of ABL Aviation, Ali Lmadani.

The positive news, overall, is that the JOLCO markets are open again, with BeYoke Capital chief executive Rion Sato noting that it is “pretty much back to pre-Covid levels, and the bidding momentum is taking place”.

However, the enthusiasm has been tempered by the strong message the investors are sending by their focus on only the strongest credit airlines. That flight toward quality is creating fierce competition among investors chasing a small pool of deals with top credits.

Another widely discussed impact on JOLCO investors is the recent volatility of the Japanese Yen against the US dollar. Although the depreciation of the Yen has had an impact on equity investors, most pointed out that the bigger issue was around the unpredictability of the currency, and confidence would return once that volatility abates.

Trading poised to increase

A number of lessors expected that as the industry gets back to normal footing that the secondary trading market would resume to a more regular pace later in the year.

Some of that will likely be driven by lessors that have warehouse facilities expiring in the coming years and are facing much higher interest rates to refinance aircraft, in turn putting pressure on their lease yields.

Larger lessors have continued to trade aircraft through the pandemic, although those trades have been at a smaller scale.

“We’ve seen some hundreds of aircraft, but it’s ended up being ones[ies] and twosies, so it takes a bit of time, still a lot of work that’s required,” says High Ridge Aviation executive director and head of Asia, Antony Snelleman.

Sustainability is only growing

Sustainability was also an area that was talked about in many of the discussions, and little wonder then, given Japan has been at the more innovative end of green loan financing for aircraft.

As an example, Japan Airlines recently closed sustainability linked loans to finance two Airbus A350-900s.

“Sustainable financing and some of the innovation has come from this country (Japan), [and] I have to say, there have been some very clever bolt-on additions in terms of some of the leases,” observes Boeing Capital Corp managing director capital markets and outreach Vasgen Edwards.

Cirium Ascend’s Morris notes that it is up to the industry to take a leading role in the area to reduce emissions, especially by encouraging further investment in sustainable aviation fuel production.

“We have to do more to decarbonise before the regulators force us to [or before being] driven by the lobbyists,” he says.

Supply chain a headache for everyone

For all the exuberance in the industry, the biggest complaint was around the supply chain issues that have affected OEMs, engine manufacturers and, by extension, financiers, that are seeing fewer opportunities to deploy capital.

“There is a clear mispricing at the moment, probably a lag, probably driven by the lack of supply and the type of transaction is limited,” says Novus’s Mounir Kuzbari.

“The OEMs are not delivering aircraft as many aircraft as they should probably at the moment because of supply chain issues.”

Boeing’s recent pause on new 737 Max deliveries due to an issue with sections supplied by Spirit AeroSystems was top on the minds of many attendees, with some lessors voicing their frustrations about the lack of information being provided on when their aircraft may be delivered.

However, as with any challenge, there is opportunity, and it is widely interpreted that the latest Boeing delays and Airbus’s own challenges in raising its A320neo-family output, are supporting values and lease rates for older-generation aircraft.

Read the full version of this article in Dashboard. Request a demo of Cirium Dashboard here.

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